It is recommended that cities do not agree to arbitration, either voluntarily or by contract. First, this may result in protections provided by state law from being applied on behalf of the city. Second, an arbitrator may not have experience in municipal law, and may apply equitable principles that would not apply in a court of law.
For instance, state law will often provide cities extra protection against damages and lawsuits, such as immunity from liability, which protects a city from judgment even if the legislature has agreed to allow it to be sued; alternatively, there may be immunity from suit which means a city cannot be sued unless it consents to be sued. Tex. Dep?t of Transp. v. Jones, 8 S.W.3d 636, 638 (Tex.1999). This is a general statement and many times an actual determination of privileges is fact-intensive.
However, in Texas, whenever a city contracts with a person or entity, then its immunity from suit is waived. See Texas Local Government Code Chapter 271.152. But damages are limited to factors such as the balance owed for services provided, possible increases for costs to perform as a result of city-caused delays; amounts for change orders authorized by the city, reasonable or necessary attorney fees and interest. Consequential damages are often limited and exemplary damages are not allowed. An arbitrator may not follow these limitations, whereas a court by law has to apply these limitations.
As always it is recommended that both a city or private party contracting with a city consult with an attorney regarding contracts and the provisions therein. For more information, please contact Leonard Schneider in our Houston office.