The Texas Supreme Court has issued a ruling that significantly impacts arbitrations involving governmental entities, which include cities, counties, school districts, conservation districts, hospital organizations, and other political subdivisions. In San Antonio River Authority v. Austin Bridge & Road, LP (Case No. 17-0905, May 1, 2020), the Court held that the issue of whether a governmental entity has waived immunity cannot be decided by an arbitrator. Instead, “the judiciary retains the duty to decide whether a local government has waived its immunity, . . . the parties’ agreement to arbitrate notwithstanding.” This ruling has, overnight, turned every arbitration proceeding against a governmental entity into a two-tiered proceeding: one on the merits in arbitration, and another on jurisdiction in the courts. It therefore raises significant strategic questions as to how a claimant in a dispute against a governmental entity should pursue its claims.
Austin Bridge arises out of a dispute regarding an agreement between the San Antonio River Authority (“the River Authority”) and Austin Bridge & Road, LP (“Austin Bridge”) for the repair of the Medina Lake Dam. The agreement contained an arbitration provision which required all disputes to be resolved by arbitration before the American Arbitration Association. When a dispute arose between the parties, Austin Bridge initiated an arbitration against the River Authority. The River Authority asked the arbitrator to dismiss Austin Bridge’s claims against it on governmental immunity grounds, which the arbitrator denied. The River Authority then sued Austin Bridge in state court, asking the court to enjoin the arbitration proceeding and declare that governmental immunity barred Austin Bridge’s claims. Austin Bridge claimed that the River Authority’s governmental immunity was waived pursuant to Local Government Code Chapter 271, which provides that certain local governmental entities waive their immunity from suit when they enter into a contract subject to Chapter 271. The trial court denied the River Authority’s relief, and ruled that the arbitration provisions in the contract are enforceable and that the arbitrator had authority to determine the issue of immunity. The San Antonio Court of Appeals partially reversed the ruling of the trial court, holding that a court, not an arbitrator, must decide whether the River Authority is immune from the claims against it (and therefore from enforcement of any award). The Court of Appeals further determined that the River Authority had waived such immunity, a ruling that the River Authority appealed to the Supreme Court.
The Supreme Court first addressed the issue of whether the River Authority had entered into an enforceable agreement to arbitrate under Chapter 271. Finding that it had, the Court turned to the issue of who must decide whether the River Authority’s immunity is waived—the arbitrator or the trial court. Austin Bridge argued that the parties agreed to submit questions of arbitrability, including jurisdiction, to the arbitrator. The River Authority, however, argued that it had no authority as a governmental entity to assign the determination of immunity to an arbitrator to decide. Noting that governmental entity is a question of subject matter jurisdiction, the Court held that an arbitrator “may not decide the River Authority’s jurisdiction or confer jurisdiction on the trial court,” but that instead “it is the non-delegable role of the judiciary to determine whether governmental immunity exists, whether such immunity has been waived, and to what extent.” Having determined that issue, the Court went on to decide that the River Authority had, in fact, waived its immunity.
In this case, the ultimate outcome was the same as the decision reached by the trial court. The River Authority was held to have waived immunity and was required to arbitrate. But this holding has the potential to create a logistical nightmare for parties who file contract-based claims against governmental entities. In the Austin Bridge case, the parties initiated arbitration in 2014, and the River Authority first sought court intervention in the arbitration proceeding in 2015. The case then wound its way through the court system for five years on the issue of immunity. Now, in 2020, the case will go back to arbitration on the merits. Because governmental entities enjoy an immediate right of appeal on immunity issues, any arbitration proceeding against a governmental entity can now be dragged out for years while the immunity issue makes its way through the courts.
This holding also creates several logistical questions. How should a claimant initiate a claim against a governmental entity? Should the claimant demand arbitration and file a parallel proceeding in district court on the issue of arbitrability? Such state court proceedings should be carefully crafted to avoid a possible argument that the claimant waived its arbitration rights. Moreover, because immunity is a subject matter jurisdiction issue (that therefore cannot be waived), what happens if the government does not raise the defense of immunity at arbitration, but then asserts it in court when a prevailing party tries to enforce their award? What happens if the government is the claimant, and the respondent files a counter-claim? Normally, a governmental entity waives immunity when it files a contract action against a party for counterclaims arising out of that same contract. However, an arbitrator cannot make that determination under the Austin Bridge holding. Does the government’s claim against the respondent proceed at arbitration while the government fights the immunity issue on a counterclaim in state court? What about if the governmental entity asserts a counterclaim in the arbitration, which waives its immunity, and then loses on the merits? Does the governmental entities’ loss restore its immunity from any subsequent attempt to enforce the award? These are issues that will have to be explored as courts grapple with this new framework.