      TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN


                                        NO. 03-06-00666-CV



             Appellant, State of Texas// Cross-Appellant, Mid-South Pavers, Inc.

                                                  v.

              Appellee, Mid-South Pavers, Inc.// Cross-Appellee, State of Texas


     FROM THE DISTRICT COURT OF TRAVIS COUNTY, 345TH JUDICIAL DISTRICT
        NO. D-1-GN-06-000141, HONORABLE JOHN DIETZ, JUDGE PRESIDING



                                            OPINION


               This appeal arises from a dispute over a highway construction contract between

Appellant/Cross-Appellee the Texas Department of Transportation and Appellee/Cross-Appellant

Mid-South Pavers, Inc. See Tex. Transp. Code Ann. § 201.112 (West Supp. 2007). After Mid-South

filed an administrative complaint, which TxDOT denied, a hearing was held before an administrative

law judge at the State Office of Administrative Hearings. The ALJ submitted a proposal for decision

to the executive director of TxDOT for adoption. In the agency’s final order, the executive director

rejected several of the ALJ’s findings of fact and conclusions of law and substituted his own findings

and conclusions in place thereof. Mid-South sought judicial review of the final order in district

court, and the district court reversed, finding that the executive director committed error by declining

to adopt the ALJ’s findings of fact and conclusions of law in the PFD. For the reasons set forth
below, we affirm the district court’s judgment reversing the final order in part, and we reverse in part

and remand this cause to TxDOT for further proceedings consistent with this opinion.


                       FACTUAL AND PROCEDURAL BACKGROUND

The highway construction contract

                 On December 29, 1998, Mid-South entered into a highway construction contract with

TxDOT to repair and re-pave 25.306 kilometers, or approximately 15 miles, of Interstate Highway

20 in Parker County. The contract price was $4,373,977.16. The project required two general tasks:

full-depth repairs of the concrete pavement in the driving lanes and complete re-paving of the

shoulders and roadway in asphalt. The repaving of the shoulders and roadway was divided into six

separate stages: placement of microsurfacing1 on bridge decks; planing of the shoulders and

repaving them with Type B hot mix; placement of the HMAC base; placement of the Petromat;2

placement of the Type D hot mix asphalt surface on the driving lanes; and placement of pavement

markings and markers. All of the work under the contract was to be completed within 135 days. If

Mid-South failed to complete the work in a timely manner, the contract allowed TxDOT to impose

liquidated damages of $1,000 per day.

                 The parties held a preconstruction meeting on January 22, 1999.3 Present at this



        1
         Microsurfacing is a special hot mix asphaltic concrete (HMAC) slurry that is used to
improve skid resistance on the driving lanes of bridges. Microsurfacing is applied in a thinner layer
than HMAC pavement.
       2
            Petromat is a sheet of fabric that is placed between the roadbed and the asphalt paving.
       3
          Although the PFD states the preconstruction meeting was held on January 28, 1999, the
record reflects that it was actually held on January 22, 1999.

                                                   2
meeting were Jimmey Bodiford, John Bailey, Allen Boone, Neal Kime, John Sharpe, and Ray

Buzalsky on behalf of TxDOT; Ron Gillihan, Jeff Hannon, Luke Miller, and Ed Parks on behalf of

Mid-South; and Russell Baldwin and Brady Gage on behalf of J.L. Steel, a Mid-South subcontractor.

Work began on the contract three days later on January 25, 1999. TxDOT accepted the project as

complete on January 29, 2001, and imposed $216,000 in liquidated damages.


Administrative proceedings and judicial review

               Following TxDOT’s acceptance of the project, Mid-South initiated administrative

proceedings under section 201.112 of the Texas Transportation Code for additional compensation

in the amount of $2,570,654.76, including a refund of the liquidated damages assessed by TxDOT.

See Tex. Transp. Code Ann. § 201.112 (allowing for administrative resolution of claims against

TxDOT); Texas Dep’t of Transp. v. Jones Bros. Dirt & Paving Contractors, Inc., 92 S.W.3d 477,

484 (Tex. 2002) (statutory procedure under section 201.112 is exclusive remedy for contract disputes

between TxDOT and private parties).        Mid-South presented fourteen claims for additional

compensation and also sought recovery of attorney’s fees, costs, and interest.

               After TxDOT denied Mid-South’s claims, Mid-South requested a contested case

hearing before an ALJ. See Tex. Transp. Code Ann. § 201.112(b). The case was referred to SOAH

for a hearing. A three-day hearing was held in February 2005, and the parties presented live

testimony from eleven witnesses. In addition, the parties filed almost seventy exhibits, including

deposition testimony from additional witnesses. After the close of the hearing and evidentiary

record, the ALJ prepared a PFD recommending that all or part of seven of Mid-South’s claims be

granted in the amount of $1,097,885.70. The ALJ also recommended that Mid-South recover

                                                 3
attorney’s fees in the amount of $102,680.59, and interest. The total recommended recovery was

$1,200,566.29, plus interest.

               Upon review and consideration of the PFD, TxDOT’s executive director concluded

that all or part of six of Mid-South’s claims should be granted in the amount of $605,135.96. The

executive director also concluded that Mid-South’s claims for attorney’s fees and interest should be

denied. TxDOT made a final payment of $605,135.96 to Mid-South on December 23, 2005.

               Mid-South sought judicial review of the final order in district court. See Tex. Transp.

Code Ann. § 201.112(d). Finding that the executive director erred in failing to comply with section

2001.058(e) of the Administrative Procedure Act and in denying Mid-South’s recovery of attorney’s

fees as allowed under chapter 2251 of the government code, the district court reversed the final order

and remanded the cause to TxDOT for further proceedings. This appeal followed.


Mid-South’s claims for additional compensation

               On appeal, the parties join issue on three of the claims for additional compensation

urged by Mid-South below, as well as Mid-South’s request for attorney’s fees and interest. With

respect to each of these claims, Mid-South challenges the executive director’s changes to the ALJ’s

proposed findings of fact and conclusions of law. Accordingly, a description of the disputed claims

and the related changes made by the executive director follows.


       1.      Reduced lane closures/Operational delays

               Mid-South sought additional compensation of $1,380,583.81 for work delays caused

by TxDOT’s refusal to allow overnight lane closures. The ALJ recommended approval of this claim



                                                  4
in the amount of $610,743. Upon review, the executive director reduced Mid-South’s recovery on

this claim to $359,262.

               From the outset, the parties disputed whether the contract allowed overnight lane

closures. The record reflects that the issue of overnight lane closures was raised and discussed by

the parties several times during the preconstruction meeting but was never resolved. The ALJ found

that four provisions in the contract would have led Mid-South to believe that overnight lane closures

would be permitted:


       C       Items 1 thru 6 shall be accomplished with no more than one lane closure, 4
               kilometers in total length in place on each of the eastbound and westbound
               lanes at the same time.

       C       The area of exposed fabric shall at no time exceed the area which may be
               covered in two days’ hot mix asphalt laying operation. The initial area of
               fabric coverage will be determined by the engineer and thereafter will be
               determined by the area covered by hot mix asphalt on the two preceding days
               of laying operations.

       C       It is the intent of these plans that exposed fabric alone shall not be open to
               thru traffic.

       C       All pavement repair in ramps, ramp acceleration lanes shall be made in
               daylight hours so that such lanes shall be restored and remain unobstructed
               for travel at night.


               Mid-South’s owner, Ronald Gillihan, testified that overnight lane closures were “very

common” in highway construction projects and that he considered that as a factor when deciding

whether to bid on a particular job, including this one. Gillihan further testified that if TxDOT

intended to preclude overnight lane closures, that type of restriction would normally be included in

the plans. With regard to the contract provisions quoted above, Gillihan testified that he understood

the language in the first provision to allow one lane closure in each of the two eastbound lanes and

                                                 5
each of the two westbound lanes as long as the lane closures did not impede the traffic. Gillihan

testified that he understood the language in the second and third provisions to allow overnight lane

closures. According to Gillihan, the language in these provisions would allow Mid-South to lay

enough Petromat in one day that it could cover with asphalt in two days but that Mid-South would

have to prevent traffic from driving on the exposed Petromat surface, which would require an

overnight lane closure. Gillihan also testified that he understood the fourth provision to mean that

Mid-South could not have overnight closures of ramps and acceleration lanes, but that overnight

closures of the driving lanes were not otherwise prohibited.

               When Mid-South was ready to begin the asphalt milling and paving operations on the

driving lanes, the record reflects that TxDOT refused to authorize overnight lane closures. As a

result of TxDOT’s refusal to permit overnight lane closures, Mid-South was required to spend an

additional two to three hours per day to set up traffic control and equipment. This resulted in a loss

of efficiency in Mid-South’s ability to perform the contract, and Mid-South faced the prospect of

incurring liquidated damages as a result of the delays.

               When questioned about its refusal to permit overnight lane closures, the evidence

shows that TxDOT gave two conflicting answers. First, TxDOT claimed that Mid-South had lost

its contractual right to have overnight lane closures because of poor safety practices. Two TxDOT

witnesses, Stucker and Bodiford, testified about Mid-South’s poor safety performance. Stucker

testified that he would rate Mid-South’s performance on safety at a one out of ten, with one being

the lowest score, because Mid-South ignored his instructions on safety matters on multiple

occasions. Bodiford testified that Mid-South “was creating an undue burden on the traveling

public.” The second reason given by TxDOT for its refusal to allow overnight lane closures was that


                                                  6
it never intended to allow them in the first instance. Stucker testified, “Well, it was our intent that

this—that the plans weren’t set up for—or they weren’t—you know the overnight closures weren’t

intended.” Another TxDOT witness, Robert Julian, testified that “the intent was not to have any

planned overnight lane closures.” Julian further testified that if Mid-South planned to have overnight

lane closures Mid-South “should have [had] enough foresight . . . to call and ask if that’s going to

be acceptable,” even though he agreed that nothing in the plain language of the contract prohibited

overnight lane closures.

                Applying the “gross error standard”4 to Mid-South’s claim, the ALJ determined

that TxDOT committed error based on its failure to “extend[ ] the length of the project to

accommodate the change in work conditions” and the referee’s5 “failure to exercise honest

judgment.” Based on these determinations, the ALJ recommended granting Mid-South’s claim in

the amount of $610,743. Upon review of the PFD, the executive director reduced Mid-South’s

recovery on this claim to $359,262.

                The difference between the amount recommended by the ALJ and the amount



       4
          The gross error standard applies when the parties to a contract agree to be bound by
the decision of a referee. Texas Dep’t of Transp. v. Jones Bros. Dirt & Paving Contractors, Inc.,
92 S.W.3d 477, 480 (Tex. 2002). Under this standard, a referee’s decision is final and conclusive
“unless in making it [the referee] is guilty of fraud, misconduct, or such gross mistake as would
imply bad faith or failure to exercise honest judgment.” City of San Antonio v. McKenzie Constr.
Co., 150 S.W.2d 989, 996 (Tex. 1941).

            Item 5.2 of the contract between TxDOT and Mid-South states, “The Engineer will act
as referee in all questions arising under the terms of the contract between the parties thereto and his
decision shall be final and binding.” We conclude that the plain language of section 5.2 supports
application of the gross error standard to Mid-South’s claims. See Jones Bros., 92 S.W.3d at 480.
Mid-South does not challenge application of the gross error standard on appeal.
       5
           Under the terms of the contract, TxDOT Area Engineer Jimmey Bodiford served as referee.

                                                  7
ultimately awarded by the executive director stems from the different loss of efficiency factors

applied by the ALJ and the executive director for Mid-South’s role in creating delays. In reaching

his recommendation of $610,743, the ALJ relied on the expert testimony of Charles Odom, who

testified on behalf of Mid-South that Mid-South’s efficiency should be reduced by a factor of 15%.

In contrast, the executive director determined that Mid-South’s efficiency should be reduced by a

factor of 50% because Mid-South “was also responsible for the delay.”6                 Based on this

determination, the executive director made changes to findings of fact 92 and 96. The executive

director provided the following explanation for these changes:


       While the ALJ recommended a discount factor of 15% as proposed by Mid-South’s
       witness Mr. Odom, a factor of 50% is more appropriate. Mr. Odom’s determination
       that Mid-South was 15% responsible was a figure that Mr. Odom testified “just
       popped out.” His testimony is an admission that Mid-South was also responsible for
       the delay. The estimation should be increased to 50% because Mid-South
       participated in the pre-construction meeting but did not effectively communicate
       concerning whether overnight lane closures were allowed. Mid-South’s Mr. Gillihan
       received a copy of the minutes of the meeting (showing the issue unresolved) but he
       did not read them. Mid-South never contacted TxDOT for clarification of the
       contract.7


(Citations omitted.)




       6
          Although Charles Shook testified on behalf of TxDOT regarding the delays associated with
TxDOT’s refusal to allow overnight lane closures, he did not apply a 50% reduction to Mid-South’s
efficiency. There was no evidence in the record that Mid-South’s efficiency should be reduced by
a factor of 50%.
       7
         The executive director provided this explanation in finding of fact 92 of the final order, but
did not provide a separate explanation for the change to finding of fact 96. We note that finding of
fact 96 is simply the mathematical calculation of the amount to be awarded Mid-South when
applying the 50% loss of efficiency factor.

                                                  8
       2.      Microsurfacing

               Under the original work schedule, the microsurfacing was to be completed after the

full-depth concrete repairs, but prior to the asphalt paving. As a result of delays associated with

multiple change orders regarding the concrete repairs, Mid-South was compelled to shift the

microsurfacing out of sequence. Because the concrete repairs were not completed until December

of 1999, the cold-weather conditions prevented Mid-South from completing the microsurfacing until

the following spring.8

               The record shows that Mid-South subcontracted the application of microsurfacing to

Cox Paving. After Cox Paving completed the microsurfacing, TxDOT began to notice several

problems with the paved surface. Both the ALJ and the executive director determined that the

principal cause of the microsurfacing failure was the installation of multiple layers of

microsurfacing. Mid-South and TxDOT discussed various options for correcting the problems with

the microsurfacing, and Mid-South ultimately agreed to pay another subcontractor to remove the

defective microsurfacing. Mid-South then sought additional compensation for the microsurfacing

work as part of its administrative claims.

               The technical challenge faced by Cox Paving was to install the microsurfacing so as

to create a smooth transition from the paved surfaces to the bridge surfaces. As the ALJ explained,

this challenge was made more difficult because the approaches to the bridge were uneven. Although

the evidence showed that TxDOT considered milling the approaches to create a more uniform




       8
          Since microsurfacing is a liquid asphalt, TxDOT imposes a temperature requirement that
prohibits putting down microsurfacing in colder weather.

                                                9
surface on which the two pavement surfaces could tie smoothly together, TxDOT rejected

this technique.

                  David Laumer, the supervisor for Cox Paving, testified that Keith Stucker, a TxDOT

inspector, contacted him directly9 and asked if it was possible to raise the level of the microsurfacing

to better match the level of asphalt on the bridge deck. Laumer responded that the only way to do

this was to apply two layers of microsurfacing. Laumer testified that Stucker instructed him to install

two layers of microsurfacing on all the bridges. Stucker testified that he did not instruct Cox Paving

to install two layers of microsurfacing.

                  The ALJ recommended that Mid-South’s claim for additional compensation be paid

on the basis that TxDOT had interfered with Mid-South’s management of the work on the contract.10

The ALJ also recommended that TxDOT add 82 days to the contract period resulting in the return

of an additional $82,000 in liquidated damages to Mid-South. The executive director rejected this

recommendation on the basis of Stucker’s testimony that he did not instruct Cox Paving to install

two layers of microsurfacing. Based on his determination that Stucker did not instruct Cox Paving

to apply two layers of microsurfacing, the executive director made changes to findings of fact 167,

170, 172, and 175. The executive director explained the rationale for these changes in finding of fact

167 of the final order:



       9
          The ALJ found this direct contact to be one of several instances of TxDOT’s direct
negotiations and interference with a Mid-South subcontractor.
       10
          The ALJ recommended payment in the amount of $159,269, which included “the amount
of Cox [Paving]’s invoice, less the amount paid by TxDOT for part of the work, plus the amount of
Dustrol’s invoice for the milling [and removal of the microsurfacing], plus some equipment and
supply costs.”

                                                  10
       While the ALJ concluded that Mr. Stucker (a TxDOT employee) instructed Cox to
       install two lifts of microsurfacing, the preponderance of the evidence does not
       support that conclusion. The deposition of the supervisor for Cox Paving, David
       Laumer, showed that when discussing the uneven level of the two surfaces, he
       suggested to Mr. Stucker that the problem could be solved by applying two lifts of
       microsurface. Mid-South Exhibit No. 22, p.4, lines 8-10. The next succeeding
       finding of fact shows Mr. Laumer’s proposed solution turned out to be the cause for
       the future failure of the microsurfacing. His deposition also shows that, according
       to Mr. Laumer, Mr. Stucker “directed” Mr. Laumer to apply two lifts of
       microsurface. His deposition was taken in February 2005. In contrast, earlier in time
       (during the surfacing of the first bridge), Mr. Laumer described to Marion [Ed] Parks
       the same communications Mr. Laumer had with Mr. Stucker. At that time, as Mr.
       Parks recalled the conversation, Mr. Laumer only said that he had “got together” with
       Mr. Stucker on “it.” It is not clear whether “it” was a discussion of the problem, or
       of any proposed solution to the problem. Tr. 384, lines 6-25. Mr. Stucker’s
       testimony showed he did not instruct Mr. Laumer to apply two lifts of microsurface.
       Tr. 1071, lines 10-20. When the decision was made to apply two lifts of
       microsurface, contemporaneous meeting minutes and correspondence also show that
       Cox Paving made the decision. TxDOT Exhibit No. P1B (attachment F).


                The executive director also made a corresponding change to conclusion of law 9,

which deleted the reference in that conclusion to Mid-South’s microsurfacing claim.


       3.       Return of liquidated damages

                As a result of his decision to reject Mid-South’s claim related to microsurfacing, the

executive director made the following related changes to findings of fact 195 and 196 regarding

liquidated damages:11


       195.     Because Claim No. 12, relating to microsurfacing, was [dis]approved, and the
                parties do not dispute that TxDOT charged 82 days to the contract while this
                issue was being resolved, Mid-South is [not] entitled to an 82-day extension
                on this part of the claim.


       11
            The executive director also made a corresponding change to conclusion of law 11.

                                                 11
        196.     Mid-South is entitled to a total extension of 109 [27] days, translating into a
                 reduction in liquidated damages of $109,000 [$27,000].12


        4.       Attorney’s fees and interest

                 Because the executive director denied Mid-South’s claims under the Prompt Payment

Act for attorney’s fees and interest, the executive director made changes to findings of fact 197 and

198 to reflect this denial. The executive director also made corresponding changes to conclusions

of law 12 and 13. To the extent the executive director provided an explanation for these changes,

that explanation appears in the final order at conclusion of law 12 as follows:


        The case concerns the adjudication of Mid-South’s contract claims under
        Tex. Transp. Code § 201.112, which does not authorize the payment of interest or
        attorney’s fees. A contract claim and a Prompt Payment Act claim are two different
        questions. Alamo Community College District v. Browning Construction Co.,
        131 S.W.3d 146, 167 (Tex. App.—San Antonio 2004, pet. filed).[13] Here there was
        a bona fide dispute between Mid-South and TxDOT and therefore the Prompt
        Payment Act did not apply. Tex. Gov’t Code ch. 2251.


                                            DISCUSSION

                 In five issues TxDOT complains the trial court erred in its reversal of the final order.

Specifically, TxDOT argues that the trial court incorrectly required the executive director to meet

the requirements in government code section 2001.058 when changing the ALJ’s proposed findings

of fact and conclusions of law. TxDOT further argues it has sovereign immunity from Mid-South’s



        12
          Language added by the executive director appears in brackets [ ], and language deleted
by the executive director appears in strike out.
        13
             The supreme court dismissed the petition for review pursuant to settlement on April 28,
2006.

                                                   12
claims for attorney’s fees and interest; substantial evidence supports the executive director’s

findings, conclusions and decisions regarding operational delays, microsurfacing and return of

liquidated damages; and there was no error in the executive director’s deletion of findings of fact and

conclusions of law that did not affect the final decision.

               Mid-South responds that the trial court correctly applied section 2001.058; the

executive director improperly changed the ALJ’s findings of fact and conclusions of law; the

doctrine of sovereign immunity is not implicated with respect to Mid-South’s claims for attorney’s

fees and interest; and there is no evidence to support the executive director’s reduction to Mid-

South’s efficiency factor. On cross-appeal, Mid-South contends the trial court erred in denying its

claim for interest. Mid-South claims it was entitled to recover interest because the evidence shows

there was not a bona fide dispute between Mid-South and TxDOT.


Standard of review

               We review TxDOT’s final order under the substantial evidence rule. See Tex. Transp.

Code Ann. § 201.112(d); Tex. Gov’t Code Ann. § 2001.174 (West 2000). “Broadly speaking, the

substantial evidence rule is a court review device to keep the courts out of the business of

administering regulatory statutes enacted by the Legislature; but it remains the business of the courts

to see that justice is administered to competing parties by governmental agencies.” Lewis v. Metro.

Sav. & Loan Ass’n, 550 S.W.2d 11, 13 (Tex. 1977). Under a substantial-evidence review, we

presume that the agency’s order is supported by substantial evidence, and the appellant has

the burden of overcoming this presumption. Graff Chevrolet Co., Inc. v. Texas Motor Vehicle Bd.,

60 S.W.3d 154, 159 (Tex. App.—Austin 2001, pet. denied). When a court is applying the

                                                  13
substantial-evidence standard of review to an agency decision, the issue for the reviewing court is

not whether the agency’s decision was correct, but whether the record demonstrates some reasonable

basis for the agency’s action. Central Power & Light Co. v. Public Util. Comm’n, 36 S.W.3d 547,

561 (Tex. App.—Austin 2000, pet. denied). We may not substitute our judgment for that of the

agency on matters committed to agency discretion. Tex. Gov’t Code Ann. § 2001.174; H.G. Sledge,

Inc. v. Prospective Inv. & Trading Co., Ltd., 36 S.W.3d 597, 602 (Tex. App.—Austin 2000,

pet. denied). We will reverse the agency’s order if the decision is not reasonably supported by

substantial evidence, is arbitrary or capricious, or is characterized by an abuse of discretion. See

Tex. Gov’t Code Ann. § 2001.174(2)(E), (F).


TxDOT’s claims

       1.       Tex. Transp. Code Ann. § 201.112 v. Tex. Gov’t Code Ann. § 2001.058(e)

                In its first issue, TxDOT argues the trial court erred in requiring the executive director

to meet the standards in section 2001.058(e) of the government code when changing the ALJ’s

findings of fact and conclusions of law. Specifically, TxDOT contends the executive director need

only satisfy the requirements in section 201.112 of the transportation code when making changes to

the PFD. Because he did so in this case, TxDOT maintains the trial court erred in reversing the final

order. Mid-South responds that the Administrative Procedure Act (APA) provides minimum

standards for all state agencies and that nothing in section 201.112 expressly supersedes the

application of section 2001.058. In support of these arguments, Mid-South relies on this Court’s

opinion in Flores v. Employees Retirement System, 74 S.W.3d 532 (Tex. App.—Austin 2002,

pet. denied).

                                                   14
               While section 2001.058 provides the general rule that guides an agency’s discretion

when making changes to an ALJ’s findings of fact or conclusions of law, we agree with TxDOT that

section 2001.058 does not apply in this case. The plain language of section 201.112(c) specifies that

section 201.112(c) of the transportation code, not section 2001.058 of the government code, governs

the executive director’s discretion to make changes in a PFD. Section 201.112(c) states:


       An administrative law judge’s proposal for decision rendered under chapter 2001,
       Government Code, shall be submitted to the director for adoption. Notwithstanding
       any law to the contrary, the director may change a finding of fact or conclusion of
       law made by the administrative law judge or may vacate or modify an order issued
       by the administrative law judge. The director shall provide a written statement
       containing the reason and legal basis for a change made under this subsection.


Tex. Transp. Code Ann. § 201.112(c) (emphasis added). The phrase “[n]otwithstanding any law to

the contrary” makes clear the legislature’s intent that section 201.112(c) supersede other Texas law

regarding an agency’s ability to change findings of fact or conclusions of law, including section

2001.058 of the APA. See, e.g., Southwestern Pub. Serv. Co. v. Public Util. Comm’n, 962 S.W.2d

207, 212-13 (Tex. App.—Austin 1998, pet. denied) (“SWEPCO”) (finding similar language in

section 2003.049(g) of the government code expressly supersedes APA section 2001.058). Rather

than imposing the general restrictive APA section 2001.058 on TxDOT proceedings heard by SOAH

under section 201.112, the legislature has crafted a specific provision for such proceedings.

Accordingly, we conclude the trial court erred in applying section 2001.058 and requiring the

executive director to satisfy the provisions of that statute when making changes to the PFD. We

sustain TxDOT’s first issue on appeal.




                                                 15
       2.      Compliance with section 201.112

               Sustaining TxDOT’s claim that the trial court erred in its application of section

2001.058 does not end our inquiry. We must still determine whether the executive director’s

changes to the PFD satisfy the standards in section 201.112(c). Mid-South argues the executive

director failed to comply with section 201.112 and his changes to the ALJ’s findings of fact and

conclusions of law were arbitrary and capricious and, therefore, the final order should be reversed.

TxDOT responds, “There are no limitations imposed on the executive director’s power to change

a finding of fact or conclusion of law.” Because we conclude the executive director acted arbitrarily

and capriciously and failed to comply with section 201.112 when making changes to the ALJ’s

findings of fact and conclusions of law, we affirm the trial court’s judgment reversing the final order.

               The executive director’s authority to change a finding of fact or conclusion of law is

not without limits. While section 201.112(c) allows the executive director to make changes to a

PFD, the executive director must provide a written statement containing the reason and legal basis

for any changes made. See Tex. Transp. Code Ann. § 201.112(c). The executive director’s final

order must be supported by substantial evidence considering the reliable and probative evidence in

the record as a whole. See id. § 201.112(d) (final order subject to review under the APA);

Tex. Gov’t Code Ann. § 2001.174. It must comport with the executive director’s statutory authority

and be free of constitutional, statutory, procedural, or other legal error, and it may not be arbitrary

or capricious or otherwise characterized by an abuse of discretion. See Tex. Gov’t Code Ann.

§ 2001.174.

               The executive director’s changes to particular findings and conclusions suggest that



                                                  16
the executive director was acting as TxDOT’s own factfinder despite the legislature having delegated

that duty to the ALJ in section 201.112(b). See Montgomery Indep. Sch. Dist. v. Davis, 34 S.W.3d

559, 564 (Tex. 2000) (“Having chosen to delegate the fact-finding role to the hearing examiner, a

board cannot then ignore those findings with which it disagrees and substitute its own additional

findings.”). The record reflects that certain changes made by the executive director are not supported

by substantial evidence and, in some instances, the executive director failed to comply with the

requirement to provide a written statement containing the reason and legal basis for changing

the ALJ’s findings of fact and conclusions of law. See Tex. Transp. Code Ann. § 201.112(c);

43 Tex. Admin. Code § 9.2(g)(4) (West 2007). These aspects of the executive director’s decision

raise serious due process concerns.

               While this Court has previously recognized that an administrative agency is not

subject to the same rules and restrictions as a court of law, an agency must respect the due process

rights of those persons who appear before it in contested cases. See Flores, 74 S.W.3d at 539 (citing

Texas State Bd. of Pharmacy v. Seely, 764 S.W.2d 806, 815 (Tex. App.—Austin 1988, writ denied);

Madden v. Texas Bd. of Chiropractic Exam’rs, 663 S.W.2d 622, 625-27 (Tex. App.—Austin 1983,

writ ref’d n.r.e.)). Section 201.112 contemplates that when a contractor is dissatisfied with TxDOT’s

informal resolution of his claims, the contractor may request a formal administrative hearing to

resolve those claims under Chapter 2001 of the government code. See Tex. Transp. Code Ann.

§ 201.112(b); Tex. Gov’t Code Ann. § 2001.051 (West 2000) (providing opportunity for contested

case hearing). Under the statute and TxDOT’s rules, this hearing is delegated to an ALJ at SOAH.

See Tex. Transp. Code Ann. § 201.112(b)-(c); 43 Tex. Admin. Code §§ 1.21-.33 (procedures in



                                                 17
contested cases), 9.2(g)(3)(D)(ii) (request for contested case hearing) (West 2007). The purpose of

such a hearing is to give the litigants an opportunity to present evidence. Any conflicts in the

evidence are resolved by the decision-maker by weighing the evidence and evaluating the credibility

of witnesses. See F. Scott McCown, When Can an Agency Change the Findings or Conclusions of

an Administrative Law Judge? 50 Baylor L. Rev. 65, 74 (1998). The resolution of disputed facts

requires weighing the evidence and making credibility determinations. Id. Accordingly, a neutral

decision-maker is crucial to a fair adjudicatory hearing. 2 Kenneth Culp Davis & Richard J. Pierce,

Jr., Administrative Law Treatise § 9.8 at 67 (3d ed. 1994). Because the ALJ has heard the evidence

and observed the demeanor of the witnesses, the ALJ is in a superior position than an agency head

or board reviewing the proposed decision. Id.

               By permitting a contractor dissatisfied with TxDOT’s informal resolution of a claim

under section 201.112 to request a formal administrative hearing, the legislature has recognized the

importance of a neutral decision-maker. See Tex. Transp. Code Ann. § 201.112(b). In addition, the

legislature has cabined the executive director’s discretion to make changes to the ALJ’s proposed

decision by requiring the executive director to provide a written statement of the reason and legal

basis for each change. Id. § 201.112(c). The supreme court recognized the importance of this

limitation in Montgomery Independent School District v. Davis:


       If a board could find additional facts, resolving conflicts in the evidence and
       credibility disputes, it would then be serving as its own factfinder despite delegating
       the factfinding role to a hearing examiner, and the process of using an independent
       factfinder would be meaningless. An independent factfinder is integral to the
       structure of the hearing-examiner process; permitting a school board to select an
       independent factfinder avoids having the board, a party to the dispute, act as its own
       factfinder when reviewing the employment decision of its own administration. The

                                                 18
       Legislature has further protected the independent nature of the hearing-examiner
       process by requiring the board to state in writing the reason, including the legal basis
       for any change or rejection it makes under section 21.5259 [of the education code].


34 S.W.3d 559, 564 (Tex. 2000). Because of the seriousness of the issues raised by the executive

director’s treatment of Mid-South’s claims, we discuss each of the director’s changes to the ALJ’s

proposed findings of fact and conclusions of law.


               A.     Reduced lane closures/Operational delays

               With respect to Mid-South’s request for additional compensation on this claim, the

ALJ recommended awarding Mid-South $610,743. In the final order, however, the executive

director awarded Mid-South $310,262 on this claim. The primary difference between the amount

proposed by the ALJ and the amount awarded by the executive director results from the executive

director’s application of a 50% reduction to Mid-South’s efficiency. The executive director

explained that he applied a 50% reduction to Mid-South’s efficiency because Mid-South “was also

responsible for the delay” and that “Mid-South never contacted TxDOT for clarification of the

contract.” We conclude, however, that the executive director’s explanation for his changes to

findings of fact 92 and 96, and the related change to conclusion of law number 11, is not supported

by substantial evidence.

               The    record   reflects   that   Mid-South     presented    testimony    from     three

witnesses—Charles Odom, Dr. John Borcherding, and Dr. Calin Popescu—regarding the delays that

resulted from TxDOT’s initial refusal to permit overnight lane closures. Odom testified that based

on his experience and training he reduced Mid-South’s efficiency by 15%. Although TxDOT



                                                 19
presented the testimony of Charles Shook on this issue, the record reflects that Shook did not

recommend a reduction to Mid-South’s efficiency, but instead presented an entirely different

calculation of the amount that Mid-South should recover on this claim. This Court has previously

held that an agency decision that falls within the range of relevant evidence in the record is supported

by substantial evidence. See Central Power & Light Co. v. Public Util. Comm’n, 36 S.W.3d 547,

559 (Tex. App.—Austin 2000, pet. denied). The only evidence in the record regarding a reduction

to Mid-South’s efficiency was the 15% figure presented by Odom. There is nothing in the record

to support the executive director’s determination that Mid-South’s efficiency should be reduced by

a factor of 50%. While it may be true that Mid-South was also responsible for some of the delay,

without more, this fact alone does not translate into a 50% reduction to Mid-South’s efficiency.

Therefore, we conclude that findings of fact 92 and 96 (and conclusion of law number 11) are not

supported by substantial evidence. Accordingly, we affirm the district court’s reversal of the final

order and remand for further proceedings on the issue of operational delays.


                B.      Microsurfacing

                The executive director also made changes to the ALJ’s proposed decision regarding

those claims related to microsurfacing.           The ALJ recommended granting Mid-South’s

microsurfacing claim in the amount of $159,269. But, in the final order, the executive director

denied this claim altogether, making changes to findings of fact 167, 170, 172, and 175 and

conclusion of law 11. Both the ALJ and the executive director based their decisions on the testimony

of David Laumer, a supervisor for Cox Paving, and Keith Stucker, a TxDOT employee. The

explanation given by the executive director in finding of fact 167 reflects that the executive director

                                                  20
also relied on the testimony of Marion Edward “Ed” Parks, a Mid-South employee, and TxDOT

Exhibit No. P1B (Attachment F).14

               The record reflects that Laumer and Stucker gave conflicting testimony with Laumer

stating that Stucker instructed him to apply two layers of microsurfacing and Stucker claiming that

he did not instruct Laumer to apply two layers of microsurfacing. Parks’s testimony reflects that

Laumer got together with Stucker on “it.” In his explanation for the changes to the ALJ’s findings,

the executive director acknowledges that Parks’s testimony “is not clear whether ‘it’ was a

discussion of the problem, or of any proposed solution to the problem.” Thus, Parks’s testimony

fails to resolve the direct conflict between the testimony of Laumer and Stucker. The executive

director’s explanation shows that he attempted to resolve this conflict by relying on Attachment F

in TxDOT Exhibit No. P1B. Referring to a letter from Mid-South to Cox Paving on August 11,

2000, Attachment F contains the following excerpt:


       On June 8, 2000 when David Laumer met with Midsouth Pavers Ed Parks, he was
       shown the bridge deck and approaches. He told Mr. Parks that microsurfacing would
       be able to correct any deficiencies. He never told Our Project Superintendent that
       there was a danger of rutting or loss of texturing. In fact, David Laumer told
       Ed Parks that he had already showed Keith Stucker, chief Inspector for TxDOT, what
       he planned on doing and had Keith’s blessing. If this job could be built as directed
       by the plans and specifications, your representative had the duty to notify Midsouth
       Pavers before any work began.

                                              ***


       14
           TxDOT Exhibit No. P1B, also referred to by the parties as “the Bohuslav report,” was a
document prepared by TxDOT for the purpose of settlement negotiations with Mid-South. Under
TxDOT rules, this report is not admissible for any purpose, and TxDOT objected to its admissibility
in the hearing before SOAH. See 43 Tex. Admin. Code § 9.2(b)(3)(C) (West 2007). We observe,
however, that the executive director relied on this report in the final order.

                                                21
       Keith Stucker, chief Inspector notified Midsouth Pavers after the first bridge deck
       was completed, Sanchez Creek, that Cox Paving takeoff header was unacceptable.
       When Ed Parks and Larry Brown pointed out high spot to David Laumer, he said
       Keith Stucker had already made him aware of the bump they had left. Ed Parks
       offered David Laumer the use of straightedge, he declined, stating that he could fix
       the problem. Once again, Midsouth Pavers was not informed of any potential
       problems that could result from your effort to correct your problem . . . .


(Emphasis added.) The ALJ stated that he gave no weight to the Bohuslav report, but the executive

director relied on this excerpt from Attachment F in support of his determination that Cox Paving,

not TxDOT, made the decision to apply two layers of microsurfacing. This excerpt does not

conclusively identify who made the decision or gave approval to apply two layers of microsurfacing.

The italicized statement merely demonstrates that Laumer “planned” to do something—presumably

to apply two layers of microsurfacing—and that Stucker gave his “blessing” to this plan. Thus, we

are still confronted with the conflict between the testimony of Laumer and Stucker.

               This Court considered a similar situation in which an agency reversed a hearings

examiner’s findings based on credibility in Texas State Board of Medical Examiners v. Birenbaum,

891 S.W.2d 333 (Tex. App.—Austin 1995, writ denied). In that case, the hearings examiner

discounted the testimony of two witnesses because she questioned their credibility. Id. at 337. The

Board’s final order showed that the Board clearly found both witnesses to be credible. Id.

Recognizing the substantial evidence standard of review, we concluded it was unnecessary to address

this apparent discrepancy in the findings between the hearings examiner and the Board because there

was independent evidence in the record to support the Board’s decision. Id. at 338.

               In the record before us, there is no other evidence that conclusively resolves the

credibility conflict between Laumer and Stucker, and we must now consider the question we left

                                                22
unanswered in Birenbaum. Like the situation we addressed in Birenbaum, the ALJ, a neutral

disinterested decision-maker who heard the testimony and observed the demeanor of the witnesses,

resolved the credibility conflict in favor of Mid-South, whereas the executive director, the

administrative head of an interested party who reviewed the PFD, resolved the same conflict in favor

of TxDOT. On this record, there is a clear question of witness credibility, which was resolved by

the ALJ one way and by the executive director in a completely different way. By resolving conflicts

and credibility issues in disputed evidence, the executive director has essentially stepped into the

shoes of the factfinder and reweighed the evidence to reach a specific result. This is not what the

legislature envisioned in section 201.112.

               In that section, the legislature allowed TxDOT to establish by rule an informal

procedure to resolve certain contract claims. See Tex. Transp. Code Ann. § 201.112(a). If a person

was dissatisfied with TxDOT’s informal resolution, the legislature allowed that person to request

a formal administrative hearing pursuant to Chapter 2001 of the government code—i.e., the APA.

Id. § 201.112(b). The legislature has also required the executive director to provide a written

statement of the reason and legal basis for any change the executive director makes to the ALJ’s

proposed decision. Id. § 201.112(c). By allowing a person to request a formal administrative

hearing, the legislature has delegated the factfinding role to the ALJ, not to the executive director.

Having delegated this factfinding role to the ALJ, the legislature in section 201.112 did not permit

the executive director to disregard those findings with which he disagrees and substitute his own

findings. See Davis, 34 S.W.3d at 564. By requiring the executive director to provide a written

statement of the reason and legal basis for any changes to the ALJ’s proposal, the legislature has



                                                 23
safeguarded the independent nature of the administrative hearing process. See id.; Flores, 74 S.W.3d

at 540. The executive director’s decision on the microsurfacing issue is at odds with these

fundamental administrative law principles.

               The supreme court has made clear that an agency’s final order may be supported by

substantial evidence and yet be invalid for arbitrariness. Texas Health Facilities Comm’n v. Charter

Med.–Dallas, Inc., 665 S.W.2d 446, 454 (Tex. 1984); Lewis, 550 S.W.2d at 13-14; Starr County

v. Starr Indus. Servs., Inc., 584 S.W.2d 352, 355-56 (Tex. Civ. App.—Austin 1979, writ ref’d n.r.e.);

compare Tex. Gov’t Code Ann. § 2001.174(2)(E) with id. § 2001.174(2)(F). “[A]rbitrary action of

an administrative agency cannot stand.” Lewis, 550 S.W.2d at 16. An administrative agency acts

in an arbitrary manner when the treatment accorded to parties in the administrative process denies

them due process of law. Id. At a minimum, due process requires that an agency’s decision comport

with the authority granted to the agency under its own statute and rules. Id. at 13 (agency

proceedings must satisfy due process). In deciding whether the executive director acted arbitrarily

and capriciously, we must determine whether the final order was based on a consideration of all

relevant factors and whether there is a rational connection between the facts and the decision of the

executive director. See Starr County, 584 S.W.2d at 355-56. We may not substitute our judgment

for that of the agency. Id.

               The executive director’s explanation for the changes made to findings of fact 167,

170, 172 and 175 demonstrates that the executive director abused his discretion in making these

changes and that his decision was arbitrary and capricious. Although section 201.112 gives the

executive director broad discretion to make changes to the ALJ’s proposed findings of fact and



                                                 24
conclusions of law, the executive director may not ignore the evidence. See Tex. Gov’t Code Ann.

§ 2001.174. Given the ambiguities in the testimony of Ed Parks and TxDOT Exhibit No. P1B, the

executive director’s explanation shows that he simply chose to believe Stucker, a TxDOT employee,

over Laumer, a third-party subcontractor.15 We have found no other independent evidence in the

record to support the executive director’s determination that Stucker did not instruct Cox paving to

apply two layers of microsurfacing. The executive director’s explanation thus gives the appearance

of being arbitrary and capricious because the executive director did not hear the testimony or

evaluate the witnesses’ demeanor, and yet he chose to resolve the conflict in testimony and

credibility in favor of TxDOT, irrespective of the facts as determined by the ALJ.

               On this record, we conclude that the executive director’s decision was arbitrary and

capricious. There is no rational connection between the facts as supported by the evidence and the

executive director’s decision. We are unpersuaded by TxDOT’s argument that section 201.112

allows the executive director to reweigh the evidence and substitute his own credibility

determinations in place of those made by the ALJ. See Davis, 34 S.W.3d at 564; Flores, 74 S.W.3d

at 540-41. This is not to say that the ALJ’s credibility determinations are always immune from

change under section 201.112. See, e.g., SWEPCO, 962 S.W.2d at 214 (section 2003.049(g) of the

government code allows the public utility commission to reevaluate the evidence admitted at a

SOAH hearing to determine if the ALJ’s findings are supported by a preponderance of evidence);

Birenbaum, 891 S.W.2d at 338 (board may change credibility findings where change is supported


       15
          That the executive director chose to believe Stucker, a TxDOT employee, over Laumer,
a third-party subcontractor, is underscored by TxDOT’s challenge below to the admissibility of
Exhibit No. P1B—a challenge they do not bring forth on appeal.

                                                25
by independent record evidence). But on this record, where the ALJ, and not the executive director,

heard the testimony and observed the demeanor of the witnesses, and in the absence of independent

evidence in the record to support the executive director’s credibility choice, we conclude that the

executive director’s decision to reject the ALJ’s findings based on credibility was arbitrary and

capricious. Accordingly, we affirm the district court’s reversal of the final order and remand for

further proceedings on the issue of microsurfacing.


               C.      Return of liquidated damages

               In light of our conclusion that the executive director’s decision on the microsurfacing

issue was arbitrary and capricious, we likewise conclude that the executive director’s related changes

to findings of fact 195 and 196, and the corresponding change to conclusion of law 11, were arbitrary

and capricious. We affirm the district court’s reversal of the final order and remand for further

proceedings on the issue of return of liquidated damages.


               D.      Changes to other findings

               In its fifth issue on appeal, TxDOT argues that the executive director need not provide

a written statement of the reason and legal basis for those changes to findings of fact or conclusions

of law “that did not affect the final decision.” Because every finding of fact and conclusion of law

plays a role in the agency’s final decision, it is difficult for us to see how TxDOT can argue that any

change by the executive director, other than perhaps a typographical correction, would not affect the

final decision in some manner. Moreover, the legislature has expressly required the executive

director to provide a written statement containing the reason and legal basis for a change to the ALJ’s



                                                  26
findings or conclusions. Tex. Transp. Code Ann. § 201.112(c); see also Levy v. Texas State Bd. of

Med. Exam’rs, 966 S.W.2d 813, 816 (Tex. App.—Austin 1998, no writ) (agency required to

“articulate specifically its reasons for each individual change made”); Employees’ Retirement Sys.

v. McKillip, 956 S.W.2d 795, 800 (Tex. App.—Austin 1997, no pet.) (same), overruled in part on

other grounds by Texas Natural Res. Conservation Comm’n v. Sierra Club, 70 S.W.3d 809, 814

(Tex. 2002).

               Our review and comparison of the PFD and the final order show that the executive

director deleted findings of fact 121 and 122 without providing the explanation required in section

201.112(c). For this reason, we affirm the district court’s reversal of the final order and remand for

further proceedings regarding these deleted findings.

               By our holding that the executive director must provide a written statement for each

individual change to the ALJ’s findings or conclusions, we do not mean to prohibit an agency from

making corresponding changes to related findings of fact or conclusions of law for the same or

similar reasons. Rather, we emphasize that the agency need only explain the rationale for each of

its changes. See Levy, 966 S.W.2d at 816. We overrule TxDOT’s fifth issue.


       3.      Sovereign immunity

               In its second issue on appeal, TxDOT argues that it has sovereign immunity from

Mid-South’s claims for attorney’s fees and interest. More specifically, TxDOT contends that there

is no clear and unambiguous waiver of sovereign immunity for attorney’s fees and interest on

contract claims against TxDOT. The ALJ recommended approval of Mid-South’s claims for

attorney’s fees and interest, but the executive director denied both claims in the final order. The

                                                 27
district court reversed the final order, awarding attorney’s fees, but not interest, to Mid-South.16

TxDOT seeks reversal of the district court’s judgment to the extent it awards attorney’s fees to Mid-

South. Because we conclude that sovereign immunity has been waived, we affirm the district court’s

judgment awarding attorney’s fees.17

                   Sovereign immunity protects the state from lawsuits for money damages and includes

both immunity from suit and immunity from liability. General Servs. Comm’n v. Little-Tex

Insulation Co., 39 S.W.3d 591, 594 (Tex. 2001). Immunity from suit bars a suit against the state

unless the legislature has expressly consented to the suit. Id. If the legislature has not expressly

waived immunity from suit, the state retains such immunity even if its liability is undisputed.

Federal Sign v. Texas S. Univ., 951 S.W.2d 401, 405 (Tex. 1997). Immunity from liability protects

the state from money judgments even if the legislature has consented to suit. Little-Tex, 39 S.W.3d

at 594.


                   A.      Immunity from suit

                   TxDOT argues that it has sovereign immunity from Mid-South’s claims for attorney’s

fees and interest because nothing in the plain language of section 201.112 of the transportation code

waives sovereign immunity for those claims. We disagree. Section 201.112 provides that a person

may seek resolution of “a claim arising out of a contract.” See Tex. Transp. Code Ann. § 201.112(a).

The supreme court has held that section 201.112 provides the exclusive remedy for contract claims



          16
         The district court based its award of attorney’s fees on section 2251.043 of the Prompt
Payment Act. See generally Tex. Gov’t Code Ann. §§ 2251.001-.055 (West 2000 & Supp. 2007).
          17
               We address Mid-South’s cross-appeal on the district court’s denial of interest below.

                                                    28
against TxDOT. See Jones Bros., 92 S.W.2d at 484. Based on this holding, we conclude that

section 201.112 waives sovereign immunity from suit for all claims arising out of a contract

governed by that section. See Tex. Transp. Code Ann. § 201.112(a)(1)-(5) (describing those

contracts subject to section 201.112).

                Having concluded that section 201.112 waives immunity from suit for all claims

“arising out of a contract,” we must determine whether Mid-South’s claims for attorney’s fees and

interest are claims “arising out of a contract” within the meaning of section 201.112. This question

presents a matter of statutory construction.

                When construing a statute, our primary goal is to determine and give effect to the

legislature’s intent. City of San Antonio v. City of Boerne, 111 S.W.3d 22, 25 (Tex. 2003). To

determine legislative intent, we look to the statute as a whole, as opposed to isolated provisions.

State v. Gonzalez, 82 S.W.3d 322, 327 (Tex. 2002). We begin with the plain language of the statute

at issue and apply its common meaning. City of San Antonio, 111 S.W.3d at 25. Where the statutory

text is unambiguous, we adopt a construction supported by the statute’s plain language, unless that

construction would lead to an absurd result. Fleming Foods of Tex., Inc. v. Rylander, 6 S.W.3d 278,

284 (Tex. 1999).

                The word “arise” means to originate, stem, or result from. Black’s Law Dictionary

102 (7th ed. 1999). The supreme court has previously construed the phrase “arising out of” in

section 101.057(2) of the Texas Tort Claims Act.18 See Delaney v. University of Houston,

835 S.W.2d 56, 59 (Tex. 1992). Section 101.057(2) is an exception to the limited waiver of


       18
            Tex. Civ. Prac. & Rem. Code Ann. § 101.057(2) (West 2005).

                                                29
immunity under the tort claims act, which provides in relevant part that the Texas Tort Claims Act

does not apply to a claim “arising out of assault, battery, false imprisonment or any other intentional

tort . . . .” Id. at 58. Consistent with its holding in LeLeaux v. Hamshire-Fannett Independent

School District, 835 S.W.2d 49, 51 (Tex. 1992), in which the supreme court construed the phrase

“arises from” in section 101.021 of the tort claims act,19 the supreme court in Delaney held that the

phrase “arising out of” requires a certain nexus, or connection, between the claim and the intentional

tort. Delaney, 835 S.W.2d at 59.

                In this case, Mid-South filed an administrative claim under section 201.112 asserting

claims for additional compensation under the contract, as well as claims for attorney’s fees and

interest under the Prompt Payment Act, chapter 2251 of the government code. There can be little

doubt that Mid-South’s claims for attorney’s fees and interest stem or result from the contract.

Without the contract and the claims for additional compensation thereunder, Mid-South would have

no claims for attorney’s fees or interest. Based on the supreme court’s holding in Delaney, we find

a sufficient nexus between Mid-South’s claims for attorney’s fees and interest and the contract

between Mid-South and TxDOT. See id. Therefore, we conclude that Mid-South’s claims for

attorney’s fees and interest are claims “arising out of a contract” within the meaning of section

201.112 and that section 201.112 necessarily waives sovereign immunity from suit on those claims.


                B.     Immunity from liability

                We next consider whether immunity from liability has likewise been waived. The




       19
            Tex. Civ. Prac. & Rem. Code Ann. § 101.021 (West 2005).

                                                  30
supreme court has consistently held that the state waives immunity from liability when it contracts

with a private party. Compare Tex. Transp. Code Ann. § 201.112(e), with Texas Natural Res.

Conservation Comm’n v. IT-Davy, 74 S.W.3d 849, 854 (Tex. 2002), and Little-Tex, 39 S.W.3d at

594. Texas law is clear, however, that a prevailing party may not recover attorney’s fees unless

permitted by statute or contract. See, e.g., Holland v. Wal-Mart Stores, Inc., 1 S.W.3d 91, 95

(Tex. 1999); Travelers Indem. Co. of Conn. v. Mayfield, 923 S.W.2d 590, 593 (Tex. 1996); Dallas

Cent. Appraisal Dist. v. Seven Inv. Co., 835 S.W.2d 75, 77 (Tex. 1992); First City Bank-Farmers

Branch v. Guex, 677 S.W.2d 25, 30 (Tex. 1984); New Amsterdam Cas. Co. v. Texas Indus., Inc.,

414 S.W.2d 914, 915 (Tex. 1967). Neither party argues that the contract provides for the recovery

of attorney’s fees or interest. TxDOT argues that section 201.112 expressly states that it does not

waive sovereign immunity from liability. TxDOT further contends that the Prompt Payment Act

does not apply and, even if it did, there is no clear and unambiguous waiver of sovereign immunity

from liability in the statute. Mid-South responds that the legislature’s inclusion of section 2251.053,

see Tex. Gov’t Code Ann. § 2251.053 (West Supp. 2007), which expressly applies to contracts

with TxDOT, demonstrates that the Prompt Payment Act applies in this case. Mid-South also

points to section 2251.043, see id. § 2251.043 (West 2000), as providing an express waiver of

sovereign immunity.

               The Prompt Payment Act requires governmental entities, including state agencies like

TxDOT, to make timely payments for the purchase of goods and services, including purchases made

by contract. See generally Tex. Gov’t Code Ann. §§ 2251.001-.055; House Comm. on Bus. &

Commerce, Bill Analysis, Tex. H.B. 275, 69th Leg., R.S. (1985). By its express terms, government



                                                  31
code section 2251.053 “applies only to a contract entered into by [TxDOT] for the construction or

maintenance of a highway or related facility.” Tex. Gov’t Code Ann. § 2251.053(a). We agree with

Mid-South that the legislature’s inclusion of section 2251.053 makes clear that the Prompt Payment

Act, chapter 2251 of the government code, applies to contracts with TxDOT.

               Moreover, section 2251.043 provides that in a formal administrative or judicial action

to recover a payment or interest due under chapter 2251, “the opposing party, which may be the

governmental entity or the vendor, shall pay the reasonable attorney’s fees of the prevailing party.”

Id. § 2251.043 (West 2000). By its terms, section 2251.043 requires the opposing party to pay the

prevailing party’s attorney’s fees regardless of whether the opposing party is a governmental entity.

Id. The plain language of this provision contemplates that a governmental entity like TxDOT may

be required to pay reasonable attorney’s fees. Id. By authorizing such payments, it follows and we

conclude the legislature in section 2251.043 has waived sovereign immunity from liability for

the award of attorney’s fees. See Texas Educ. Agency v. Leeper, 893 S.W.2d 432, 446 (Tex. 1994)

(by authorizing awards of attorney’s fees, the Uniform Declaratory Judgments Act necessarily

waives governmental immunity for such awards).20 We overrule TxDOT’s second issue and affirm

the district court’s judgment that Mid-South is entitled to recover attorney’s fees.


       4.      Substantial Evidence

               In its third and fourth issues on appeal, TxDOT claims that the district court erred in


       20
            Because the plain language of section 2251.026 of the government code likewise
authorizes interest payments by a state agency, we also conclude that the legislature has necessarily
waived sovereign immunity from liability for the award of interest. See Tex. Gov’t Code Ann.
§ 2251.026 (West Supp. 2007); Texas Educ. Agency v. Leeper, 893 S.W.2d 432, 446 (Tex. 1994).

                                                 32
reversing the final order because it was supported by substantial evidence. Specifically, TxDOT

argues that substantial evidence supports the executive director’s findings, conclusions, and

decisions regarding operational delays, microsurfacing, and return of liquidated damages. As

previously noted, there is no evidence in the record supporting the executive director’s decision to

reduce Mid-South’s efficiency by a factor of 50%; therefore, we conclude that the executive

director’s findings, conclusions and decision regarding operational delays are not supported by

substantial evidence. With regard to the executive director’s findings, conclusions and decisions on

microsurfacing and return of liquidated damages, we find that, based on Stucker’s testimony, there

is substantial evidence to support the executive director’s decision. Nevertheless, as explained

above, we conclude that the executive director’s decision was arbitrary and capricious. Accordingly,

we overrule TxDOT’s third and fourth issues.


Mid-South’s Claim on Cross-Appeal

               In a single issue on cross-appeal, Mid-South argues that the district court erred in

denying Mid-South’s claim for interest under the Prompt Payment Act. See Tex. Gov’t Code Ann.

§§ 2251.002 (exceptions to interest payments), .026 (authorizing interest payments by state

agencies). Section 2251.002 of the government code provides that where there is a bona fide dispute

between a political subdivision and a vendor, contractor, subcontractor, or supplier that causes a

payment to be late, interest is not due on that payment. See id. § 2251.002(a)(1).21 Because the


       21
           We note that section 2251.002 was amended in 2003, but the amendment provided that
it only applied to contracts executed after September 1, 2003. See Act of May 28, 2003, 78th Leg.,
R.S., ch. 286, § 4(b), 2003 Tex. Gen. Laws 1252, 1255. The parties agree that because the contract
at issue here was executed in 1998 the pre-2003 version of section 2251.002 applies. The parties

                                                33
district court found that a bona fide dispute existed between Mid-South and TxDOT, the district

court affirmed the final order finding that Mid-South was not entitled to interest. We disagree.

                 Section 2251.026(a) of the Prompt Payment Act provides that state agencies, like

TxDOT, are liable for interest on overdue payments.22 Id. § 2251.026(a) (West Supp. 2007). In the

case of a disputed payment, section 2251.042 provides that a vendor, like Mid-South, is entitled to

interest if the dispute is resolved in the vendor’s favor. See id. § 2251.042 (West 2000).

                 Moreover, the exception for a “bona fide dispute” found in section 2251.002(a)(1)

applies only to political subdivisions, not state agencies. Id. § 2251.002(a)(1). That exception

provides:


        This chapter does not apply to a payment made by a governmental entity, vendor, or
        subcontractor if: . . . there is a bona fide dispute between the political subdivision and


also agree that the 2003 amendments do not affect the outcome of this appeal because there were no
substantive changes to the relevant provisions in the statute. Therefore, we cite to the current version
of the statute.
        22
             Prior to its amendment in 2001, section 2251.026(a) provided:

        If the warrant for a payment the originating state agency owes is not mailed or
        electronically transmitted before the payment is overdue, the agency is liable for an
        interest payment that accrues under this chapter.

Act of May 4, 1993, 73rd Leg., R.S., ch. 268, § 1, 1993 Tex. Gen. Laws 583, 845, amended by Act
of May 20, 1997, 75th Leg., R.S., ch. 634, § 3(a), 1997 Tex. Gen. Laws 2179, 2180 (current version
at Tex. Gov’t Code Ann. § 2251.026(a) (West Supp. 2007)). The current version of section
2251.026(a) provides:

        A state agency is liable for any interest that accrues on an overdue payment under this
        chapter and shall pay the interest from funds appropriated or otherwise available to
        the agency at the same time the principal is paid.

Tex. Gov’t Code Ann. § 2251.026 (West Supp. 2007).

                                                   34
       a vendor, contractor, subcontractor or supplier about the goods delivered or the
       services performed that causes the payment to be late.


Id. (emphases added). The Prompt Payment Act’s definition of “governmental entity” confirms this

distinction. See id. § 2251.001(3) (West Supp. 2007). Section 2251.001(3) defines “governmental

entity” as “a state agency or political subdivision of this state.” Id. TxDOT is a state agency, not

a political subdivision. Because the plain language of section 2251.002(a)(1) references only “a bona

fide dispute between the political subdivision and a vendor, contractor, subcontractor, or supplier,”

the exception in section 2251.002(a)(1) does not apply to TxDOT—a state agency—and it is not

relevant whether a bona fide dispute existed between Mid-South and TxDOT. For these reasons,

we conclude that the district court erred in its judgment that Mid-South was not entitled to interest.

               The record reflects that the ALJ awarded interest to Mid-South on those claims in

which he recommended that Mid-South prevail. The ALJ noted that TxDOT did not dispute the

accrual dates urged by Mid-South.23 Nor did TxDOT dispute the interest rates urged by Mid-South.24

The executive director adopted the ALJ’s recommendations that Mid-South prevail on Claim Nos.

1, 4, 9, and 13, and TxDOT has not challenged those determinations on appeal. We conclude that

       23
          Mid-South urged accrual dates of July 20, 2000 for Claim No. 12; October 3, 1999, for
claim No. 14; and October 3, 1999, for all other claims.
       24
           Based on section 2251.025(b) of the government code, Mid-South urged an interest rate
of 1% per month through June 30, 2004, and 5% per annum (the Wall Street Journal prime rate as
of July 1, 2003, plus 1%) thereafter. See Tex. Gov’t Code Ann. § 2251.025(b) (West 2000 & Supp.
2007). Although TxDOT did not dispute the interest rates urged by Mid-South, we note that section
2251.025(b) was amended in 2003, and the legislature provided that the amendments do not apply
to a payment that became overdue before September 1, 2004. See Act of June 2, 2003, 78th Leg.,
R.S., ch. 1310, § 122(f), 2003 Tex. Gen. Laws 4748, 4794-95. The rate of interest for such a
payment is “the rate determined under the law in effect before July 1, 2004, and the former law is
continued in effect for that purpose.” Id.

                                                 35
Mid-South is entitled to interest on Claim Nos. 1, 4, 9, and 13 based on the amounts originally

awarded by the executive director for those claims. With regard to the additional claims that we

have remanded—including Claim No. 2 for reduced lane closures/operational delays; Claim No. 12

for microsurfacing; and Claim No. 14 for return of liquidated damages—we conclude that Mid-

South is entitled to interest based on the amounts ultimately awarded on remand. Accordingly, we

sustain Mid-South’s issue on cross-appeal, and we remand for further proceedings to determine the

interest due on Mid-South’s claims.


                                         CONCLUSION

               Having considered all of the claims raised on appeal by both TxDOT and Mid-South,

we affirm the district court’s judgment reversing the final order in part, and we reverse in part and

remand this cause to TxDOT for further proceedings consistent with our opinion as authorized under

section 2001.174(2) of the APA. See Tex. Gov’t Code Ann. § 2001.174(2) (West 2000). With the

exception of the issue regarding interest due Mid-South, we limit the scope of this remand to the

record previously established by the parties before the ALJ. See Texas Health Facilities Comm’n

v. Nueces County Hosp. Dist., 581 S.W.2d 768, 770 (Tex. Civ. App.—Austin 1979, no writ)

(limiting scope of remand under similar statute); First Sav. & Loan Assoc. v. Lewis, 512 S.W.2d 62,

64 (Tex. Civ. App.—Austin 1974, writ ref’d n.r.e.) (court may control scope of its remand).




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                                           __________________________________________

                                           Jan P. Patterson, Justice

Before Justices Patterson, Puryear and Pemberton

Affirmed in part; Reversed and Remanded in part

Filed: December 19, 2007




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