Tuesday, September 20, 2011

Texas Legislature Passes Anti-Indemnification Law

Indemnification is a topic that has for years been a sore spot for subcontractors. In a nutshell, upstream parties, such as owners and general contractors, frequently require indemnification from downstream parties on a project, such as the mechanical contractors. While this does not sound so bad in principle, the reality has not been so rosy for downstream contractors.

For an indemnification agreement to be legally enforceable under Texas law, it needed to satisfy the “express negligence doctrine.” The express negligence doctrine provides that parties seeking to indemnify the indemnitee from the consequences of its own negligence must express that intent in specific terms (and be specifically stated within the four corners of the contract).

In other words, if a general contractor required a sub to indemnify it, the sub would have to indemnify the general contractor not just for the sub’s negligence, but also for the general contractor’s own negligence. This is a huge shifting of risk, but since owners and general contractors held the purse strings of a project, they usually were able to negotiate these heavy-handed indemnity provisions into their contracts.

One of the biggest complaints against these indemnity provisions was that they were a disproportionate shifting of risk. For instance, a subcontract may be worth $50,000, but by providing indemnification to the GC or owner on a large project for their own mistakes, the potential liability could easily be in the millions (example–GC’s negligence causes an accident that catastrophically injured or killed someone). For smaller subcontractors, that potential liability could easily have exceed the limits of their general liability insurance.

Subcontractor groups have been fighting against these indemnity provisions through the Texas legislature for years, with limited success. But things may have just drastically changed. This most recent legislative session brought the enactment of HB 2093. This bill, which creates what will become the new “Chapter 151" of the Texas Insurance Code, essentially voids any contract that requires the indemnitor to indemnify the indemnitee against the indemnitee’s own negligence.

Translating that into plain English, a general contractor should no longer be able to require the HVAC contractor to indemnify the GC for the GC’s own negligence. Even if it is in the contract, the provision would be unenforceable. Additionally, HB 2093 states that the parties to a contract cannot waive this anti-indemnity provision.

It will take some time for the nuances of this new law to be worked out, and it does not go into effect until January 1, 2012. All contractors--not just subs--would be wise to become familiar with this new law well in advance of its effective date and take head of it in negotiating future contracts.

Friday, January 7, 2011

Top 10 New Year’s Legal Resolutions for Everyone in Construction

Once again, I present my Top 10 New Year's Resolutions for everyone in the construction industry.

10. Take time to laugh a little.

9. Be consistent in your contract drafting to avoid fighting the same battles in litigation AND in arbitration.

8. Promptly report all potential losses and claims to your insurance company and specifically request defense and indemnity for you and any employee named in the claim or lawsuit. And document your reporting!

7. Beware of lien waivers!

6. Safety first on the job site. It avoids litigation, keeps OSHA away, maintains employee morale, and most importantly–it’s the right thing to do.

5. Know who you’re contracting with and make sure they are financially viable (or have a bonding or insurance company that is). This is so important I repeated it from last year’s list and moved it up.

4. Sometimes, the best decisions you make are the decisions to turn down business. A marginal, slow, or non-paying customer that brings headaches is sometimes worse than no customer at all.

3. Don’t put all your eggs in one basket. In other words, don’t rely solely on one large project, as problems with that project (including nonpayments) will put you at the upstream party’s mercy and drastically hurt your business.

2. Properly document your change orders and don’t just rely on unsigned letters or emails.

And once again, the #1 New Year’s legal resolution for 2011 for everyone in construction:

1. Read your contracts! Understand your contracts! Enforce your contracts!!!

Monday, October 11, 2010

Lessons The Construction Industry Can Learn From The Foreclosure Crisis

One of the major headlines in the news lately has been the moratoriums banks have put on foreclosures. Some of the major lenders, including JP Morgan Chase, Bank of America, and GMAC, have voluntarily stopped foreclosing on residential properties due to questionable underlying documentation. Many state attorneys general have also come forward demanding that banks stop foreclosures until they can provide proof that they have all the proper paperwork on the properties in question.

No doubt, many of the properties subject to foreclosure formed the basis of the boom period for residential construction companies. But apart from the macroeconomics of supply and demand, are there any lessons the construction industry in general can learn from watching the banks?

Absolutely. The biggest problem I see with the banks was carelessness or sloppiness in their documentation and record-keeping.

Lenders relied heavily on forms with a few blanks to be filled in with the details of each transaction. With as many mortgages as were being sold, contracts, assignments, deeds of trust, and other critical documents were completed by unskilled employees who did not appreciate the significance of the documents they were creating or, more importantly, the consequences if they were not done correctly.

Unfortunately, I have seen these themes rear their ugly heads in the construction industry all too often.

Anyone who has spent any time in construction can tell you how critically important good record-keeping is. It is key in submitting payment applications, documenting compliance with scopes of work and code requirements, and proving claims or defenses if litigation arises.

When it comes to protecting your rights to payment through liens, accurate and proper documentation is indispensable. Liens are easy enough to perfect. However, they are also highly technical, and a failure to comply with the statutory requirements of your particular jurisdiction can render your lien unenforceable.

Of course, the most egregious sin of poor record-keeping in the construction industry–at least in my opinion–is the handshake contract. (A close second is the two-line purchase order that doubles as the contract for your major construction project.) In a perfect world, a handshake agreement would be fine. Unfortunately, we don’t live or work in that imaginary place. What happens when there is a question about scope of work? Or about how long construction will take? How are payments to be made, and what happens if there is a dispute about defects? When will as-built drawings be provided, and what happens if they aren’t?

The beauty of contracts is that they clearly define the duties and obligations of all the parties and eliminate ambiguity. Obviously, the larger the contract value and more complex the construction project, the more detailed the contract should be to address–in advance–all the potential ambiguities.

Banks and residential lenders have gotten themselves in trouble because they did not accurately document their transactions. Now they are paying the price by having difficulty foreclosing when borrowers have defaulted.

Contractors can learn a valuable lesson. Avoid headaches down the road such as payment delays, liquidated damages, or even litigation, by having good practices in place and accurately documenting your work.

Tuesday, August 31, 2010

4 Practical Steps to Help Ensure Prompt Payment

If I have seen one trend in construction over the past couple years, since the downturn in the industry, it has been an increase in payment disputes. These have ranged from simple disagreements about the scope of work in a contract to an upstream party closing its doors and leaving its subcontractors with no payment and little practical recourse.

The conversation I most dislike having with my clients is telling them that yes, they are owed a significant sum of money, but due to the other party’s insolvency, they will probably never see a penny. While most contractors understand why they are not getting paid, it does little to ease the financial sting. To help avoid this conversation, here are four practical steps every contractor can take to enhance the likelihood of being paid on their contracts.

Practical Step #1: Know Who You’re Contracting With

As relatively small as the construction industry is, there are still a lot of players entering into contracts. Unfortunately, construction is one industry (among many others) that has its fair share of fly-by-night companies–ones that you’d never heard of 6 months ago and that you’ll never see 6 months from now. Other times, contractors will be generally familiar with a company, but not well versed in the nuts and bolts of how it operates, its track record of making payments, how it handles change orders, etc.

Perhaps most importantly, the financial stability of another company may not be well known to the contractor.

During the construction boom where there were plenty of projects for everyone, contractors could be a little more selective with whom they worked. If they didn’t feel completely comfortable with a developer, general contractor, or subcontractor, they could simply pass, as another project wouldn’t be far behind. But this is a different day, and contractors have gotten a lot less selective about they projects they take on (and the profits they will accept). As a result, there is a greater chance of contracting with a company you’re not familiar with.

I’m not going to advise contractors who are straining to keep their doors open or avoid layoffs to turn down potential business just because they do not know the other party. However, when working with a new company, it is wise to perform some due diligence, whether it is a developer, general contractor, or a sub.

Due diligence may not be the first step you take in the bidding process, but it should be part of your company’s protocol before signing a final contract and making a substantial commitment of time and money. Consider the care you take before simply hiring an employee–you request a resume or job application, conduct an interview, check references, sometimes conduct a second interview, and possibly require a drug test. Your process for evaluating companies you contract with and with whom you are committing thousands or millions or dollars should be no less strenuous.

Knowing a little more about who you’re contracting with will not prevent all disputes, but it will definitely help you avoid a great number of them.

Practical Step #2: Payment Bonds, Payment Bonds, Payment Bonds!!!

Surety bonds protect your construction investments! This is not only the title of a recent guest post, it is an accurate statement of the purpose of these instruments. Even the best developers and construction companies sometimes are unable to pay on contracts. Whether it’s an industry-wide downturn or a project that has simply been disastrous, sometimes a party simply cannot or will not pay their obligations. In that scenario, it is extremely important to have a financially sound bonding company in place that can step in and pay.

Obviously, the bigger the project the more important a payment bond is. As the contract price goes up, so does the potential negative impact of nonpayment.

However, I’ve seen many smaller projects where no payment bonds are used. I realize that at a low enough project price, the added expense of bonds make a contract economically unfeasible. But before you write off the importance of this added bit of “payment insurance,” ask yourself how your company could withstand the impact of nonpayment. Not slow payments, not partial payments, and not the ability to win a judgment in litigation. Can your company absorb a complete non-payment. If this scenario spells disaster for your business, it is critical to have a little insurance in the form of a payment bond rather than rolling the dice on another party’s ability (and willingness) to pay you.

Practical Step #3: File Your Liens...ON TIME

Mechanics liens are one of the easiest ways to ensure payment on a construction project, and yet they are one of the most commonly botched practices among contractors. All other tricks for getting paid on a project rely on the willingness, ability, and legal obligation of another party to pay up. Liens, on the other hand, place your remedy in the land and its improvements (which, in theory, always have intrinsic value).

Liens are generally fairly easy to perfect. However, they are highly technical and have strict deadlines that have to be met. Failure to strictly comply with these deadlines and other technical requirements can render your lien invalid (and could possibly subject to you liability for improperly filing a lien; the penalty in Texas is not less than $10,000).

The specific deadlines vary from state to state, but generally, a contractor must first provide notice to the original contractor and property owner within a couple months of the work or materials being furnished. Then, they must file a lien affidavit with the county clerk of the county in which the property is located. Notice should be given to the original contractor, the owner, and possibly the general contractor.

Liens on residential construction are usually a little more technical because state legislators tend to protect homeowners (who are generally less sophisticated than commercial developers). For example, Texas lien laws require residential construction contracts to be signed by both a husband AND wife. If you’re in the residential construction business, make sure you’re familiar with the nuances of your state’s residential lien laws, as a failure to follow them to the letter can render your security interest worthless.

Contractors should have protocols in place that make sure the prerequisites to filing a lien have been timely satisfied. Send out regular notices every month as work is performed. And most importantly, don’t keep waiting month after month after month for payment. As a construction attorney, I have told too many clients who come to me to file a lien that they have blown their deadlines and cannot lien property. The good news is that with a little advance preparation, that conversation can be easily avoided.

Practical Step #4: Be Proactive Once You See Trouble Coming

How many times have you heard this excuse: “We’re going to get you your payment–we just need to get paid on this next project and we’ll have your money.” Then ask yourself how many times that scenario had a happy ending. You patiently wait and wait only to be given a new excuse. Sometimes, this leads to lien deadlines being blown.

I am not one to advocate for litigation where it can be avoided or where it makes no sense economically. However, I firmly believe that contractors need to be very proactive when it comes to payment disputes. If you have a slow payer, send a demand letter for the amount owed. Many states require this as a prerequisite to being able to recover attorney’s fees in breach of contract lawsuits. At a minimum, it shows you’re serious and are creating a paper trail. Consult an attorney–sometimes lawyer letterhead has a way of getting a party’s attention. If my client is not interested in maintaining an ongoing business relationship with the other party, I will often send a draft of a lawsuit that will be filed if arrangements cannot be reached.

If the party you contracted with cannot pay you what is owed today, there is little likelihood that their situation will change in a week, a month, or a year. Take appropriate steps to protect your interests. Whether that is filing a lien or filing a lawsuit, it is important to make your company a priority to the other party. Don’t wait for them to pay other contractors or subs before getting to you.

Thursday, August 12, 2010

Construction Bonds: How They Can Protect Your Project

From time to time, the Texas Construction Law Blog would like to feature guest bloggers who offer different perspectives on issues affecting the construction instrustry. The following article is the second of a two-part series about the legal protection and financial security surety bonds offer those involved in construction projects. The guest author is Danielle Rodabaugh, a principal for Surety Bonds.com.

In her last piece, Danielle discussed the basics of the bonding process in the construction industry. Today she will be delving further into the subject matter, explaining each of the three major kinds of construction bonds:

* bid bonds
* performance bonds
* payment bonds

As with other surety bonds, construction bonds provide legal financial protection to guarantee the work done by professionals within the industry.

Bid Bonds: Locking in the Price
Contractors must get bid bonds to assure a project’s developer that—if selected—they will enter into a contract for the amount quoted in the original bid. Contractors provide the bid bond along with their bid proposal. Doing so keeps contractors from increasing their bids on projects after being contracted by the developer. Additionally, the language in bid bonds requires the contractor to secure performance and payment bonds as necessary throughout the project.

If the contractor breaks the bond’s terms, the bond’s financial guarantee allows the developer to collect reparation. Usually this is in the amount of how much more the developer has to pay to contract the next-lowest bidder for the project. If the contractor cannot cover the cost, the surety will be held accountable for paying reparation up to the bond’s full face value.

Performance Bonds: Guaranteeing Execution
Performance bonds guarantee that a contractor will perform all aspects of a project according to the contract. Contractors secure this bond to guarantee their work to whoever requests the bond—usually a government entity. If the contractor does not complete the project satisfactorily, the performance bond keeps the project owner from losing the investment.

If a contractor does not perform his work satisfactorily, then the performance bond will require the surety to fulfill all facets of the contract. The surety could also be responsible for paying retribution up to the bond’s full face value for delay damages and other fees incurred due to the principal’s inability to perform.

Payment Bonds: Assuring Compensation
Contractors get payment bonds to assure that they will pay all necessary labor and material costs. These bonds confirm that workers will be paid according to the terms set forth in the contract. Because mechanic’s liens—which ensure payment of outstanding debts upon sale of a property—can only be used on private property projects, payment bonds are essential to making sure that all bills are paid in full. The payment bond essentially takes the place of a mechanic’s lien when a contractor or subcontractor is working on a public property project.

If the contractor fails to issue payments or otherwise breeches the contract, subcontractors and/or other workers can make a claim against the bond so that they can receive their deserved compensation. Once again, if the contractor does not have the funds to do so the surety will be left footing the bill.

***Performance bonds and payment bonds are often issued in conjunction with one another, and are sometimes issued as one contract called a “performance and payment bond.”

Construction Bond Regulations
Before searching for a surety agency, you need to check with both state and local regulations about bonding in your area. Federal, state, and local laws all mandate that bid bonds, performance bonds, and payment bonds be utilized for most public projects. The federal Miller Act dictates the use of surety bonds for all projects in excess of $100,000. Many states have have passed “Little Miller Acts,” which elaborate further on the federal act regarding construction bonding regulations. For example, Illinois surety bond requirements mandate that bonds be used on all public construction projects that cost $5,000 or more, whereas requirements in other states keep the limit at $100,000. This huge variance in regulations means its crucial for those working on a construction project to check the regulations set forth by their jurisdiction before seeking out a surety provider.

Monday, July 26, 2010

Surety Bonds Protect Your Construction Investments

From time to time, the Texas Construction Law Blog would like to feature guest bloggers who offer different perspectives on issues affecting the construction instrustry. The following article is the first of two about the legal protection and financial security surety bonds offer those involved in Texas construction projects. The guest author is Danielle Rodabaugh, a principal for Surety Bonds.com.

Unfortunately, the economic downturn has had many detrimental effects on the construction industry. The resulting financial instability of many professionals, companies, and banks have made payment issues increasingly probable when working with projects of all sizes. It is not surprising for individuals to go unpaid when little or no legal protection was established prior to beginning the project. Whether you're the proprietor, banker, or contractor, you want to make sure:

* the project has a solid financial foundation before work begins
* legal protection is in place to guarantee that your work will be compensated later on

Surety bonds provide this legal protection and financial guarantee.

Functionality of Texas Surety Bonds
Many people–even those who are required to be bonded by law–aren't sure exactly how surety bonds work. Essentially, a surety bond is a legal agreement between three parties to help ensure the fulfillment of a contract:

1. The principal performs a service and secures a bond to guarantee his work according to the contract.
2. The obligee receives the work performed by the principal and is protected by the bond's financial guarantee.
3. The surety issues the bond as a neutral third party to ensure that all work done by the principal is completed according to the contract. The surety is also responsible for overseeing obligations on the part of both the principal and the obligee.

Since bonds are legally binding documents, they encourage the principal to fulfill the contract's terms or else face financial retribution. If the principal fails to meet the bond's conditions, such as making necessary payments, the obligee can make a claim on the bond. This means that bond money can be made available to the wronged obligee. A bond's obligee will vary due to a number of factors, such as the specific bond type or the legal language used in the bond's wording.

Financial Accountability
Depending on the bond type and its specific language, the surety bond company can be held fully accountable for the principal's faults, i.e. the surety could be left paying the bills. This encourages surety bond specialists to take great care in completing a thorough financial review of a principal before issuing the bond. If the contractor or construction company is unable to secure a bond then the entity might not be contracted to do the work, as its performance might be viewed as worrisome. This part of the process helps weed out contractors and construction companies that may be financially unstable due to past problems.

Legal Regulations Regarding Bonding
Various state-mandated regulations require different kinds of bond protection depending on the specific project and those involved. In construction, the Miller Act states that contract surety bonds are to be utilized for all federal projects involving the construction, alteration, or repair of any building or public work project in an amount exceeding $100,000. This law also requires a contractor working on such a project to post two bonds: a performance bond and a labor and material payment bond. Consequently, surety bond agencies issue a number of different construction bonds for large projects that involve in-depth, provisional contracts.

Unfortunately, the Miller Act can only be enforced on federally-funded construction projects that cost more than $100,000. This means that a great deal of construction contracts are still written without ever giving a thought to bonding those involved. Those working with smaller construction contracts are oftentimes at risk, as such contracts may be agreed to by "word of mouth" rather than being officially recorded, leaving loopholes so that legal accountability cannot be determined at a later date. Even though bonding might not be required by law for all projects, it's important for people to realize that they can still choose to protect their assets with a surety bond in these instances.

Although getting a surety bond in Texas might seem complicated or confusing at first, a little research can go a long way in guaranteeing the validity of your work or investments. For a more detailed look at how surety bonds can help resolve payment issues in the construction industry, check back when the second half of the discussion will be posted.

Wednesday, June 30, 2010

A Few Construction Laughs

There are plenty of serious construction law topics to discuss, but it's nice to have a laugh every once in a while. So just be glad you're not having to explain any of these to your insurance carrier!

This probably isn't OSHA-compliant.

"Design Defect"

Umbrellas At Work.

Getting Mixed Signs.

Like my grandfather used to say, "When you find yourself
at the bottom of a hole, quit digging."

I think this is a variation of "Measure Twice, Cut Once."

There has to be a DOT-approved sign in there somewhere.