Does amending an old government contingent-fee lawyer contract trigger Texas's Chapter 2254 approval and fee-cap rules?

Plain-English summary

When a Texas city, county, or other political subdivision hires outside lawyers on a contingent fee basis, the contract has to clear a set of oversight rules. Representative Terry Canales, chair of the House Committee on Transportation, asked the Attorney General a timing question: if a political subdivision signed a contingent fee legal contract before September 1, 2019, and later amends it, must the amendment comply with the oversight provisions in Government Code chapter 2254?

The answer turns on two laws and two effective dates. In 2019, the Eighty-sixth Legislature passed House Bill 2826, which added requirements to subchapter C of chapter 2254 for contingent fee legal contracts "entered into" on or after September 1, 2019. Those requirements include a specified fee structure with a cap (section 2254.106), a public-justification process with written findings of a substantial need for the services (section 2254.1036), and Attorney General approval of the contract (section 2254.1038). A contract made in violation of subchapter C is "void as against public policy" (section 2254.110). In 2021, the Eighty-seventh Legislature passed Senate Bill 1821, which broadened the definition of "contingent fee contract" to include an amendment that "changes the scope of representation" or that "may result in" filing an action or amending a petition in an existing action. That change took immediate effect on May 19, 2021.

The AG split the analysis by when the amendment happens. For an amendment made on or after May 19, 2021, the expanded definition applies directly, so an amendment that changes the scope of representation, like the example of letting attorneys pursue construction-defect lawsuits over additional school buildings, would likely be subject to chapter 2254's approval process, AG approval, and fee cap. For an amendment made after September 1, 2019 but before May 19, 2021, House Bill 2826 did not define "enter into," so the AG looked to general contract law. A modification that changes a material element of a contract creates a "new" contract that takes the place of the original (Miller v. McCarty; Blackstone Medical). Because chapter 2254's provisions focus on the specific legal matter being pursued, the AG reasoned that an amendment expanding the scope to a new legal matter changes a key element, so a court could find the amended contract is a new contract "entered into" for purposes of House Bill 2826.

The closing point applies to both windows: if a court finds an amended contingent fee contract is subject to chapter 2254 and it failed the requirements, the contract is void under section 2254.110, and no fees may be paid for work done under it.

What this means for you

This describes what the opinion holds. It is the AG's 2021 reading; statutes can change, so confirm current law before relying on it.

Cities, counties, and other political subdivisions

The opinion treats an amendment that expands the scope of a contingent fee legal contract as potentially triggering chapter 2254, even when the original contract predates September 1, 2019. For amendments on or after May 19, 2021, the AG reads the expanded statutory definition as covering scope-changing amendments; for earlier amendments, it says a court could find a scope-expanding amendment creates a new contract subject to the rules.

Outside counsel on contingent fee arrangements

The opinion identifies the consequence of skipping the oversight steps: under section 2254.110, a covered contract that fails the requirements is void as against public policy, and no fees may be paid under it or under any theory of recovery for the work.

Government attorneys and contract administrators

The opinion frames whether a modification creates a "new" contract as a fact question turning on the parties' intent and on whether a material element, here the underlying legal matter, was changed. It describes the approval, written-findings, and AG-approval steps as the elements a covered amendment must satisfy.

Common questions

Q: Our contract predates September 1, 2019. Are we automatically exempt when we amend it?
A: Not necessarily, per the AG. An amendment that expands the scope of representation can be treated as a new contract subject to chapter 2254, depending on when it was made and the facts.

Q: What changed on May 19, 2021?
A: Senate Bill 1821 broadened the definition of "contingent fee contract" to include amendments that change the scope of representation or that may result in filing an action or amending a petition. Amendments on or after that date fall within the definition.

Q: What about an amendment made between September 1, 2019 and May 19, 2021?
A: The AG said House Bill 2826 did not define "enter into," so a court applying general contract law could find that a scope-expanding amendment creates a new contract "entered into" after September 1, 2019 and therefore subject to the rules.

Q: What happens if a covered amendment skips the required steps?
A: Under section 2254.110, it is void as against public policy, and no fees may be paid to anyone under the contract or under any theory of recovery for work done in connection with it.

Q: Which steps does chapter 2254 require?
A: The opinion points to the fee structure and cap (section 2254.106), public justification and written findings of substantial need (section 2254.1036), and Attorney General approval with a description of the matter (section 2254.1038).

Background and statutory framework

Chapter 2254 of the Government Code governs state and local contracts for professional and consulting services (sections 2254.001 through 2254.154), with subchapter C (sections 2254.101 through 2254.110) covering contingent fee legal contracts. House Bill 2826 (Act of May 24, 2019) added the fee cap, justification, and Attorney General approval requirements and made them apply to contracts entered into on or after September 1, 2019. Senate Bill 1821 (Act of May 19, 2021) amended the definition of "contingent fee contract" in section 2254.101(2) to reach scope-changing amendments and took immediate effect by a two-thirds vote.

The AG drew the "new contract" analysis from a line of Texas contract cases: Coleman v. Reich on the elements of an enforceable contract; In re F.C. Holdings and Enserch Corp. v. Rebich on what a modification is; Hathaway v. Gen. Mills on a modification needing to satisfy the elements of a contract; and Miller v. McCarty and Blackstone Medical on a modification creating a new contract that replaces the original. Whether a contract was modified, the AG noted, depends on the parties' intent and is a question of fact (Medical Imaging Solutions Group). The AG tied the materiality point to specific subchapter C provisions, including section 2254.1036(a)(1)(A) and (b)(1) and section 2254.1038(a)(1) and (b)(3)(A), which focus on the particular legal matter to be pursued.

Citations and references

Statutes:

• Tex. Gov't Code §§ 2254.101–.110 (subchapter C; contingent fee legal contracts)
• Tex. Gov't Code §§ 2254.106, 2254.1036, 2254.1038, 2254.110 (fee cap; justification and findings; AG approval; void contracts)
• House Bill 2826, 86th Leg. (2019); Senate Bill 1821, 87th Leg. (2021)

Key cases:

• Miller v. McCarty, 323 S.W.3d 612 (Tex. App.—Texarkana 2010, no pet.) (a modified contract is a new agreement replacing the original)
• Blackstone Med., Inc. v. Phoenix Surgicals, L.L.C., 470 S.W.3d 636 (Tex. App.—Dallas 2015, no pet.) (modification creates a new contract of new and unchanged provisions)
• Hathaway v. Gen. Mills, Inc., 711 S.W.2d 227 (Tex. 1986) (Texas Supreme Court; a modification must satisfy the elements of a contract)
• Coleman v. Reich, 417 S.W.3d 488 (Tex. App.—Houston [14th Dist.] 2013, no pet.) (elements of an enforceable contract)
• Med. Imaging Solutions Grp., Inc. v. Westlake Surgical, LP, 554 S.W.3d 152 (Tex. App.—San Antonio 2018, no pet.) (whether a contract was modified is a fact question)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/ken-paxton/kp-0378
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2021/kp-0378.pdf

Original opinion text

August 2, 2021

The Honorable Terry Canales
Chair, House Committee on Transportation
Texas House of Representatives
Post Office Box 2910
Austin, Texas 78768-2910

Opinion No. KP-0378

Re: Whether amendments to a contingent fee contract for legal services entered into before September 1, 2019, must comply with chapter 2254 of the Government Code (RQ-0397-KP)

Dear Representative Canales:

You ask whether amendments to a contingent fee contract for legal services originally entered into before September 1, 2019, must comply with certain provisions in chapter 2254 of the Government Code.¹

In 2019, the Legislature enacted oversight provisions that apply to contingent fee legal contracts entered into on or after September 1, 2019.

Chapter 2254 governs state and local contracts for professional and consulting services. See generally TEX. GOV'T CODE §§ 2254.001–.154. Subchapter C, about which you ask, governs contingent fee contracts for legal services. See generally id. §§ 2254.101–.110. As a result of changes² to subchapter C made in 2019 during the Eighty-sixth legislative session, political subdivisions entering into contingent fee legal service contracts must, among other things, adhere to a specified method for calculating contingent fees, including a cap on fees, and must comply with certain approval requirements. See id. §§ 2254.106 (establishing fee structure), 2254.1036 (requiring prior justification to the public by the governmental body, as well as written findings documenting the justification), 2254.1038 (requiring Attorney General approval of the contract). A contract made in violation of subchapter C "is void as against public policy." Id. § 2254.110. These requirements apply "only to a contract entered into on or after the effective date" of the bill that enacted the changes, which is September 1, 2019. House Bill 2826 § 10; see also id. § 11 ("This Act takes effect September 1, 2019.").

In 2021, the Legislature broadened the scope of contingency fee agreements to which oversight applies.

Since the time of your request, the Eighty-seventh Legislature in 2021 amended the definition of a contingent fee contract to "include[] an amendment to a contract for legal services . . . if the amendment: (A) changes the scope of representation; or (B) may result in: (i) the filing of an action; or (ii) the amending of a petition in an existing action."³ This change was made effective "immediately . . . [upon] a vote of two-thirds of all the members elected to each house," which occurred on May 19, 2021. Senate Bill 1821 § 3. The new definition of "contingent fee contract" applies "to a contract or contract amendment entered into on or after" May 19, 2021. Id. § 2 (referring to the effective date of the bill).

With this background in mind, we address your question of whether a contract amendment occurring on or after September 1, 2019, that changes the scope of work of a contract existing prior to that date must comply with the contingency fee contract provisions of chapter 2254. See Request Letter at 2 (asking specifically whether failure to adhere to requirements regarding the governmental approval process, Attorney General approval, and a cap on fees would render the amendments void). As an example scenario, you ask whether a political subdivision that contracted with attorneys "before September 1, 2019 to pursue a multimillion-dollar lawsuit for alleged defects in the construction of a specified elementary school [may] amend that contract after September 1, 2019 to allow the attorneys to pursue other multimillion-dollar lawsuits for alleged defects in the construction of other school buildings" or whether such an amendment is "void and unenforceable." Id. You do not specify the timing of such an amendment.

For contracts amended on or after May 19, 2021, an expanded definition of "contingent fee contract" applies.

If the contract is amended on or after May 19, 2021, a court would apply the newly-expanded definition of "contingent fee contract," which includes an amendment that "changes the scope of representation" or which "may result in . . . the filing of an action; or . . . the amending of a petition in an existing action." Senate Bill 1821 § 1. Given that the scenario you describe would change the scope of representation, a court would likely find that such an amendment is subject to the contingency fee contract provisions of chapter 2254 of the Government Code, including the governmental approval process, Attorney General approval, and a cap on fees. See TEX. GOV'T CODE §§ 2254.106 (establishing fee structure), 2254.1036 (requiring prior justification to the public by the governmental body, as well as written findings documenting the justification), 2254.1038 (requiring Attorney General approval of the contract).

For contracts amended after September 1, 2019, but prior to May 19, 2021, House Bill 2826's oversight provisions can still apply under certain circumstances.

The Eighty-sixth Legislature in 2019 made the requirements of House Bill 2826 prospectively applicable to contracts "entered into" on or after September 1, 2019, but it did not define what it means to "enter into" a contract for purposes of the bill. House Bill 2826 § 10. Generally, a party enters into an enforceable contract when there is (1) an offer, (2) acceptance in strict compliance with the terms of the offer, (3) a meeting of the minds, (4) each party's consent to the terms, (5) execution and delivery of the contract with the intent that it be mutual and binding, and (6) consideration. Coleman v. Reich, 417 S.W.3d 488, 491 (Tex. App.—Houston [14th Dist.] 2013, no pet.).

When a contract is modified, there "is some change in an original agreement that introduces a new or different element into the details of the contract, but [the modification] leaves its general purposes and effect undisturbed." In re F.C. Holdings, Inc., 349 S.W.3d 811, 815 (Tex. App.—Tyler 2011, orig. proceeding); see also Enserch Corp. v. Rebich, 925 S.W.2d 75, 83 (Tex. App.—Tyler 1996, writ dism'd by agr.). A contract modification must likewise satisfy all the essential elements of a contract. Hathaway v. Gen. Mills, Inc., 711 S.W.2d 227, 228 (Tex. 1986). A contract modified thus "constitutes a new agreement that takes the place of the original."⁴ Miller v. McCarty, 323 S.W.3d 612, 615 (Tex. App.—Texarkana 2010, no pet.); see also Blackstone Med., Inc. v. Phoenix Surgicals, L.L.C., 470 S.W.3d 636, 647 (Tex. App.—Dallas 2015, no pet.) ("A modification to a contract creates a new contract that includes the new modified provisions and the unchanged old provisions.").

We observe that House Bill 2826 added several provisions to chapter 2254, subchapter C, of the Government Code that focus on the legal services to be provided. For example, subsection 2254.1036(a)(1)(A) requires a political subdivision to notify the public of "the reasons for pursuing the matter that is the subject of the legal services." TEX. GOV'T CODE § 2254.1036(a)(1)(A). In connection with the approval of a contingent fee contract, a political subdivision must state its findings in writing that "there is a substantial need for the legal services" in question. Id. § 2254.1036(b)(1). When it submits the contract to the Attorney General for approval, the political subdivision must include "a description of the matter to be pursued." Id. § 2254.1038(a)(1). And the Attorney General can deny that approval if "the legal matter . . . presents one or more questions of law or fact that are in common with a matter the state has already addressed or is pursuing." Id. § 2254.1038(b)(3)(A). These provisions suggest that the details of the underlying legal services are important elements for the justification of a contingent fee legal arrangement. As such, in a scenario where this element is changed through an amendment, a modified "new" contract results.

Here, the amendment described would expand the scope of work to allow attorneys to pursue additional multimillion-dollar lawsuits for alleged defects in the construction of other school buildings. See Request Letter at 2. Thus, a court could find that the amended contract is a new contract "entered into" for purposes of the requirements in House Bill 2826.

Under either timing scenario, failure of an amended contingency fee contract subject to oversight provisions to meet those requirements renders the contract void.

If a court finds that an amended contingency fee contract for legal services is subject to chapter 2254's requirements, and the amended contract failed to meet those requirements, it would be void under subsection 2254.110 of the Government Code. TEX. GOV'T CODE § 2254.110 ("A contract entered into or an arrangement made in violation of this subchapter is void as against public policy, and no fees may be paid to any person under the contract or under any theory of recovery for work performed in connection with a void contract.").

¹ See Letter from Honorable Terry Canales, Chair, House Transp. Comm., to Honorable Ken Paxton, Tex. Att'y Gen. at 2 (Feb. 1, 2021) ("Request Letter").

² See Act of May 24, 2019, 86th Leg., R.S., ch. 857, §§ 2, 4, 2019 Tex. Sess. Law Serv. 2320, 2320–2322 ("House Bill 2826").

³ Act of May 19, 2021, 87th Leg., R.S., S.B. 1821, § 1 (to be codified as an amendment to TEX. GOV'T CODE § 2254.101(2)) ("Senate Bill 1821").

⁴ Whether a contract has been modified "depends on the parties' intentions and is a question of fact." Med. Imaging Solutions Grp., Inc. v. Westlake Surgical, LP, 554 S.W.3d 152, 161 (Tex. App.—San Antonio 2018, no pet.).

S U M M A R Y

House Bill 2826 from the Eighty-sixth Legislature amended subchapter C of chapter 2254 of the Government Code to add certain requirements to contingent fee contracts for legal services entered into on or after September 1, 2019. Senate Bill 1821 from the Eighty-seventh Legislature, effective on May 19, 2021, broadened the reach of those requirements by amending the definition of "contingent fee contract" in subchapter C to include amendments to contingent fee contracts under certain circumstances.

To the extent a contract amendment expands the scope of legal services to encompass a new legal matter, whether made before or after May 19, 2021, a court could find on particular facts that the amended contract is subject to chapter 2254 requirements regarding the governmental approval process, Attorney General approval, and a cap on fees. A contract amendment subject to chapter 2254 of the Government Code but failing to meet the law's requirements is void under subsection 2254.110.

Very truly yours,

KEN PAXTON
Attorney General of Texas

BRENT E. WEBSTER
First Assistant Attorney General

LESLEY FRENCH
Chief of Staff

MURTAZA F. SUTARWALLA
Deputy Attorney General for Legal Counsel

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

BECKY P. CASARES
Assistant Attorney General, Opinion Committee