Sharyland Water Supply Corp. v. City of Alton, 354 S.W.3d 407

Sharyland Water Supply Corp. sues the City of Alton and three contractors after sewer lines were installed crossing the water system, allegedly in violation of standards and regulations.
The jury found Alton breached its Water Supply Agreement and the contractors were negligent; Sharyland sought damages and attorney’s fees.
The court of appeals reversed in part, granting mainly a take-nothing judgment against Sharyland except for a declaratory-judgment fee issue against Alton.
The Supreme Court of Texas held immunity issues and damages limits under Local Government Code chapter 271 apply, but allowed contractor-negligence claims to proceed under an economic loss analysis, reversing in part.
The Court reaffirmed immunity defenses, addressed declaratory-judgment fee issues, and remanded for issues not reached by the appellate court.
Key holdings include that the economic loss rule does not bar Sharyland’s negligence claim against the contractors, and that Sharyland cannot recover certain fees against Alton under 271.153 as it stood at the time suit was filed.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Waiver of immunity under 271.152	Sharyland argues 271.152 waives immunity for its contract claim.	Alton contends immunity remains despite contracting with Sharyland.	271.152 waiver applies; immunity waived.
Damages under 271.153	Sharyland seeks damages for repair costs under 271.153.	Alton contends damages limited to listed categories; no recovery for repair costs here.	Damages limited to listed categories; repair costs not recoverable under 271.153 as written.
Counterclaim and offset	Sharyland argues counterclaims by Alton offset claims and defeat immunity.	Alton’s counterclaims do not defeat immunity where damages are not recoverable or offsetable.	Equitable/offset considerations did not authorize recovery; immunity remains in context.
Economic loss rule vs. contractors	Sharyland contends the economic loss rule does not bar negligence against contractors.	Contractors argue economic loss rule bars tort recovery for purely economic losses.	Economic loss rule does not preclude the negligence claim against contractors; damages arise from repair and system damage.
Third-party beneficiary status	Sharyland claims it was a third-party beneficiary of contractor contracts.	Alton/contractors argue no clear intent to confer direct benefit to Sharyland.	Sharyland not a third-party beneficiary; not entitled to related damages or fees from contractors.

Nobility Homes of Tex., Inc. v. Shivers, 557 S.W.2d 77 (Tex. 1977) (economic loss rule origins; implied UCC remedies for economic loss from defective products)
Mid Continent Aircraft Corp. v. Curry County Spraying Service, Inc., 572 S.W.2d 308 (Tex. 1978) (economic loss as product/contract-based losses addressed via UCC or contract law)
Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617 (Tex. 1986) (economic loss as limited to contract breach; no exemplary damages for negligence in such context)
Southwestern Bell Telephone Co. v. DeLanney, 809 S.W.2d 493 (Tex. 1991) (distinguishes contract duties from tort duties; injury limited to economic loss sounds in contract)
Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41 (Tex. 1998) (fraudulent inducement exemption; economic loss rule not extended to fraud claims)
Reata Construction Corp. v. City of Dallas, 197 S.W.3d 371 (Tex. 2006) (government immunity context: offset against city’s counterclaims; immunity not absolute in all responses)
City of Irving v. Inform Constr., Inc., 201 S.W.3d 693 (Tex. 2006) (offset against governmental counterclaims; immunity discussed in offset context)
IT-Davy, 74 S.W.3d 849 (Tex. 2002) (equitable waiver; no blanket waiver-by-conduct in breach-of-contract suit against government)