Required ADR: Do We Have To?

(Updated 10/29/2008)


In 1999, the Texas Legislature passed a law often referred to as the "Required ADR Statute." It is now in the Government Code, Chapter 2260 . It describes a procedure for resolving certain contract claims against the State or a State agency. This statute requires, among other things, that we place a clause in every contract to which the statute applies stating that the procedures must be used to try to resolve a dispute arising under the contract. The procedure applies to (i) contracts by which the State acquires goods or services and (ii) construction contracts.

Most people understand the need for alternative dispute resolution (ADR) today and are willing to try to resolve contract disputes without resorting to lawsuits, but even among those who share this view of ADR, there are many who find our contract clauses objectionable.

Over time, we have come to understand their objections and have become better able to answer their questions and explain the statute, so that most people with whom we contract ultimately accept the fact that this is what we have to do. This page is written to convey information based on that experience. We very much hope it helps, but if it doesn't, please don't hesitate to ask the person with whom you are negotiating a contract with the University of Texas System Administration, or one of its component institutions, for further explanation.

The Statute:

How were disputes resolved before?

The past is the best place to start to learn about contract dispute resolution involving State agencies today. It helps to have something to compare the statute to. Before this statute existed, a contractor with a dispute with a State agency under a contract had to ask the Texas Legislature, which only meets for 6 months every other year, to pass a special private bill to permit the contractor to sue the State. This was not easy to accomplish. Most people find this requirement hard to believe, but that's because very few people are familiar with the aspect of being a State called "sovereign immunity." This could be a very long story, but to make it short, States can and do limit citizens' rights to sue the States in their own courts.

What does the statute do?

The statute defines a procedure that replaces the old regime of obtaining Legislative consent to sue. It requires those contractors whose contracts are covered by the statute to use the statutory procedures to resolve any dispute the contractor has with the State. Section 2260.005 says in no uncertain terms that the procedures are the exclusive and required prerequisites to filing a lawsuit against the State.

The procedure provides, first, for negotiation and mediation of disputes. The head of the State agency, or another individual in the agency who might be designated in a contract, negotiates with the contractor in an effort to try to resolve the dispute. They may negotiate one-on-one or they may hire a mediator if they wish. If they can't resolve the matter to the contractor's satisfaction, the statute authorizes a "Contested Case Hearing" where both sides present their case to an administrative law judge in the State Office of Administrative Hearings. The judge is authorized to award damages of less than $250,000 to the contractor. If he decides that the claim involves more than that, he has to make a report to the Legislature recommending either that the Legislature pay the additional damages (appropriate money to cover the higher claim), or that it not appropriate the extra money and that it deny the contractor the right to sue the State. That is the end of the process. There is no appeal.

We are required by the statute to insert in each contract for goods or services and in construction contracts a clause that the Attorney General's office helped to draft. Our goal is to comply with the requirement to have a contract clause in our contracts and to convey in a few paragraphs the gist of what the statute says. This isn't easy, of course, because the statute is longer than a few paragraphs.

Many people want to edit the contract clause to make it describe some other process that they would prefer, but as you can probably guess from what I've said so far, that approach just does not work. We are not at liberty to change the process that the statute requires. We can, however, edit the clause in ways that do not change the description of the procedure. For example, we can go into more detail or less detail; we can describe who the people will be that will carry out the negotiations; but we cannot say that we will use some other process first, instead, or later.

The statute 

The statute is online. As statutes go, it's not that long. When you keep it in perspective, that is, when you remember that there used to be no alternative to asking the Legislature for permission to bring a lawsuit, this procedure with its crisp time frames and administrative hearing is really quite helpful.


One more matter: with one exception, this statute does not apply to State claims against a contractor. At first blush this probably seems unfair, but if you think about the reason that the procedure is there at all, that is, to make it possible for a person or entity to resolve a dispute with an agency that can't easily be sued, there's no need for the procedure when the agency wants to resolve a dispute with a person or entity that can be sued. In practice, we may use ADR anyway, but not the procedure required by the Government Code, Chapter 2260. The exception is for claims that a State makes against a contractor after the contractor has already initiated the procedures set out in the statute. These are called "counterclaims" to the contractor's claims, and the procedure applies to all of the claims either party makes, once it has started.

The fact that State agencies are free to sue a contractor on any claims except counterclaims explains why our contract clauses say that the agency has not "waived its right to seek redress in the courts." Many people want to make this mutual, saying that neither the University, nor the contractor has waived rights to seek redress in the courts, but again, you can understand why this won't work. The right to sue is not mutual. There is a big impediment to a contractor's right to seek redress in the courts: the State's sovereign immunity.

Please take the opportunity to read the statute if you have not done so. Reading this explanation along with the statute text should answer questions you may have.