Construction Law Blog

Texas Legislature Passes Anti-Indemnification Law

2011-09-20T18:15:00.000-07:00

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.

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

2011-01-07T16:40:00.000-08:00

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!!!

Lessons The Construction Industry Can Learn From The Foreclosure Crisis

2010-10-11T17:06:00.000-07:00

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.

4 Practical Steps to Help Ensure Prompt Payment

2010-08-31T11:23:00.000-07:00

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.

Construction Bonds: How They Can Protect Your Project

2010-08-12T09:38:00.000-07:00

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.

Surety Bonds Protect Your Construction Investments

2010-07-26T08:07:00.000-07:00

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.

A Few Construction Laughs

2010-06-30T14:01:00.000-07:00

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.

What Can the Construction Industry Learn from the BP Oil Spill?

2010-06-22T08:15:00.000-07:00

For way longer than anyone would prefer, BP and the Deepwater Horizon explosion and oil spill in the Gulf of Mexico have been front and center in the news. By even the most conservative accounts, it has become one of the worst environmental disaster in U.S. history. The consequences of the BP oil spill will be felt far and wide, particularly in the oil and gas industry and on the Gulf coastline. But apart from the technical aspects of the Deepwater Horizon explosion and subsequent oil leak, are there any bigger picture lessons to be learned? And can those lessons apply to a construction industry based a long way away from that broken pipe at the bottom of the sea.

As I watch news of the BP oil spill develop, I see three major themes that have direct application to everyone in the construction industry, whether they are working on billion-dollar stadiums and factories or residential remodels. Every contractor should take these lessons to heart so that they need not be learned the hard way.

Lesson #1: Be Aware of Risk-Shifting Provisions in Contracts

BP has been the primary focus of news coverage of the Gulf oil spill, not to mention Congressional hearings and a primetime address by President Obama. However, when all the investigations have been completed, will BP be the party held primarily responsible (at least financially)? Hyundai Heavy Industries of South Korea built the Deepwater Horizon rig for its owner, Transocean. Anadarko Petroleum was a partial owner of the well. Transocean leased the rig to BP. You can rest assured that the various contracts between these parties contained risk shifting provisions, such as indemnity provisions or limitations on liability. Was Transocean contractually obligated to indemnify BP for BP’s negligence (or vice versa)? Contracts between BP and Transocean and their various subcontractors may have contained similar provisions, or even liquidated damage clauses. Could it end up that, if the explosion was caused by the negligence of some contractor, that contractor is financially responsible for the entire cleanup because of a throw-away indemnity provision that no one paid any attention to during contract negotiation?

Finally, while everyone is focused on the environmental disaster and the price of clean-up, one thing has been overlooked. Millions upon millions of dollars worth of oil are being lost on a daily basis. That oil, or at least the rights to it, were acquired at a very significant cost. Additionally, BP’s lease on the Deepwater Horizon rig from Transocean was almost $500,000 per day, so it clearly had to be generating significant income for BP and the other leesees. Who will be responsible for these lost profits, or are the parties’ potential liability mitigated through limitation of liability clauses? While lost profits are definitely not the primary focus of the media, with the high price of cleanup you can rest assured that this issue will come up eventually.

One thing is certain–the first thing BP’s and Transocean’s lawyers did was to review all the contracts that touched upon the ownership, maintenance, and operation of the Deepwater Horizon rig to determine if another party might be responsible for the enormous tab this oil spill has generated. Contractors would be wise to undertake this same analysis–before disaster strikes. Know what your responsibilities are before the project starts, including whether you will be responsible for another party’s mistakes. This won’t eliminate all catastrophes, but it will better position you to deal with them when they do strike.

Lesson #2: Skeletons in the Closet Always Come Out

As the investigation into the causes of the BP oil spill deepens, BP has come over increased scrutiny for what some spectators have called “shortcuts” that the company took in the face of significant risks. The upcoming investigations by Congress, various governmental agencies, and eventually, discovery conducted by attorneys in litigation, will turn over every stone at BP, Transocean, Anadarko, Halliburton, and every other company remotely linked to the Deepwater Horizon platform in search for the culpable parties.

Old data never dies in this era of electronic communications and near-infinite storage. The emails you deleted and then deleted out of your Deleted box still exist on a server somewhere. Voicemail has gone digital too, meaning it lives on well past its removal from your New Messages folder.

For better or worse, what we say and what we write has a much longer life than it used to. While a paper shredder used to capably cover ones tracks, it is no match for the data that exists in slack space.

It is likely that somewhere, on some server, there is an email from some underling at BP or Transocean that warned about what, at the time, seemed like an unlikely disaster. And the warning may in fact have been absurd at the time it was written. But when a tech team, paired with a legal team, gets a hold of that obscure email, it will cause unmitigated headaches for whoever was the subject of that note.

The lesson to keep in mind is be careful what you email, and even the voicemails you leave. The passage of time distorts context, and the raw data will live long beyond your memory of the setting in which the note was emailed.

Lesson #3: Accidents Happen - Plan for Them

Finally, a major reason the BP oil spill has become such a disaster is that they have had difficulties stopping the oil from flowing out of the broken underwater pipe. While some catastrophes were probably anticipated, clearly the one that materialized did not have a firm response plan.

If there is one thing that is certain in any business as dangerous as the construction industry, it is that accidents will strike at some point. With rigorous attention to safety, most of the worst catastrophes can be prevented. However, accident nevertheless happen.

How will you respond? Who is your first call? Who is in charge on the ground? And when the dust settles, how do you move forward–first with addressing the accident, and second, by simply getting back to business?

The minutes, hours, and days following a catastrophic accident is no time to plan how your company will respond to it. That plan should be in place long before anything bad ever happens so that when it does occur, you and your company will know what steps to follow for everything from immediate medical care to documenting the accident scene to insurance coverage.

In many ways, the BP oil spill is very remote from the day-to-day dealings of most construction companies. After all, the uniqueness of working on a broken pipe one mile under water is the source of many of the issues. However, if you stop to look at the bigger picture and the themes that have unfolded, there is much that can be applied to the construction industry. Accidents do happen despite the best planning. But by paying attention (and controlling) risk shifting provisions in contracts, being careful about the electronic data you generate, and planning in advance for disaster, your response can keep a bad situation from getting worse.

The Final 1%: Getting the Project Finished (and Getting Paid For It)

2010-03-08T19:00:00.000-08:00

Who has the most touchdowns in NFL history? Most football fans can quickly tell you the answer is Jerry Rice. And most fans know that Brett Favre has the most touchdown passes. Touchdowns are an important statistic because they are so crucial to success in the game of football. Fans and students of the game also realize that it is difficult to get that final yard. It is much easier to move the ball half way down the field than it is to finally push it over the goal line. Not that the first 50-80 yards of turf are necessarily easy, but that last yard is always the hardest.

The same can be said of construction projects. Planning and designing a development, getting financing, winning contracts, and moving dirt all present plenty of potential pitfalls. However, that final push–moving a project from 99% done to completely finished–is many times the most difficult part. Parties fumble around as to details of their final responsibilities and, equally importantly, the timing of those obligations.

Far too often, in the rush to get a project started, final close-out matters are not thoroughly addressed (they definitely aren’t the sexiest part of a project). Parties ignore these details at their own peril.

To avoid disputes at the end of projects, take the time to give them proper attention in the contracting stage early on. For example,

Have specific deadlines for when architects are to make final inspections and issue certificates for payment.
Provide a definitive timeline for punch list items to be completed.
Address all the lien waivers that are needed.
Decide whether a surety needs to sign off on anything.
Determine whether warranties run from substantial completion or when specific portions of the project were completed.
Determine when as-built drawings are to be provided, to whom (and in some cases, from whom), and in what form (blueprints, CAD drawings, pdf, etc.).
Most importantly, firmly lay out all the prerequisites that must be satisfied for before the final application for payment.

Most construction disputes arise from ambiguity–not knowing which party has what responsibility, and not knowing the time in which that obligation must be met. Fortunately, ambiguity it is a preventable ailment.

A smooth close out of a construction project begins long before the first shovelful of dirt is moved. All the parties may be rearing to start on the Next Great Building, but you can be assured everyone will be much less excited–and willing to cooperate–on the back end when trying to get that project from 99% finished to 100%.

Builders Should Learn From Olympic Luge Tragedy

2010-02-22T07:49:00.000-08:00

If you have turned on the television, listened to the radio, or picked up a newspaper recently, then you’ve probably been inundated with coverage of the Vancouver Winter Olympics. Unfortunately, the 16-day period that is generally regarded as one of the most joyous in sports began on a very sad note. During a training run, Georgian luger Nodar Kumaritashvili had a horrific accident that resulted in his death.

While Olympic officials and many commentators cited athlete error for the unfortunate event, many felt that the luge track was too fast–that designers and builders created a course that simply allowed its users to reach unsafe speeds.

I live in Texas, where luge is an event that is watched every four years (and not too often in between) and luge track building is a construction niche that never enters the mind. However, I have seen construction projects in other fields lead to unfortunate accidents and even deaths. For that reason, everyone in the construction industry can use this Olympic tragedy as a learning moment.

Every builder should ask themselves this question: "What happens if someone is severely injured or, heaven forbid, killed on a project I’m working/worked on?" If you don’t know the answer, then you need to immediately start doing some homework.

If the project is still in the midst of construction, you should be sure you are taking all the safety precautions needed to project your own crews. First, it is the right thing to do, and secondly, companies do not want OSHA conducting an investigation only to find your company liable for a preventable accident.

Assuming the project is post-construction, the first thing any builder or contractor should do when they hear about an accident is grab their contracts. These will lay out if there is indemnity to you from another party, or if you were a named insured under another contractor’s insurance policy. If you do have indemnity, you can breath a little easier as another party will be responsible for your defense and all settlements/judgments.

Conversely, if you are the party providing indemnity to another, it is imperative that you immediately notify your insurer of this incident. Insurers are typically not obligated to provide coverage until their insured ask for a defense. Also, third party notification is not sufficient–the actual insured needs to demand coverage and defense from their carrier.

Once these preliminary steps are taken, the case will probably turn into an investigative matter on causation. In other words, what caused the injury or death, and who was responsible for that cause. In the Georgian luger death, most commentators who did not blame the athlete cited the course design (that it was designed to be too fast for even elite lugers to safely navigate). That is an element that would most likely fall to the architect and engineers. There have not been allegations of defects in construction, so the parties swinging the hammers would probably not be the target.

On other projects, however, the design might be just fine, but the execution flawed. In those situations, the general contractor and subs would probably be the parties facing potential liability.

It is indeed a shame that the Vancouver Winter Olympic Games began on such a sad note. This Georgian luger’s death should remind us how fragile life is and how much we should treasure every moment. But let it also be a reminder to all in the construction industry to follow best practices. Protect your own crews and provide a safe working conditions for others. Know your indemnity obligations, and make sure they are enforceable. Stay in close contact with your insurer and do not give them any basis to deny coverage. And thoroughly investigate the true cause of accidents to defend current claims and prevent future ones.

Lien Waivers: Caveat Contractor!

2010-01-27T08:23:00.000-08:00

Ok, my Latin may be lacking, but one thing I do know is that contractors should beware when lien waivers enter into construction contract negotiations.

Frequently, lien waivers are thought of in the mid-project, payment context. Basically, where a contractor or sub-contractor gets paid and signs a release of their lien rights. In this context, lien releases are harmless because the party has been paid. There is no reason, and in fact, no legal basis to file a lien. In this setting, lien releases actually serve an important role in getting a project to completion. At the end of the day, owners and developers need a building/structure/etc. that is relatively free and clear of encumbrances when they have paid those to whom they owe payments.

Where lien waivers get a little riskier is when they become an up front contractual requirement instead of post-payment documentation. In short, in these pre-construction lien waivers, upstream parties require downstream parties to prospectively waive their lien rights in advance. By entering into this type of arrangement, the downstream party essentially forfeits one of their most powerful tools to ensure payment for labor and materials–the mechanics lien/materialman lien.

Why have prospective lien waivers become an issue? From an owner’s or lender’s perspective, they are a great deal. Owners and lenders are able to limit the pool of potential parties who could place an encumbrance on a property should payment issues arise. This becomes even more attractive on larger projects where there are more subcontractors (i.e. the potential for more mechanics lien claims) and the property at issue is high value.

Lien waivers are not such a good deal for the downstream contractors and subcontractors, however. One of the best tools contractors have to make sure they get paid is the mechanics lien/materialmans lien. Companies become insolvent, financing falls through, but real property does not go away. And without payment, neither does a lien.

Contractors who enter into construction contracts that include prospective lien waivers should realize what they are agreeing to in advance. If the contract is lucrative enough, this risk may be worth taking on, given the potential profits. However, at a minimum, contractors should hedge their risk by insisting on a payment bond. This is common on larger projects, but payment bonds are not always incorporated into smaller ones. If a party is asking you to waive lien rights, they should at least provide some assurance that you will have a remedy if payments are not made.

Of course, lien waivers are deal points, like so many other things (including price). They can be negotiated. At the end of the day, if you are going to accept the risk that you will forfeit your lien rights, insist on some sort of consideration in return.

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

2010-01-04T16:44:00.000-08:00

10. Know who you’re contracting with, and make sure they are financially viable (or have a bonding or insurance company that is).

9. Treat your employees and staff fairly and they will (usually) treat you fairly in return.

8. The best defense to an OSHA investigation is to prevent an OSHA investigation.

7. Prevent costly personnel ambiguities by having well defined, fair, written policies in place in advance–and communicate those policies to all employees.

6. Don’t agree to any indemnity provision unless you’re willing to financially be on the hook for another party’s own negligence.
OR
6a. If you negotiate indemnity from another party, make sure the indemnity provision in the contract is actually enforceable.

5. Do not include heavy-handed, punitive liquidated damage provisions in your contracts–courts will not enforce them.

4. Old emails never die–if you wouldn’t put it on paper, don’t type it and hit "Send."

3. Limitations of liability are serious stuff–if you use them, use them correctly.

2. Have good billing practices, know your lien deadlines, and stick to them!

And the #1 New Year’s Legal Resolution...drumroll please....

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

What Does Tiger Woods Have To Do With Construction Law?

2009-12-11T12:21:00.000-08:00

You cannot turn on the TV, pick up a newspaper, read a magazine, or listen to the radio these days without hearing the latest chapter in the Tiger Woods saga. We have been inundated with the most private details of Tiger’s personal life, from text messages and voice mails to web streamed confessions and (supposedly) intimate photos. Conversations that were supposed to be hidden have been splashed all over the news for the world to view.

"Yeah, but what does that have to do with construction law?" you may be asking yourself.

Quite a bit.

The construction world (just like any industry), and every construction project in general, is full of casual communications. From emails and voice mails to red-line changes to Word documents and Excel spreadsheets, a significant portion of our communications is done digitally. Which means somewhere, on some computer or some server, there is a copy of that communication. Or, someone else, who we do not control, has a copy of that document that never completely goes away.

In other words, virtually everything pounded out on a computer or left on a digital messaging system has the potential to end up in front of a jury.

Most construction projects of any significant size almost always entail some sort of disputes, such as delays, cost overruns, punch list items, and payments. The majority of these are worked out between the parties, but a few end up in litigation. And when that happens, all those emails become discoverable. So do electronic drafts of documents, and faxes with your scribbled notes. All of a sudden, your private email conversations about a project are being read by an opposing lawyer and could quite possibly end up as Exhibit 1 for a jury to view. Claims against a subcontractor for delay damages are really weakened by a hasty email to a co-worker that admits you were slow in approving change orders because your office was overworked and understaffed.

It has been stated many times before, but it is worth stating again–take the same precautions in sending emails and creating electronic documents that you would take in creating paper communications. Just because you deleted that email, and then emptied your "Deleted" folder, does not mean that communication has gone away. It still probably rests on a server or in the hidden world of slack space on a hard drive.

Just as communications have gone digital, so have lawyers. Attorneys know to ask for emails and images of hard drives (so that the techies can cull through the slack space) because so often, that is where the dirt is. And it is very easy to see the edits and changes in many Word documents, not to mention metadata such as when the file was created and by whom.

Like it or not, our data has a longer life now than it ever has before. Tiger Woods never imagined that his most intimate text messages would end up in a David Letterman monologue, but they have. Don’t make the same mistake with your communications. Before hitting that "Send" button, think whether you would mind having your thoughts displayed as a trial exhibit for a judge, jury, and whole world to read.

Consistent Contract Drafting Will Keep You from Fighting the Same Dispute in Both Arbitration and Litigation

2009-11-18T11:42:00.000-08:00

Opinions on arbitration as an alternative to traditional litigation are as varied as there are contractors and lawyers who draft the contracts. There are certainly benefits and drawbacks to both forms of dispute resolution. However, prudent contractors should decide which form is appropriate for the job and make sure all contracts within that project are consistent. Otherwise, you run the risk of having to fight the same battle in both litigation and arbitration at the same time.

Let me provide an example on the importance of consistency in dispute resolution forums. You’re the general contractor on a project, and the owner insists on an arbitration clause in your contract whereby all disputes between you and the owner will be sent to arbitration. You aren’t particularly a fan of arbitration, but it was a big deal to the owner, so you went along with it. With the prime contract in place, you execute contracts with all the subcontractors that are needed to bring this project to life. Since these contracts are for smaller dollar amounts, they are simpler, more form-based, and do not include arbitration agreements. So far, this probably sounds like a pretty common scenario. However, by this point, the potential for problems has already been created.

Things are going well on the project until the electrical contractors make a mistake (sorry to pick on the electricians in this hypothetical). They are willing to fix their mistake, but it has added 3 weeks to the project. They also blame the mistake on an ambiguity in the engineer’s plans and have requested a significant change order on the pricing for this correction. Unfortunately, by the time this mistake has been corrected and is ready for inspection, the engineer has gotten extremely busy and cannot make it to the project site for the inspection for another 2 weeks.

Then bad weather delays inspection by another week. All of a sudden, the project is 6 weeks off schedule. The owner is upset at the delay, you’re mad at the electrical contractors for getting the project off schedule, and the electricians are not happy because you’ve withheld payments because of their delay (which they blame on the engineer). Before you know it, you’ve been sued by the electrical contractor for payments, and the owner has begun arbitration proceedings to recover delay damages. You’d like to consolidate these disputes into one case–however, the owner has a valid arbitration clause and refuses to go into traditional litigation, and you have no basis to force the subcontractor out of court and into arbitration. So you’re left fighting two battles at twice the cost, twice the time, and twice the headache.

At some point, every contractor will have a project that involves both upstream and downstream disputes similar to this hypothetical scenario. So how can a builder avoid being torn in two directions? The key is through good planning at the contracting stage. Have a careful eye to the dispute resolution forums in your contracts. If the contract is silent on this issue, then that means any dispute will be traditionally litigated through the courts. If there is a valid arbitration agreement, then that is where any disputes will likely be determined.

To prevent being dragged into both arbitration and litigation at the same time, make sure all your contracts on a project are consistent on the dispute resolution forum. If one contract has an arbitration clause, make sure all your contracts contain a similar provision. Conversely, if the "upstream contract" makes no mention of arbitration (meaning litigation would be the dispute resolution forum), keep your "downstream contracts" silent as well.

As with any construction project, the key is good advance planning. Adding a little forethought to your contract will help avoid being torn in two directions later should disputes arise.

Recent Andorran Bridge Collapse Should Make Contractors Double Check Risk-Shifting Contract Provisions

2009-11-10T12:19:00.000-08:00

Question: If/when a catastrophic accident hits your job site, what is your immediate response? What if the accident happens to your subcontractor or a third party, then how do you respond (or does it make a difference)?

Unfortunately, construction crews in the tiny Pyrenees principality of Andorra are now having that conversation. Recently, five workers died and six more were injured when they fell 50 feet as bridgework they were on collapsed.

This tragic accident serves as an obvious reminder that safety should always remain job #1. However, it should also be a wake-up call to contractors to make sure their risk-shifting and risk management is up to date.

If or when that catastrophic accident hits your job site, your contract documents–believe it or not–should be one of the first things you look at. In fact, they may be the thing that guides your next move. Why? Because they will be probably be the documents that determine if you or some other party will be responsible for the defense and indemnification of the injured worker’s claims.

Most construction contracts contain some sort of risk shifting provision, whether it be an indemnification clause, a limitation of liability provision, or an additional insured requirement. Prudent contractors include these in their favor in anticipation of a catastrophic accident. These contractual provisions essentially shift potential liability away from you and place the risk of loss on another party.

When a serious construction injury occurs, rest assured that every company remotely connected to the accident site will be brought into the claim and, perhaps, into litigation. Before this happens, contractors should carefully analyze their contract documents to determine if another party owes them indemnity or if a third party’s insurance will cover them. Conversely, contractors should determine whether they owe indemnity or insurance to a third party.

Shifting the defense and indemnification for a claim to a third party, particularly in catastrophic accident situations, can result in significant savings (depending on a contractor’s own insurance). It could lead to the savings of a deductible, a large self-insured retention amount, and even premiums. All of a sudden, those seemingly mundane deal points are worth a whole lot. But these provisions must be explicitly stated in the contract documents.

The tragic Andorran bridge collapse should remind contractors to be vigilant in their contract negotiations and not to ignore risk shifting mechanisms such as indemnity clauses and additional insured provisions. Just like any construction project, proper planning and attention to detail will pay off down the road when your company is dealt a curve ball.

An Ounce of Prevention Beats a Pound of Cure: Why Every Contractor Should Pay Close Attention to Personnel Policies

2009-09-17T14:50:00.000-07:00

"Have the design plans been approved by the architect or engineer?"

"Is financing in place?"

"What are the codes that have to be complied with?"

These are among the many questions that are asked before almost any construction project begins. And prudent contractors make sure they have the answers in advance, so they don’t run into any uncertainties down the road.

While most contractors make sure they know the answers to those construction-related questions, what about questions concerning their own business.

"What happens to accrued vacation pay when an employee voluntarily leaves?"

"What is the policy for reporting and investigating sexual harassment?"

"What kind of employee behavior is grounds for immediate termination?"

If you had to scratch your head and think about the answers to these questions, then your company could be exposing itself to needless risk that could largely be avoided.

Given the high number of layoffs and reductions in force the construction industry has faced in the last 18 months, there are ample opportunities for former employees (or current ones) to try and squeeze out a few more dollars with claims or threats of litigation. Maybe they didn’t use all their vacation time and now feel they should be compensated for it. Or maybe they feel that a few off-color jokes around the water cooler actually arose to sexual harassment. With the right policies and practices in place, a lot of these headaches can be minimized.

Every employer, whether in the construction industry or otherwise, should have an employee handbook in place that lays out the company’s policies and procedures. It lets employees know what they can expect out of their employer, but it also lets them know exactly what is expected out of them. And it helps prevent the gray areas from which disputes often arise.

Many contractors allow employees to use company vehicles. What happens when your employee stops by the bar on the way home while driving a company van? Should an accident ever happen, you can rest assured the claimant will be looking at the name on the side of the van first. You may not be able to completely eliminate potential headaches, but with appropriate alcohol and drug policies in place, you can at least mitigate them and minimize your potential liability.

What about overtime–are employees entitled to it even if it was not approved in advance? What if you did not even know the employee was working overtime until they submitted their hours? This is another matter that can be addressed by having clear policies in place in an employee handbook that both employer and employee can reference.

These are just two of the many employment issues that affect contractors in a real, tangible way. Having policies in place via an employee handbook doesn’t just save time in trying to determine what the company policy actually is (often times after the fact), it also saves money. If you have a policy that employees forfeit any accrued vacation pay upon termination of employment (voluntary or otherwise), you will know exactly how to respond when a former employees seeks payment for the two weeks of unused vacation he left behind.

It’s no secret that the last 18 months have been difficult on the construction industry, and contractors are looking for any ways they can find to save costs. In personnel and employment matters, prevention and good planning are the keys. The old adage really is true–an ounce of prevention beats a pound of cure.

OSHA Keeps an Eagle Eye on Texas

2009-08-31T08:10:00.000-07:00

Workplace safety should be the at the top of the priority list for every industry, but the construction industry should give it even more importance because of the often times dangerous nature of the business. Worker protection is a worthy goal in and of itself, but there are, of course, other advantages to injury prevention. Lower insurance premiums, fewer missed work days (and hence, increased productivity), and employee morale are all side benefits of a safe workplace.

And so is OSHA compliance. OSHA has recently increased the number of inspectors in Texas in an effort to bolster construction site safety compliance. To do so, it has brought in inspectors from outside of Texas.

OSHA announced that it is focusing on Texas because the state has the highest rate of construction site fatalities. As many companies have learned the hard way, OSHA violations can be quite costly. For example, in May 2009, the organization issued citations to a Dallas-area company for one repeat and two willful violations. The proposed penalties totaled $60,000. (The investigation was prompted by a workplace fatality, which is likely to bring litigation and significantly increased costs beyond OSHA fines.)

Attention to workplace safety should permeate every business in the construction industry. A culture of safety should be instilled from day 1 with every employee. It begins with the implementation of policies and employee training. It continues with daily vigilance on safety issues in the office and on job sites. And it is brought full circle with an intolerance for poor practices.

Fortunately, the overall trend in safety has shown steady improvement. Since OSHA was created in 1971, occupational deaths have been cut by 62% and injuries have declined by 42%. More recently, the AGC announced the results of a new analysis that found construction safety incidents dropped 38% over the last ten years and the construction fatality rate declined 47 percent since 1998, the year the federal government switched to a safety oversight approach known as "collaborative safety."

There are countless legal issues that could be discussed in the context of workplace safety, but the one that stands above them all has less to do with a courtroom and more to do with avoiding a very unpleasant conversation with a wife, mother, or parent. For that reason alone, the quest for a safe workplace is a battle worth fighting every day.

What the Construction Industry Can Learn from the Healthcare Reform Debate

2009-08-17T07:20:00.000-07:00

It has been impossible lately to turn on the television or radio, much less the news, without getting an earful about the healthcare reform debate. Regardless of how you personally feel about the reform, there are two important lessons that can be learned from this debate–and neither have anything to do with healthcare!

One of the initial complaints about the proposed healthcare legislation was that members of Congress had not even read the 1000+ page bill and did not know its provisions. What does this have to do with construction? Unfortunately, quite a bit. Just like many Congressmen were not initially very informed of many of the intricacies of the healthcare bill, many contractors and builders are not fully aware of all the terms of the contracts they enter.

Throughout my practice, I have seen numerous instances where I have asked parties whether certain clauses were in their contracts and they simply did not know. I can tell you from experience that it is very difficult for a contractor to manage liabilities and risk on their projects–not to mention payments–if they do not have a thorough understanding of the binding contracts they sign.

Sometimes construction contracts can be fairly lengthy, and often they contain quite a bit of boilerplate language. They may even "look" similar to the hundred other contracts you have signed. But contractors should read every contract thoroughly before entering into it, because that document will govern any disputes that arise later.

Another lesson to be learned from the healthcare debate–misinformation can be costly. For every accurate report on the healthcare bill and the discussions surrounding it, there is probably at least one inaccurate report. Similarly, contractors often have misunderstandings about their contracts. In addition to being familiar with the terms of their contracts, every contractor should know whether all the clauses in their contracts are actually enforceable before signing. For example, Texas law has some very specific requirements about indemnity clauses, and if those requirements are not met, the indemnity clause will not be enforceable. The contract language itself may be clear enough, but if it does not meet these technical requirements, it is worthless. The same goes for liquidated damage provisions; poor contract drafting that does not meet certain criteria could void these provisions as well. Being accurately informed about the validity of your contractual obligations is key.

Regardless of one’s feelings on healthcare reform, it is unquestioned that the proposed bills would bind the country’s healthcare industry to certain standards and requirements and it would involve substantial amounts of money. That sounds a lot like construction contracts. This may sound like basic common sense, but it is very true in this industry–an ounce of prevention beats a pound of cure. Familiarity with your contracts and knowing their enforceability before signing is the best way to position your company to minimize its liability, shift risk, and ensure prompt payments.

Risk Managers Beware: Third-Party Notice of Suit Insufficient to Trigger Insurer's Duty to Defend and Indemnify

2009-07-27T11:48:00.000-07:00

Insurance issues tend to go hand-in-hand with most construction projects. From contractual indemnity and additional insured provisions to workers comp issues, contractors must be as well-versed in insurance as they are in bricks and mortar. When coverage decisions can potentially mean the difference in thousands or even millions of dollars of liability, getting things right with insurance is imperative.

For this reason, a recent decision out of the Fort Worth Court of Appeals, Jenkins v. State and County Mutual Fire Insurance Co., 2009 WL 1650071, should inspire a healthy fear in all construction risk managers. In short, the court strengthened an insurance company’s ability to deny defense and indemnity to an insured based on who provided notice to the insurer of a lawsuit.

In Jenkins, the plaintiff was injured when a tank skid fell off a truck. The plaintiff sued the owner of the truck and its driver (among others). The owner and other defendants (except the driver) were served and promptly forwarded the suit to their insurer, who took over their defense. The plaintiff was unable to personally serve the driver and eventually served him by publication, which was allowed under the rules of civil procedure. The plaintiff’s attorney then advised the insurer (that presumably would have provided coverage to all the defendants, including the driver) of the service by publication and forwarded the suit papers. As such, the insurer had actual knowledge of the suit against its insured driver, even though the driver himself never notified the insurer of the suit and never requested defense and indemnity.

A default judgment was eventually entered against the driver and a jury later found that the driver was solely responsible for the plaintiff’s injuries. The plaintiff tried to collect from the insurer, but the insurer denied that it owed coverage because the driver failed to comply with the policy’s notice-of-suit condition. The plaintiff argued that the insurer had actual knowledge of the suit and therefore waived the notice-of-suit provision. The trial court agreed with the insurer that it did not owe coverage, and the case was appealed.

The Fort Worth Court of Appeals upheld the trial court’s decision that the insurer did not owe coverage. The court noted the rule that an insurer has no duty to defend or indemnify an insured unless the insured forwards suit papers and requests a defense in compliance with the policy’s notice-of-suit conditions. The mere awareness of a claim or suit does not impose a duty on the insurer to defend under the policy; there is no unilateral duty to act unless and until the insured (including additional insureds) first requests a defense.

In short, the court ruled that an insurer has no duty to defend and no liability under a policy unless and until the insured in question (and not a third party) complies with the notice-of-suit conditions and demands a defense. This is true even when the insurer knows that the insured has been sued and served and when the insurer actually defends other insureds in the same litigation. Because the driver himself (i.e. insured) did not make a claim for defense and indemnity, the insurer did not owe him coverage.

To be certain, this decision was a harsh application of very technical requirements of an insurance policy. But it was in line with supreme court precedent and it now represents the law.

While Jenkins was not a construction case per se, the decision will nevertheless have ramifications in the construction industry. Most construction litigation that invokes insurance also involves claims for indemnity and additional insured status. Based on a strict application of the Jenkins decision, it may not be enough to simply tender a case for defense and indemnity to the party from which the indemnity flows. This would be the case even if their insurer is aware of the litigation. The more prudent approach would be to make the tender directly to the carrier.

The same applies to employees who are covered by the same policy as their employer and who are sued individually alongside their employer. In fact, individual employees are often sued along with their employer in construction accident lawsuits. For the employee to receive a defense, they should personally notify the insurer of the suit and request defense and indemnity. The employee should not just hand the suit to his employer and assume everything will be taken care of.

The lesson to be learned from the Jenkins ruling is simple yet important. Because the duty to defend and indemnify does not begin until an insured complies with the notice-of-suit condition, insureds should be absolutely certain that they comply with the notice requirement to the letter to avoid the risk of accidentally forfeiting coverage.

Wage & Overtime Claims: When Builders Must Wear the HR Manager (Hard)Hat

2009-06-30T20:35:00.000-07:00

Just as any construction project has many parts that must be effectively executed to achieve the end product, every construction company has many components that it must manage to ensure success. One of the more important ones is personnel/human resources. At the end of the day, all the nice equipment, financing, and contracts don’t mean much if there are no skilled trades and craftsmen on the ground to bring a project to life.

The world’s leading HR management organization, SHRM (Society for Resource Management) recently published a study that about 72 percent of employees across the nation said they work through lunch, while 70 percent reported working beyond a 40-hour workweek. Only 21 percent of the people polled cited pressure from supervisors as the reason for this. To the contrary, 52 percent claimed the extra work was because of "self-imposed pressure," while 44 percent cited "meeting project or performance goals."

Discussions about overtime and extra work may, on its face, seem a little out of place for a construction industry that has been hit hard financially in the last 18 months and seen plenty of layoffs. Recently, however, there have been trickles of encouraging economic news ("green sprouts," as Fed Chairman Ben Bernanke has called them), and we know that the industry will pick up at some point. The SHRM survey and the construction industry layoffs all beg the question of what will companies do when they face increased workloads with decreased workforces? Put another way, should you worry when employees start working that extra time to meet project and performance goals?

The Fair Labor Standards Act (29 U.S.C. 201, et seq.) is the starting point for many wage and pay claims. At its most basic level, the FLSA requires employers to pay a minimum wage to employees for each hour of work. As a general rule, all job-related activity or time is included in "hours worked," unless specifically excluded by the Act. Non-exempt employees generally are to be paid overtime at not less than 1½ times the regular rate for all work time in excess of 40 hours per week.

Sounds simple enough, right? It gets a little trickier. What all exactly is considered "hours worked"? What if the employee works extra time without approval? Is driving to a job site considered "hours worked"? What about down time waiting for other contractors to finish their portion of a project? Are employees still on the clock under these circumstances?

If an employee voluntarily works extra hours, that time is considered "hours worked" and must be compensated. The reason for the extra work is not important–what matters is whether the employer knew or had reason to know the employee was working extra.

Whether waiting time is "on the clock" is a more fact intensive issue–it is a question of whether the employee was engaged to wait or waiting to be engaged (generally speaking, engaged to wait = hours worked; waiting to be engaged...not typically hours worked).

If an employee is not able to effectively use waiting time for his own purposes, it generally belongs to and is controlled by the employer. Under this scenario, the employee is "engaged to wait." This is the case even if they are just chatting with co-workers, reading a book, or working a crossword puzzle. Periods of being engaged to wait are typically shorter in duration, and the waiting is an integral part of the job (imagine a truck driver waiting while his trailer is being unloaded).

Additionally, an employee who is required to remain on call on the employer's premises or so close that he cannot use the time effectively for his own purposes is working while "on call." An employee who is not required to remain on the employer's premises but is merely required to leave word at his home or with company officials where he may be reached is not working while on call.

Of the other side of the coin, periods during which an employee is completely relieved from duty and which are long enough to enable him to use the time effectively for his own purposes are not "hours worked."

An employee who travels from home before his regular workday and returns to his home at the end of the workday is engaged in ordinary home to work travel which is a normal incident of employment. This is true whether he works at a fixed location or at different job sites. Normal travel from home to work is not worktime.

However, time spent by an employee in travel as part of his principal activity, such as travel from job site to job site during the workday, must be counted as hours worked. Where an employee is required to report at a meeting place to receive instructions or to perform other work there, or to pick up and to carry tools, the travel from the designated place to the work place is part of the day's work, and must be counted as hours worked regardless of contract, custom, or practice. If an employee normally finishes his work on the premises at 5 p.m. and is sent to another job which he finishes at 8 p.m. and is required to return to his employer's premises arriving at 9 p.m., all of the time is working time. However, if the employee goes home instead of returning to his employer's premises, the travel after 8 p.m. is home-to-work travel and is not hours worked.

At some point, construction companies (and hence, construction workers) will be doing more work with fewer people because of recent downsizings. These examples are just a few of the situations that are commonly encountered in routine wage and hour determinations. It is important to get these matters right, because mistakes in this area can be very costly. Employees can bring an action for the compensation and overtime that they earned, and they are entitled to attorney’s fees. This is certainly one area where an ounce of prevention is much better than a pound of cure.

Legislative Wrap-Up: Anti-Indemnity Legislation Fails and Texas Residential Construction Commission To Expire

2009-06-09T08:56:00.000-07:00

Another session of the Texas Legislature recently concluded and, as usual, there will be plenty for the political talking heads to chew on for a while. Among the thousands of bills that were proposed this year were a few that were of particular interest to the construction industry.

SB 555 (and its identical companion bill, HB 818) would have effectively eliminated indemnity and additional insured provisions in construction contracts. According to that proposed legislation, provisions in a construction contract would be void and unenforceable if they required an indemnitor to indemnify or defend another party (the "indemnitee") against a claim to the extent that the claim was caused by the negligence or fault of the indemnitee. An "additional insured" provision would also be void to the extent it requires insurance for this same scenario (the indemnitee’s own negligence).

This would have represented a major change in construction contracts, since this basic risk shifting so common in most construction contracts would be fundamentally altered. However, SB555 (and HB818) failed to pass. So the abolition of indemnity will be off the table for at least two years until the next legislative session.

How you felt about SB 555 (and HB 818) probably depended on the nature of your business. Subcontractors, who tended to be ones doing the indemnifying, were generally more supportive of the bill. Owners and developers, who typically benefitted from indemnification, were more opposed to it.

While the bill did not pass this session, it did have some support. And the concept is not a novel one. For example, Oregon has enacted an anti-indemnity statute (Oregon Revised Statute 30.140) similar to what was proposed in SB 555. It will be two years until the next legislative session in Texas, and a lot can happen in the political landscape between now and then (not to mention the construction industry). However, I would not be surprised if this issue comes up again and legislators make another effort at some form of anti-indemnity legislation.

A second issue that was being followed closely was the future of the Texas Residential Construction Commission. As I wrote about here, the Texas Residential Construction Commission ("TRCC") is set to expire later this year. Several lawmakers introduced a number of different bills that would call for various changes to the TRCC. Some called for the continuation of the TRCC but with changes to its procedures; some called for its outright abolition.

At the end of the day, however, nothing passed that would rescue or reform the TRCC. As a result, the Commission will naturally phase out in the months ahead. While the TRCC had some supporters, its detractors (which included most consumers and many builders) seemed to be more numerous and vocal, and it is doubtful the Commission will be missed by many.

This will definitely bring about a change in the legal landscape in the residential construction industry. Without the TRCC, parties are more on their own in their contractual negotiations, and the barriers to litigation will be lifted.

All in all, this legislative session ended like many before it–some things were accomplished while others didn’t quite get finished. And in two years, we’ll do it all over again.

Hidden Land Mines: Identifying (and Managing) Risk in LEED/Green Building Projects

2009-05-25T11:24:00.000-07:00

Anyone in the construction industry, particularly those involved in LEED/green building projects, has probably realized that it not a matter of "if" green building litigation will come, but "when" and "how." To date, green building litigation has been pretty infrequent, but anticipating where litigation will come from will be an important step in avoiding it.

One widespread school of thought has been that green building litigation will arise from projects that simply do not obtain the LEED requirements that are contracted for. Green or LEED-oriented buildings are much more costly to build than conventional buildings, and owners and developers pay a premium for this LEED branding. So they are clearly not going to be happy if a project does not obtain the certification that was expected. As with many construction defect or design defect cases, litigation may arise for breaches of contract or breaches of warranty.

However, this may not be the only theory of liability in the green building arena. A recent case out of Maryland, Shaw Development v. Southern Builders, suggests that the scope of potential liability may be broader.

The Shaw case arose in connection with a condo project in Maryland that included a number of green design features that were intended to support a LEED Silver application. The owner sued the general contractor seeking, among other things, over $600,000 in lost tax credits under a state green building program.

Maryland had provisions that provided tax credits to owners for building eco-friendly buildings. The procedure to receive this credit was to initially apply for a sort of preliminary certification of the project. The project would be built and then, when completed, it would be evaluated for final approval. The preliminary certification, however, contained an expiration date, and the condo project at issue in Shaw was not completed before that project’s preliminary certification expired.

The lawsuit in Shaw did not specify exactly how the general contractor was to be liable, and the case settled prior to trial so there is no precedential value either. However, it is quite possible that the design actually was adequate–the project was just not delivered in time to qualify for the tax credits.

So what is the lesson to be learned from Shaw? Actually, the key in all green building contracts, particularly ones that contemplate LEED certifications and/or green-based tax credits (or even service provider discounts, such as electricity) is to define and clarify risk and set out which party will be liable for certain failures. That means being sure your contract actually fits the project and isn’t just a blanket form (Note: the contract at issue in Shaw was an AIA form but clearly did not address these issues).

Assuming the Shaw facts–that a project failed to receive significant tax credits because it was completed late–who would be liable for those lost tax credits? Would it be the general contractor? The owner? The architect or engineer? What if the project was delayed because of unforeseeably bad weather? What if it was a subcontractor’s mistakes? Or the engineer’s delay in approving modifications to project specs? An electrician who installed bad wiring had no idea his work could result in the loss of a large tax credit–is it fair to hold him responsible?

The shifting of liability should be expressly laid out in the contract documents, including who is liable if a project fails to obtain certain certifications. By clearly defining these items, parties may be able to avoid the litigation that comes with uncertainty in contract provisions. At a minimum, however, parties will put themselves in a better position if litigation does in fact arise.

Chinese Drywall and Statutory Indemnity: The Intersection of Construction Law and Products Liability

2009-05-11T16:25:00.000-07:00

Anyone who has paid attention to construction news in the last 6 months knows that one of the hot topics has been Chinese drywall. According to the reports, tainted drywall manufactured in China emits potentially toxic chemicals including carbon disulfide, carbonyl sulfide, and hydrogen sulfide. In larger amounts, these emissions may create a health risk and the defective drywall emits a sulfur-like odor. These toxic materials also may corrode metals within a building, damaging wires, pipes, air conditioners, electronic equipment, etc.

As a result of these defects, Chinese drywall problems have led to a flurry of litigation. If the drywall is in fact defective, the manufacturers may be faced with liability. However, when litigation arises, you can rest assured that the manufacturer will not be the only named defendant. At a minimum, the builder would likely be named as a co-defendant in the lawsuit. Suppliers would probably be included as defendants as well. In fact, more than likely, every party from the painters up the chain to the manufacturers would be named in a lawsuit.

What if your company had no idea it was dealing with defective drywall but still finds itself stuck in the middle of litigation? What if your company didn’t know it was supplying a bad product. What if you just installed the materials your long-time supplier provided? Is there any protection for you in this situation, or does your company simply have to live with a big target on its back?

While there has certainly been an increase in tainted Chinese drywall litigation, the good news for builders and those in the construction industry is that there may be statutory indemnity available to pass along the costs of litigation to the manufacturers. In Texas, builders have Chapter 82 of the Texas Civil Practice & Remedies Code to lean on. In short, Chapter 82 (more specifically Section 82.002) requires a manufacturer to indemnify and hold harmless a seller against a loss arising out of a "products liability action," except for any loss caused by the seller’s own negligence, intentional misconduct, or negligently modifying or altering the product.

For purposes of this provision, a "seller" is a person who is engaged in the business of distributing or otherwise placing into the stream of commerce a product or any component part. The term "seller" is not limited to the traditional role of wholesale distributor or retailer that you would typically associate with the term. A "products liability action" is any action against a manufacturer or seller for recovery of damages arising out of personal injury, death, or property damage allegedly caused by a defective product.

The statutory indemnity required by Chapter 82 of the Texas Civil Practice & Remedies Code applies regardless of the way in which the action is concluded and is in addition to any other duties to indemnity (such as a contractual duty). This indemnity also includes attorney’s fees and court costs.

"Indemnity is great, but I still don’t want a judgment against my company," you say. You may still be in luck. Generally speaking, a seller that did not manufacture a product is not liable for damages related to that product unless the claimant proves:

1) that the seller participated in the design of the product;
2) that the seller altered or modified the product and the claimant’s harm resulted from that alteration or modification;
3) that the seller installed the product, or had the product installed, on another product and the claimant’s harm resulted from the product’s installation onto the assembled product;
4) that:
a) the seller actually knew of a defect to the product at the time the seller supplied the product; and
b) the claimant’s harm resulted from the defect;
or
5) that the manufacturer of the product is:
a) insolvent; or
b) not subject to the jurisdiction of the court

So how do these statutory provisions actually translate into indemnity or liability avoidance for tainted Chinese drywall claims?

If you’re the builder and you’ve been sued because tainted drywall caused damage to a structure (or its components) or personal injury, you can probably seek indemnity from the drywall manufacturer (assuming the builder was not involved in the design or warnings on the product). Similarly, if you’re a painter or sheetrocker who simply installed the materials without any material alteration, then you too would probably be able to seek indemnity from the manufacturer. In either situation, there's a decent chance your company would probably not be liable if it did not know about the allegedly defective product (indemnity notwithstanding).

Product liability law takes into consideration the innocent seller and carves out protections for them so they are not liable for defective products they had no real hand in creating or warning about. But this indemnity is not automatic–it should be formally requested of the manufacturer within a reasonable time after the claim. Even then, the would-be indemnitor can deny the request, forcing the innocent seller to seek enforcement through litigation. The good news, however, is that attorneys’ fees are typically recoverable when enforcing an indemnity request (if successful).

Even though products liability and construction law aren’t typically thought of together, the current Chinese drywall situation shows that there can be an overlap of these two areas of law. It is important to know your rights and obligations so you are not left liable for someone else’s mistake.

FINALLY, Some Positive Construction Economics News!

2009-04-23T07:49:00.000-07:00

Ok, we all know the construction industry has taken it on the chin for while now, from the balance sheet to the evening news and everywhere in between. Well, the AIA finally gives us some positive news.

After a series of historic lows, the Architecture Billings Index ("ABI") was up more than eight points in March. As a leading economic indicator, the ABI is supposed to reflect the approximate 9-12 month lag time between architecture billings and construction spending. The March ABI reflected a decrease in overall demand for design services, but the score was nonetheless the highest it has been since September 2008. This news should probably be taken with cautious optimism, but any optimism represents an improvement for many builders.

Mixed design practices fared the best, followed by institutional, multi-family residential, and commercial/industrial.

So what is the legal take on this? Increased work equals new contracts. And with new contract formation comes the potential for contractual pitfalls–indemnity clauses, limitations of liability, pay-when-paid provisions, etc. As I’ve discussed in previous articles, many of these provisions are not quite as cut and dry as they would appear. The key is to get things right on the front end in preparing the contracts that govern the relationship (and obligations) of the parties. You negotiate hard for certain terms–be sure they are enforceable. On the flip side, be sure you’re not stuck with responsibilities (and liabilities) you didn’t think you had.

I’ve seen it countless times–the ounce of prevention really does beat the pound of cure.

Deadline to Implement Federal E-Verify Requirement Pushed Back

2009-04-21T17:14:00.000-07:00

On November 14, 2008, a Federal Acquisition Regulation ("FAR") rule was changed to require that certain federal agency contracts (and some subcontracts) include a provision mandating the use of the E-Verify program. But exactly what is E-Verify? In a nutshell, the E-Verify program is an online program, jointly administered by the Department of Homeland Security and the Social Security Administration, to verify employees’ information, including immigration status. This new rule would be in addition to the current Form I-9 requirements.

The E-Verify rule would require all federal solicitations and contracts over $100,000, lasting for a period of 120 days or more, to include a provision that contractors:

1. Enroll in E-Verify;
2. Use E-Verify for all new hires in the US;
3. Use E-Verify for all workers assigned to the contract; and
4. Include a provision in certain subcontracts for services and construction that are over $3,000.

There are some exceptions to the E-Verify requirement–namely, contracts for items that are commercially available off-the-shelf.

This rule was supposed to go into effect on January 15, 2009; however, this date was recently pushed back for a second time and now it will not be implemented until at least June 30, 2009.

The reason for this most recent delay is the pending litigation Chamber of Commerce v. Chertoff, et al., in U.S. District Court for the District of Maryland. In December 2008, the U.S. Chamber of Commerce, among other groups, sued the Department of Homeland Security to have the mandatory E-Verify rule deemed illegal and to enjoin its enforcement. The plaintiffs in that case have filed for summary judgment, while the DHS and other defendants have asked the court for additional time to respond so that the Obama Administration can first complete its review of the federal contractor E-Verify requirement.

The political aspects of this issue notwithstanding, the E-Verify program is of particular significance to the construction industry because the time and cost-intensive nature of the program would add another layer of expense and burden to companies that enter into federal contracts. While the ideas behind E-Verify might be on the right track, the execution of the program would likely add to the strain of a construction industry that is already reeling from the current economic climate.

Whatever the courts decide about the E-Verify program, it is likely that some change in employee verification will be on the horizon–either the full blown E-Verify, a scaled-back version, or some other yet-to-written legislation. In the meantime, the best practice is to stay on top of employee I-9s for now and be mindful of potential changes in the future.

Give 'Em A Brake

2009-04-08T14:25:00.000-07:00

Most of us drive through highway or road construction zones regularly, if not daily. I personally drive through two each day in my daily commute. We do it so often that we frequently give little thought to the workers who are actually out there improving our roadways. So I was surprised to hear that for the past decade, there have been an average of 1,000 fatalities per year in highway work zones, with another 60,000 people injured, according to the Associated General Contractors (AGC). As a result, this week has been named National Work Zone Awareness Week.

The AGC has set a goal for federal and state governments to reduce the number of highway work zone fatalities by 50% within the next two years. Many states (including Texas) have already doubled the fines for moving violations in these areas in an effort to increase safety. Still, we drivers need to do our part too.

So in honor of National Work Zone Awareness Week and, more importantly, in honor of the contractors improving our roadways, slow down and pay attention when you see roadwork being done. It shouldn’t cost a life to repair a road or bride.

The Texas Residential Construction Commission Isn’t Dead Yet

2009-03-25T16:49:00.000-07:00

As noted in my March 2, 2009 post, the Texas Residential Construction Commission is set to expire in September 2009 by operation of the very laws that created it, absent the legislature passing legislation that would save it. The Sunset Commission, which reviews state agencies, recommended the termination of the TRCC, and Representative Todd Smith proposed legislation that would actively eliminate the agency.

However, the TRCC may not be dead quite yet. State Senator Glenn Hegar recently introduced SB 1015 which would continue the TRCC’s existence. Under this bill, the Commission would be allowed to continue for another four years until 2013. The bill would modify the procedure for the administration of the inspection and dispute resolution process (including when litigation could be brought) and make the TRCC process generally more accessible to the general public.

One unique feature of Sen. Hegar’s proposed legislation would be the creation of a Homeowner Recovery Fund. This would be a fund, maintained by the Commission, which would be available to reimburse claimants who obtain a judgment against a builder for a violation of the TRCC Act. A practical effect of this fund would probably be an increase in litigation against "judgment-proof" or insolvent builders, since it would be a source of funding for what might otherwise be uncollectible judgments.

Just as with HB 1635 (which would abolish the TRCC), SB 1015 is in its early phases and still has to work its way through committee. With multiple pending bills that call for both the abolition and the maintenance of the TRCC (but with substantial changes), one thing that is certain is that the landscape of the Texas residential construction industry will look very different at end of this legislative session.

Check back to this blog regularly for the latest updates on significant actions out of the Capitol.

The Limits of Limitation of Liability Clauses

2009-03-24T09:03:00.000-07:00

Design professionals, among many others, have used limitation of liability clauses ("LOL") for years to limit the amount of damages they might be potentially liable for. Though they can vary, a typical LOL clause looks something like this:

LIMITATION OF LIABILITY
THE LIMIT OF LIABILITY OF ARCHITECT/ENGINEER TO THE CLIENT FOR ANY CAUSE OR COMBINATION OF CAUSES SHALL BE, IN THE TOTAL AMOUNT, LIMITED TO THE FEES PAID UNDER THIS CONTRACT OR $50,000, WHICHEVER IS GREATER. INITIALLED:____ ARCHITECT/ENGINEER; ____CLIENT

Texas law requires LOLs to comply with the "fair notice" requirement, which means that the clause should be conspicuous. A term is conspicuous if it is written, displayed, or presented such that a reasonable person should notice it. The test for a court is whether attention can reasonably be expected to be called to the provision. Things that make a provision conspicuous include larger type, all capital letters, bold font, and contrasting colors.

Texas courts tend to uphold limitations of liability if they meet the conspicuousness requirement and there is nothing otherwise unconscionable about the contract. When enforced, these clauses are extremely effective at limiting the amount of a party’s liability.

However, while LOLs are an effective may to mitigate risk and liability, they will not limit a party’s damages for every potential claim (even if they are worded to do so).

In 1973, Texas enacted the Deceptive Trade Practices–Consumer Protection Act ("DTPA") in an effort to protect consumers. The Act essentially outlaws anything your mother told you not to do (such as providing misleading information about the character of goods or services, advertising goods and services with no intent to sell them, rolling back the odometer on a car or truck, etc.). It also allows for a separate DTPA cause of action for breach of express and implied warranties (this is in addition to common law breach of warranty claims).

The DTPA contains an explicit "no waiver" provision, which essentially sets out that any waiver by a consumer of their DTPA rights is unenforceable and void (unless it is writing, the parties have equal bargaining power, and the waiving party is represented by legal counsel). This no waiver provision can also apply to limitations of liability.

One of the major cases on the non-applicability of limitation of liability clauses on DTPA claims is Arthur’s Garage, Inc. v. Racal-Chubb Security Systems, Inc. 997 S.W.2d 803 (Tex.App.–Dallas 1999). There, a commercial customer brought an action against an alarm company with which it had contracted for the installation, service, and motoring of an alarm system following a fire. Investigators eventually discovered that the smoke detector was improperly wired. The fire resulted in over $450,000 worth of damage; however, the contract between the parties contained a limitation of liability clause that limited liability to $350.

The plaintiff in that case sued for breach of contract, negligence, breach of implied and express warranties, and violations of the DTPA. The DTPA violations included misrepresentation, breach of express and implied warranties, and unconscionable conduct.

The court stated that the LOL was void as to the plaintiff’s DTPA claims based on misrepresentation and unconscionable conduct. The limitation of liability was applicable to the DTPA breach of express warranty claim, but it was void as to the DTPA implied warranty claim (the implied warranty at issue was the implied warranty to repair or modify existing tangible goods or property in a good and workmanlike manner). The court noted, however, that DTPA rights on some implied warranty claims could be waived, depending on the implied warranty.

What is the lesson to be learned from this? It is that even valid limitation of liability clauses are not invincible. Knowing potential theories of liability to which LOLs do not apply should provide guidance in the drafting of contract documents and at least partially guide the relationship between parties.

The End of Indemnity (in Construction Contracts)?

2009-03-11T11:14:00.000-07:00

Since it is legislative season in Austin, the Texas Construction Law Blogger is going to continue the discussion of the Legislature’s recent activities. One of the most significant pieces of legislation to the construction industry is SB 555 (and its identical companion in the Texas House of Representatives, HB 818). In a nutshell, these bills would essentially eliminate indemnity and additional insured provisions in construction contracts.

The bills provide that a provision in a construction contract is void and unenforceable if it requires one party (the "indemnitor") to indemnify or defend another party (the "indemnitee") against a claim to the extent that the claim is caused by the negligence or fault of the indemnitee. An "additional insured" provision would also be void to the extent it requires insurance for this same scenario (the indemnitee’s own negligence).

If passed, this legislation would basically eliminate indemnity clauses in construction contracts. It would mean that I can’t require you to indemnify me for my own mess-up (or you can’t make me indemnify you for your own blunders). At first glance, this may not sound like much–but it would actually be an enormous change in insurance and indemnity law.

To understand the potential impact of this legislation, a brief primer on indemnity law is needed. Because indemnity provisions seek to shift the risk of one party’s future negligence to another party, Texas law imposes a fair notice requirement before it enforces such agreements. There are two parts to this "fair notice." The first is a conspicuousness requirement–something must appear on the face of the contract to attract the attention of a reasonable person to the indemnity clause when he looks at it (such as larger type, all caps, bold font, contrasting colors, etc.).

The second part of the fair notice, and the part that is affected by SB555, is the "express negligence" doctrine or test. Under the express negligence doctrine, an intent to indemnify one of the parties from the consequences of its own negligence must be specifically stated within the four corners of the document. In other words, if you want to be indemnified by another party, the indemnity clause must explicitly state that the indemnity extends to cover your own negligence in order for it to be enforceable (in most cases).

The following is an example of an indemnity provision that did NOT satisfy the express negligence test. (See Gilbane Bldg. Co. v. Keystone Structural Concrete, Ltd., 263 S.W.3d 291 (Tex.App.–Houston [1st Dist.] 2007))

Contractor agrees to indemnify and hold harmless the Owner, the Architect/Engineer, and all of their agents and employees from and against claims, damages, losses and expenses, including but not limited to attorney’s fees, arising out of or resulting from the performance or failure in performance of Contractor’s work under this Agreement provided that any such claim, damage, loss, or expense (1) is attributable to bodily injury, sickness, disease, or death, or to injury to or destruction of tangible property including the loss of use resulting therefrom, (2) is caused, in whole or in part, by any negligent act or omission of Contractor or anyone directly or indirectly employed by Contractor, or anyone for whose acts Contractor may be liable, regardless of whether caused in part by a party indemnified hereunder.

To satisfy the express negligence test and be an enforceable indemnity clause, the language should sound more like this (Note: this is simply boilerplate; each contract should have an indemnity clause specially tailored for that document.)

Contractor agrees to hold harmless and indemnify Owner for all claims, damages, and causes of action arising out of the work. It is expressly understood that the contractor’s agreement to indemnify Owner is intended to indemnify and hold harmless Owner for Owner’s own liability and negligence, including, but not limited to, their comparative, proportionate and/or joint liability and/or negligence, including liability for gross negligence and strict liability, whether that liability and/or negligence is the sole or concurring cause for the assertion of any such claims, demands and/or causes of action.

This is the type of language that is needed to make an indemnity clause valid and enforceable. However, that same language would also cause it to be unenforceable under the new legislation proposed in S.B. 555. So at the end of the day, this bill could bring about the end of indemnity provisions in construction contracts.

How you feel about this legislation probably depends on the nature of your business. Upstream parties who tend to receive the indemnification are probably against it; downstream parties who usually provide the indemnification are probably more in favor of it.

Either way, this legislation, if passed, would represent a tremendous change in contract law as it applies to the construction industry because it would virtually eliminate the long-standing practice of risk-shifting. Because of its impact on insurance coverage, it could also have an impact on project pricing.

The bill is currently in committee and was considered in a public hearing. Be sure to check back on this blog for updates on its status.

Texas Residential Construction Commission: Is the End in Sight?

2009-03-02T16:39:00.000-08:00

For the last several years, the Texas Residential Construction Commission ("TRCC") has been the topic of plenty of commentary and opinions (both positive and negative) in the residential construction industry. But all that discussion may become moot in the near future.

The legislation that created the TRCC also stated that, unless continued through further legislation, the TRCC would automatically be abolished as of September 1, 2009. As a result, the Texas Sunset Advisory Commission (an agency created to identify and eliminate waste, duplication, and inefficiency in government) reviewed the TRCC to determine whether it should be continued.

In January 2009, the Sunset Commission issued its report and recommended that the Texas Residential Construction Commission be abolished and the Texas Residential Construction Commission Act be repealed. According to the report, the TRCC was never completely effective at any of its purposes.

During the current legislative session, State Representative Todd Smith of Tarrant County proposed legislation that took the demise of the TRCC a step further. On February 23, 2009, Representative Smith introduced HB 1635, a bill that would abolish the Texas Residential Construction Commission as of February 10, 2010 (if enacted). You can see the bill, as introduced, here.

This legislation would also exempt from liability a builder hired by a lender to complete the construction of a foreclosed home. This exemption would apply to construction defects of which the builder had no knowledge that existed prior to the acquisition of the home by the lender. The builder would, however, still be liable for work performed for the lender after the acquisition of the home by the lender.

Of course, HB1635 is in its infancy and it remains to be seen what, if any changes are made, whether it will gain enough votes to pass, and whether the governor will sign it into law. It also remains to be seen if another representative or senator will propose legislation that would attempt to continue the existence of the TRCC. In any event, this is definitely something to watch, as the fate of the Texas Residential Construction Commission will have a significant impact on everyone in the residential construction industry.

Construction Contingent Payment Act–The Legislature’s Modifications to the Rules of the Game

2009-02-24T13:15:00.000-08:00

Contingent payment clauses (also known as "pay when paid" or "pay if paid" clauses) have long been a tool used by contractors to shift the risk of nonpayment. In short, the payor's payment to the payee is contingent on the payor itself being paid by another party (usually the owner). Under these clauses, if the payor is not paid, it has no obligation to make payments to the payees (subcontractors). These clauses effectively shift the risk of nonpayment from the general contractor to the subcontractor (or from subcontractor to sub-subcontractor).

For more on crafting enforceable contingent payment clauses, see my previous blog article.

In 2007, the Texas Legislature stepped in and placed some additional rules on these clauses through Section 35.521 of the Texas Business & Commerce Code (you can read about the Legislature’s labor here, or you can just see the "baby" here--to borrow a line from Bill Parcels). In a nutshell, the Act established certain situations where a contingent pay clause cannot be used as a defense for not paying subcontractors. A payor may NOT avoid payment in the following situations:

When the owner’s nonpayment to the GC is the result of the GC not meeting its own obligations, unless the non payment is the result of the subcontractor’s failure to meet its requirements.
When the owner fails to pay the GC because of the work of another subcontractor, the contingent pay clause is not effective as to the innocent subcontractor.
When, after a subcontractor has not been paid for past work, it gives notice to the GC objecting to the further enforceability of the contingent pay clause, the GC may not then enforce the clause on work or materials provided after the notice.
When the owner and GC are essentially the same.
When enforcement of the clause would be "unconscionable."
A contingent pay clause may not be used as a basis for invalidation of the enforceability or perfection of an otherwise valid lien.

The requirements of the Act cannot be waived. However, the Act does allow for the assertion of a contingent pay clause as an affirmative defense to a lawsuit for payment under a contract. Finally, the Act does not apply to design services, civil engineering construction (roads, utilities, water supply projects, etc.), and most residential construction.

What is the lesson to be learned from this statute? First, good faith is generally required on the part of the general contractor to avoid one of the exceptions to enforceability of an otherwise valid contingent pay clause. Second, it is evidence that the Legislature has made increased efforts to protect subcontractors from heavy handed contractual provisions. A contingent pay bill was first introduced (unsuccessfully) in the 2003 Legislative session. Four years later, in 2007, the current version was passed. It will be interesting to see if this year’s legislative session results in any new measures.

Personal Liability Under the Texas Construction Trust Fund Act: The 800 Pound Gorilla You Never Knew Existed

2009-02-16T10:03:00.000-08:00

Most people in the construction industry have at least some awareness of the Texas Construction Trust Fund Act. For an overview of the Act, I recommend my blog article here.

What many contractors may not realize is the potential personal liability that the Trust Fund Act creates. It is very important to be aware of this fact in advance to avoid potentially serious mistakes down the road.

In a nutshell, the Act deems construction payments and loan receipts "trust funds." The corollary is that a "contractor, subcontractor, or owner or an officer, director, or agent of a contractor, subcontractor, or owner, who receives trust funds or who has control or direction of trust funds, is a trustee of the trust funds." What does that mean? It means that the individual owner, officer, director, or agent may personally be a trustee. Trustee status does not simply stop at the corporate veil.

If an individual is a trustee, he or she owes the beneficiary of the trust funds a fiduciary duty. This means a duty of loyalty, and the utmost good faith, candor, integrity of the highest kind, and fair and honest dealing. The fiduciary duty is basically the highest standard of care in our legal system.

Because the Act confers "trustee status" on individuals and not just companies, personal liability can also fall to the individual–even if they were acting solely in the course and scope of their employment and in furtherance of their employer’s business.

In Herbert v. Greater Gulf Coast Enterprises, Inc., 915 S.W.2d 866 (Tex.App.–Houston [1st Dist.] 1995), the Houston Court of Appeals found personal jurisdiction for Trust Fund Act violations over someone who had no individual contact with Texas. In that case, the plaintiff, a subcontractor, sued the Connecticut general contractor and its president individually. The court rejected the defendant’s argument that he individually had no contact with Texas. In its ruling, the court noted that the Legislature enacted the Construction Trust Fund Act as a special protection for contractors and subcontractors "to avoid the injustice of owners and contractors refusal to pay for work completed."

The plaintiff in Kelly v. General Interior Construction, 262 S.W.3d 79 (Tex.App.–Houston [14th Dist.] July 3, 2008) sued the two sole shareholders of an Arizona GC individually for breach of contract, violations of the Construction Trust Fund Act, and fraud. The defendants argued that Texas courts did not have personal jurisdiction over them individually because they acted solely in their corporate capacity. The court ruled that there was no jurisdiction on the breach of contract claim because the individuals had, in fact, acted on behalf of their company. However, they found jurisdiction on the Trust Fund Act claim. The court noted that the Trust Fund Act essentially allows subcontractors to pierce the corporate veil. The Act creates personal liability if (1) the party breaches the Act’s duties with the appropriate intent, and (2) the claimants are within the class of people the Act was designed to protect.

C&G, Inc. d/b/a Fox Rental v. Jones, 165 S.W.3d 450 (Tex.App.–Dallas 2005) is a very interesting case (particularly if you want to give yourself a little heartburn). Fox Rental sued CCG supply company, including officers Jones and Duncan under Trust Fund Act. Jones and Duncan had signatory authority on CCG's checking account. Neither of them personally received any trust funds, nor did they "independently" determine to whom the trust funds should be paid. In fact, they simply disbursed such funds as they were directed by the officers of American Eco, which owned CCG. Over time, Jones and Duncan objected to American Eco’s use and direction of the funds; in fact, they were eventually asked to leave their employment in large part because of their objections to the way American Eco handled the funds. By all accounts, these guys were doing the "right thing" and objecting.

Nevertheless, court of appeals held that they participated in both the decision to divert the funds and the actual diversion of the funds. As such, they were held personally liable. Their objections were not a defense, and the court did not accept the "just following instructions" justification either.

The point of this discussion is that construction trust funds are a serious matter that can bring serious personal liability. There are defenses to claims of violations of the Act, but with the potential for personal liability, these defenses should be particularly well documented. In any event, construction trust funds are not something to play fast and loose with. Knowing the Act’s requirements and potential for liability in advance will, however, help minimize liability down the road.

Construction Law CLE on Texas Payment Statutes

2009-01-21T14:54:00.000-08:00

A little self-promotion from the Texas Construction Law Blogger:

On Thursday, February 5th at 12:00 noon, Walker M. Duke will be presenting the Continuing Legal Education program "Three Payment Statutes Every Construction Lawyer Should Know" to the Construction Law Section of the Dallas Bar Association at the Belo Mansion, 2101 Ross Avenue, Dallas, Texas.

The presentation will discuss three statutes that relate to payment issues in the construction industry. First is the Texas Prompt Payment to Contractors and Subcontractors Act. This Act is useful for attorneys to know because it provides some guidance to a common scenario—a subcontractor has not been paid on a job and does not know whether to walk off the job for nonpayment or continue and hope for the best.

The second statute is the Texas Construction Trust Fund Act. This statute covers how construction funds and loan receipts should be handled. Construction law attorneys should be aware of the requirements of this statute because failure to meet its requirements can result in criminal penalties, in addition to civil liability.

The third topic is Texas lien laws. Liens can be a powerful tool for builders and contractors to encourage payment for services rendered and goods provided. However, they are fairly technical and must meet the strict requirements of the Texas Property Code. Failure to comply with these requirements, including deadlines (that are often blown by contractors before they call their lawyer), prevents proper perfection of the lien, and could result in a sizeable liability for wrongfully filing a lien.

For more information, contact Walker Duke at (214) 891-8040 or the Dallas Bar Association at (214) 220-7400.

Green Tax Relief

2008-11-26T11:31:00.000-08:00

The Energy Policy Act of 2005 (26 U.S.C. § 179D) created a tax incentive to improve energy efficiency of commercial buildings (this tax incentive was extended through 2013 as part of the Emergency Economic Stabilization Act of 2008, a/k/a "The Banking Bailout"). The "Commercial Building Tax Deduction" established a tax deduction for expenses incurred for energy efficient building expenditures made by the building owner. The deduction is equal to energy-efficient commercial building expenditures made by the taxpayer, subject to a cap of $1.80 per square foot.

The tax credit applies to "energy efficient commercial building property." But what exactly does that term mean? It means property–

1) for which depreciation is allowable;
2) installed on or in any building in the US and within the scope of ASHRAE Standard 90.1-2001;
3) which is installed as part of the interior lighting systems; the heating, cooling, ventilation, and hot water systems; or the building envelope; and
4) which is certified as being installed as part of a plan designed to reduce the total annual energy and power costs with respect to the aforementioned building systems by 50% or more (in comparison to a reference building which meets the minimum requirements of ASHRAE .Standard 90.1-2001.

Certification requirements must be met to qualify for these deductions. The secretary of the treasury, in consultation with the secretary of the secretary of energy, provided guidance in Notice 2006-52 that describes methods of calculating and verifying energy and power costs, using qualified computer software based on provisions of the 2005 California Nonresidential Alternative Calculation Method Approval Manual and the 2005 California Residential Alternative Method Approval Manual. Inspections must be performed by engineers or licensed contractors, and they must meet the guidelines of the National Renewable Energy Laboratory.

Partial deductions are available for buildings that do not meet the whole building requirement of 50% energy savings. The deduction is allowed with respect to each separate building system that comprises the energy-efficient property. For these "component deductions," the requirements are as follows: 20% savings for interior lighting, 20% savings for HVAC and hot water, and 10% savings for building envelope. The maximum allowable deduction for the separate systems is $.60 per square foot.

Other notable features about the Commercial Building Tax Deduction:

Churches are not eligible for the deduction.
Portions of buildings (e.g. common areas, portions of common areas, etc.) can be retrofitted and the associated square footage considered for the deduction.
Screw-in compact fluorescent lamps (CFLs) cannot be used to reduce wattage for purposes of the deduction. ASHRAE 90.1-2001 lighting power calculations require maximum labeled wattage of incandescent luminaire be used.

Anyone who has even considered designing or constructing a "green" building knows that the associated costs are much higher than a traditional build. However, the Commercial Building Tax Deduction at least mitigates some of that cost and makes it a little easier to be green.

LEED To Be Upgraded in 2009

2008-11-21T12:10:00.000-08:00

In 2000, the US Green Building Council (USGBC) introduced the LEED Green Building Rating System. For the last 8 years, the LEED system has established a set of integrated, measurable goals that guided how eco-conscious buildings were to be designed and constructed.

LEED v3, which will go into effect in 2009, will bring about several significant changes to the green building rating system, and it will have several components. The updated technical standards will be codified in LEED 2009. This was not intended to be a "tear down and rebuilt" of the current LEED system, but rather, a reorganization of the existing system. The USGBC has characterized LEED 2009 as the sum of four parts:

1. LEED prerequisite/credit alignment and harmonization
2. Predictable development cycle
3. Transparent environmental/human impact credit weighting
4. Regionalization

The second part of LEED v3 is an expanded third-party certification program. Currently, all LEED project submissions are reviewed by USGBC with the support of independently contracted reviewers. Beginning in January 2009, however, the USGBC will move administration of the LEED certification process to the Green Building Certification Institute, a non-profit organization established in 2007. This reorganization was done to improve the overall certification process in way that can grow with the demand for green building certification. The other goal was to establish third-party certification that can be audited to determine effectiveness and fairness.

The third part of LEED v3 is the LEED Online management system, which should hopefully make the legwork part of all-things-LEED a little easier.

With 8 years of growing pains out of the way, and over 7,000 comments on LEED 2009, hopefully the USGBC has developed a good sense of what works and what doesn’t. All in all, LEED v3 should be an enhanced, more workable version of what was started in 2000.

Liquidated Damages: Be Sure You Get What You Bargained For

2008-11-03T15:44:00.000-08:00

At some point in the life of every construction business, a project will not go as planned. For whatever reason, the project just does not unfold as it was originally designed. Maybe it was because another contractor had to repair its own mistake, maybe it was bad weather, or maybe the work was just slower than what was initially estimated. Despite best efforts, the original schedules become a thing of distant memory.

Anyone who has been in this situation knows that it does not take long before the finger pointing begins, which is quickly followed by damage claims related to the delays. However, delay damages can be very difficult to quantify and calculate. Some elements may be fairly concrete, such as rents lost due to a building opening 90 days late. Other elements are more nebulous, like the value of the extra time office employees spent working on the project (extended home office overhead), lost opportunities of other projects, etc.

One solution to some of the uncertainty of delay damages is the inclusion of a liquidated damages clause in the construction contract. In a nutshell, liquidated damages clauses provide that the non-breaching party is entitled to a certain amount of damages if specified conditions are not met. Probably the most common example is a provision that awards one party a certain dollar figure per day a project is late in completion.

Like so many other provisions, liquidated damages clauses are deal points that are negotiated. If you worked to get a liquidated damage clause included in your contract, you certainly want to be sure it is enforceable.

To be valid, a liquidated damages clause must satisfy a two-part test. First, the damages covered by the clause should be incapable or difficult to estimate at the time of the contracting. Second, the liquidated amount must be a reasonable calculation of expected damages. The key is that a liquidated damages clause must not be a penalty. For example, a provision that provides $5,000 per day that a project is late, when the actual amount of damages relating to the delay is closer to $500, is likely to be struck down. The clause does not provide a reasonable substitute for actual damages but rather, it acts as a penalty.

A liquidated damages clause that is considered a penalty is not enforceable. In other words, that heavy handed damages clause that you traded some deal points to have included in the contract may be worthless.

These clauses can be particularly powerful when used in combination with a provision that specifically states that liquidated damages are the exclusive remedy available for breach of the contract. This essentially eliminates the possibility of recovering consequential damages. From the owner’s perspective, this could create a higher per day amount. From the contractor’s perspective, it provides some limitation on potential liability.

In any event, liquidated damages clauses should be as specific as possible to prevent confusion down the road. If damages are to accrue on workdays only, language to that effect should be included. Conversely, if weekends and holidays are to be included in the damage calculation, that should be explicitly stated. Ambiguity can cost you. Considering the fact that there are around 100 weekend days in a year, not to mention holidays, a twelve month delay could potentially increase (or decrease) damages by almost a third.

Liquidated damages clauses are an effective way to remove some of the uncertainty related to construction delay claims. The specific details are negotiable, but they need to be a reasonable estimate of difficult-to-calculate damages. Should the dispute go to litigation, these clauses can lower expenses incurred in determining the exact amount of damages related to the delay. However, these clauses may also be the sole remedy should a construction project go bad. The specifics of each contract will determine whether a liquidated damages provision is appropriate, but it is always a good item to have in your negotiation toolbox.

Catastrophe Struck--Now What?

2008-10-23T13:53:00.000-07:00

We all know that construction can be a dangerous business. Safety is one of the biggest issues any construction business deals with, and rightfully so. Unfortunately, in spite of the best safety programs, training, and precautionary measures, accidents still do happen. And sometimes, they are catastrophic. What do you do when you get the call that one of your employees has been badly injured or, even worse, killed?

First and foremost, the immediate welfare of your employee should take priority. Get them the immediate medical attention they need; when in doubt, error on the side of caution. Then alert their family so that the employee’s loved ones can get involved in the medical decision-making.

"Ok," you say, "my team member has been taken to the hospital. What do I need to be doing back at the job site?" Make sure that the site does not pose a continuing threat to anyone else. You’ve already had one injury, you certainly don’t want more. If it may take some time to determine whether the premises remains hazardous, limit access to the area until you’ve determined the threat is gone.

At this point of the situation, assuming that the employees health is being tended to and the job site no longer poses a danger, it is important to start documenting what happened. Find witnesses, get their account of what happened, and write down their contact information. Take photos of the accident scene; this is the only chance you will have to capture the image of what it looked like at the time of the accident. If your company has a policy in place about creating incident/accident reports, work through that protocol. Memories fade, and no one will ever have a better account of what happened than immediately after the event. Keep in mind, however, that the products of your investigation may be discoverable if litigation ensues.

Hopefully, your documentation began long before the accident. Your company should have a safety plan in effect, and you should have been following it. You also should have some documentation that your employees followed the safety protocol.

"Whew, I’ve taken the immediate response actions, and now I’m gong to head back to the office to catch my breath," you utter after a long day (or night). You plop down in your chair at your desk and then it hits you – things have only just begun. Time to start making phone calls. If the injured person was an employee, your workers comp carrier should be immediately notified of the accident. You should also call your commercial general liability (CGL) carrier as well and advise them of the incident. Depending on the nature of the accident, you may be required to notify OSHA as well.

You should also contact your legal counsel as soon as possible. If there is a fatality, they should be one of the first calls you make. The reality of today’s business climate is that there is a good chance that catastrophic (and even some non-catastrophic) accidents will result in litigation, particularly if the injured person is a non-employee (workers comp statutes provides some relief from lawsuits for employers when their own employees are injured). Because of this fact, you have certain duties to preserve evidence. You should preserve photos, witness statements, accident reports, documentation done surrounding the accident, written policies and procedures...the list could go on. In a nutshell, if the materials (including computer files and e-mails) have any relevance, they should be preserved. This may sound like common sense, but the penalties can be stiff if litigation arises and relevant materials have been altered or destroyed.

The best way to handle catastrophic accidents is to prevent them. The reality, however, is that at some point you will probably have to deal with one. This doesn’t represent an exhaustive list of everything that needs to be done, but it is a good start. By taking the proper steps, both before and after the incident, hopefully you will be able to keep the catastrophic accident from becoming a catastrophic liability for your company.

Indemnity Agreements: What you see (and say) isn’t always what you get

2008-10-06T14:29:00.000-07:00

During construction contract negotiations, indemnity agreements tend to be viewed one of two ways. One approach is that they are a critical component that serves to protect the indemnitee and limit liability related to the contract. The other approach is, "eeh, whatever."

The attitudes towards indemnity agreements change drastically on the back end, though. I can tell you that, as an attorney, the first thing I look at when analyzing a construction dispute is the contract that governs the relationship between the parties. And within the contract, I go straight to the indemnity agreement (if there is one) to see if someone else is going to be financially responsible for my client’s liability, including any settlement or judgment.

Like so many other items, indemnity agreements are deal points to be negotiated. However, I personally believe that if you can receive indemnity protection without having to give up too much in return, it is a good idea to ask for it because it can serve as an effective limitation of your liability. In some instances, it may even be worth giving up quite a bit to receive that protection.

Indemnity clauses are a little tricky, though, and if you don’t word yours properly, it can be worthless. A simple, yet important, general rule of contract law is that contracts should be interpreted consistent with a plain reading of the text. In other words, a contract says what it means and means what it says. Indemnity clauses are an exception to this general rule. What may look like a valid, clear indemnity provision may not satisfy the requirements imposed by Texas law.

Texas (among many other states) has adopted the "express negligence doctrine." See Ethyl Corp. v. Daniel Constr. Co., 725 S.W.2d 705 (Tex. 1987). 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. Under the doctrine of express negligence, the intent of the parties must be specifically stated within the four corners of the contract.

"Great," you say, "but what does that actually mean?" In a nutshell, it means that to be covered by an indemnity agreement, that provision must explicitly state that it includes indemnification for the indemnitee’s own negligence.

Let me illustrate by showing you what not to do. In Ethyl, the owner was sued by an employee of a contractor for injuries related to the owner’s and the contractor’s negligence. The owner sought indemnity from the contractor pursuant to the following provision in their contract:

Contractor shall indemnify and hold Owner harmless against any loss or damage to persons or property as a result of operations growing out of the performance of this contract and caused by the negligence or carelessness of Contractor, Contractor’s employees, Subcontractors, and agents or licensees.

The Texas Supreme Court ruled that this provision did not provide indemnity to the owner for the owner’s own negligence. Because the injured employee asserted negligence against both the owner and the contractor, and the indemnity provision did not provide indemnity to the owner for its own negligence, the owner was not entitled to indemnity from the contractor. The Court stated that "indemnitees seeking indemnity for the consequences of their own negligence which proximately causes injury jointly and concurrently with the indemnitor’s negligence must also meet the express negligence test."

So how do you create a valid indemnity agreement? First, I would recommend working with an attorney on your specific contract, as the difference between a valid and invalid indemnity clause could be thousands, and even millions of dollars. Second, be sure your contract can pass the express negligence test. Include explicit wording that the indemnity extends to cover the negligence of indemnitee. This language may be a harder sell in contract negotiations, but without it, your indemnity agreement may be unenforceable.

Warranty Claims, Attorney’s Fees, and You

2008-09-25T16:44:00.000-07:00

Most transactions have some sort of cost associated with them. The bank charges $2 to use its ATM. Your financial advisor charges his fee to execute your stock trade. Your lender charges interest for the immediate use of its capital to fund your project.

When it comes to breach of warranty claims, those transaction costs often appear in the form of attorney’s fees, and they can frequently be the tail that wags the dog. Texas has strict limitations on when attorney’s fees are recoverable. Generally speaking, they are only recoverable when specifically allowed by statute or if the claim falls into one of eight defined categories:

1) rendered services;
2) performed labor;
3) furnished material;
4) freight or express overcharges;
5) lost or damaged freight or express;
6) killed or injured stock;
7) a sworn account
8) an oral or written contract

Noticeably missing from this list is breach of warranty. "Are you telling me," you ask, "that if I have to file a lawsuit because the widgets I bought and installed into the Taj Mahal II failed, and I WIN, I’m still going to be out my attorney’s fees???" Maybe, but you’re in a better position than you would have been a year ago.

Attorney’s fees have typically been non-recoverable in breach of warranty claims, so lawyers got creative to find other bases to receive them. One of the more common ways has been to bring claims based on consumer protection statutes (most notably, the Deceptive Trade Practices Act, or "DTPA"). The DTPA, which includes breaches of warranty within its scope, does allow for recovery of attorney’s fees.

Not every would-be plaintiff, however, qualifies for the protections created by the DTPA. For example, businesses with assets greater than $25 million are excluded. Does that mean that larger companies cannot recover their attorney’s fees while smaller companies can, even under the same facts? Until recently, that was probably the case.

Earlier this year, the Texas Supreme Court shook things up with the Medical City Dallas, Ltd. v. Carlisle Corporation case. 251 S.W.3d 55 (Tex. 2008). The court ruled that attorney’s fees are recoverable for claims of breach of an express warranty. The reasoning behind this decision was that breaches of express warranties sound in contract, and attorney’s fees are recoverable for a breach of contract. The court did not address whether attorney’s fees were recoverable for breach of implied warranties.

What does all this mean for you? First, it means that your transaction costs for bringing a claim for breach of warranty may have just gone down. But it also means that best practices dictate that you get that warranty written down. The law is still fuzzy on whether attorneys’ fees are recoverable for implied warranties, so make sure the warranty you get is express.

The Birth of a Contract

2008-09-19T15:15:00.000-07:00

The construction industry is driven, to a large degree, by contracts (just consider the name "contractor"). The AIA has its standard forms, and many companies have their own models that they prefer to use. But when is a contract formally created? Does it happen with a handshake? What about when forms get faxed back and forth, with each new round creating new modifications to the terms?

Generally speaking, a valid contract is formed when an offer is made, it is accepted, and there is a meeting of the minds. There is no acceptance when there is an attempt to change or qualify the terms of the offer. If there is such an attempt, the offer is rejected. A purported acceptance that adds conditions not contained in the offer is not actually an acceptance–it is a rejection of the offer. Additionally, a qualified or conditional response to an offer does not create a contract because there is no meeting of the minds. This is actually a counter-offer.

A counter-offer must be accepted by the party who made the original offer to constitute a contract. An acceptance takes effect only when the acceptance is communicated to the offeror. When an offeror/counter-offeror does not specify the manner of acceptance, the offeror impliedly authorizes acceptance by the same manner used to present the offer.

Meeting of the minds, or mutual assent, is the essence of a contract, and it is judged objectively on the basis of what the parties actually said and did.

"OK, that sounds like a bunch of legalese," you say, "and I’m still not sure when a contract is formed when I’m going back and forth with the owner/general/sub."

The Texas Supreme Court has provided some guidance, and the case of Capital Bank v. American Eyewear is instructive. That case involved a question of whether a lease was valid and contained an acceptance of an offer. The plaintiff, American Eyewear, prepared a proposed lease and submitted it to the Bank. The Bank’s president then made several changes in the document, signed and delivered it. An officer of American Eyewear then, in turn, initialed the changes made by the Bank’s president, but made three additional changes before signing the document. The court held that when American Eyewear made changes in the lease form executed by the Bank and sent it back to the Bank, that action acted as a counter offer, which was not binding on the Bank without the Bank’s acceptance of the counter offer.

These are some basic guidelines, but the actual formation of a contract is a very fact driven analysis. There will, however, always be three elements: 1) offer, 2) acceptance, and 3) a meeting of the minds.

Examining whether a formal, binding contract is formed may seem like a rudimentary question, but it is actually very important–particularly if there have been back-and-forth changes to forms. If no actual contract was ever formed, then those terms and conditions that you thought were going to guide the transaction may not be applicable. Or, those modifications you thought you made may be worthless.

Mediation

2008-09-12T15:34:00.000-07:00

Everyone knows at least one mediation joke. My favorite is that the sign of a successful mediation is when everyone leaves equally unhappy (which, by the way, is partially true).

Despite the sometimes negative reputation mediation has gained over the years, it can be a very effective, every economical way to resolve disputes. The specifics of mediation may vary a little depending on the forum, but the basics are this. All parties get together in one room and provide a brief opening statement. The parties then break up into separate rooms. The mediator will typically visit with the party seeking relief first. He or she will find out a little about the claims being made and the relief being sought. The mediator will then visit each of the other parties and find out about their defenses or counter-claims. Anything told to the mediator is completely confidential. Depending on the complexity of the case, dollars and cents may not even be discussed in this first round. The mediator is simply trying to learn in an hour or two what you’ve lived with for some time.

At some point, the claimant makes a formal demand (typically a monetary amount, but sometimes it could be specific performance). That demand is relayed to the other party(ies), who explain to the mediator why they believe that figure is incorrect. If everyone is there is good faith, a counteroffer is usually given and taken back to the claimant. This process repeats itself until either a settlement or stalemate is reached.

"Why," you ask, "should I spend a morning or whole day sitting in the office of some mediator (and pay them for their time) when we could just send offers back and forth over the phone?" Well, there are several reasons.

First and foremost, if you are working under an AIA contract, there is a good chance that you will have to mediate. The AIA General Conditions of the Contract for Construction (Form A201-2007) states that "Claims, disputes, or other matters in controversy arising out of or related to the Contract except those waived....shall be subject to mediation as a condition precedent to binding dispute resolution."

Secondly, mediation really can be a cost-effective way to resolve disputes. Compared to the potential costs of extended litigation or arbitration, the time and expense related to a mediation is not very high. It is useful to have a neutral third party provide his or her honest assessment of a case. They hear all the facts and arguments the way a jury or arbitrator would hear them. And they will offer their disinterested assessment of how a case might turn out if it is not resolved.

A mediator can also be a much more effective messenger of the strengths of your case than you are. Even if they are just relaying the arguments you have already made directly to the other party over the phone (or face-to-face), the fact that the messenger is a neutral third party will often times give those same arguments a little more weight.

Perhaps the most important aspect of mediation is that the parties still control their own destiny. You control how much (if any) you agree to pay or accept. You control what terms and conditions a settlement will have. And you have the right to get up and leave at any point. There is no obligation to settle, and the mediator cannot commit you to a settlement. There is no judge, jury, or arbitrator telling you what you will or will not do. This is a far cry from what happens at a trial or arbitration should the dispute not be resolved. There, you put your company’s fate in the hands of complete strangers over whom you have no control.

At the end of the day, however, mediation only works if all parties are making a good faith effort at resolving the dispute. If a party is not interested in a resolution, it is a waste of time. But if the parties are genuinely interested in trying to work out their differences, then it is certainly a worthwhile endeavor and may prevent bigger headaches down the road.

Prompt Payments to Contractors and Subcontractors -- It's Not Just a Good Idea, It's the Law

2008-09-01T21:37:00.000-07:00

My last article discussed the pitfalls of holding and distributing construction payments and loan receipts. But what if you’re on the other end of that equation–what if you’re the party who is seeking payment. What kind of protection is out there for you?

Liens may be an available remedy, and there is always the option of litigation. But what if your company is working on a project and your portion of the job is about half finished, but the company you contracted with is about four months behind on payments. This isn’t the first time they’ve fallen behind, but it’s a lucrative contract for your company (when you’re paid) and you would like to finish out your work. Additionally, it is a high profile project and you would like to use it as an example of what your company can do, but these late payments are creating all kinds of cash flow problems for you. Do you keep working and hope payment comes sooner rather than later, or do you pull your crew from the site? If you pull your crew, are you inviting litigation for walking off the job?

The Texas Prompt Payment to Contractors and Subcontractors Act provides some guidance for this scenario. It states that if an owner receives a written payment request from a contractor for an amount that is allowed under a contract for work or specially fabricated materials, the owner must make payment within 35 days of receiving the request. Unpaid amounts accrue interest at 1½ % per month.

Even more notable about the statute is that it gives contractors the ability to stop working. If an owner fails to pay the contractor an undisputed amount within 35 days, the contractor may suspend its contractually required performance. This can be done ten days after the contractor gives the owner (and possibly the owner’s lender) written notice that (1) payment has not been received, and (2) the contractor intends to suspend performance for nonpayment.

At this point, you’re doing a mental calculation of the costs of pulling your crew off the job site and then sending them back and wondering if it is worth the expense. You’re in luck—the statute provides that a contractor who suspends performance under this provision is not required to supply further labor, services, or materials until it is paid the amounts due (over which performance was suspended), plus costs for demobilization and remobilization.

Obviously, there are many factors to consider before pulling off a job for nonpayment, including the relationship between the parties, potential for future projects, and the amount at stake. However, having the force of the Texas Payment to Contractors and Subcontractors Act behind you will at least provide a little piece of mind.

The Texas Construction Trust Fund Act -- What You Don't Know Can Hurt You

2008-08-25T14:15:00.000-07:00

It is pretty universally accepted that construction payments and construction loan receipts should be prudently held and distributed. However, this is more than just a sound business practice–a failure to appropriately hold and distribute construction funds could actually land you in jail and bogged down in litigation.

The Texas Construction Trust Fund Act (the "Statute"), found in Chapter 162 of the Texas Property Code, regulates construction payments and loan receipts. The Statute expressly states that construction payments are trust funds if (1) the payments are made to a contractor or subcontractor, (2) under a construction contract, and (3) for the improvement of specific real property in this state. This also applies to loan receipts. The party who receives these funds is a trustee.

A trustee who, intentionally or knowingly or with intent to defraud, retains, uses, disburses, or otherwise diverts trust funds without first fully paying all current or past due obligations incurred by the trustee to the beneficiaries of the funds, has misapplied the trust funds.

Sounds like common sense, right? It might be, but the penalties for failing to adhere to these requirements can be quite stiff. A trustee who misapplies trust funds over $500 in violation of the Statute commits a Class A misdemenor. If the trustee misapplies those trust funds with intent to defraud, they may be guilty of a third-degree felony.

Since potential felony liability for failing to pay subcontractors sounds pretty harsh, it’s important to know exactly what "intent to defraud" means. A trustee acts with "intent to defraud" when he retains, uses, disburses, or diverts trust funds with the intent to deprive the beneficiaries of the funds.

In addition to potential criminal prosecution, misapplication of trust funds can also create civil liability–and hence, litigation. Because the holder of the construction payment or loan receipts is a trustee, there may be a fiduciary relationship with the beneficiary–at least with respect to the trust funds. Fiduciary relationships bring with them heightened duties, including loyalty and the utmost good faith, candor, integrity of the highest kind, and fair and honest dealing.

By failing to pay, the intended beneficiary could bring a lawsuit asserting, among other claims, breach of fiduciary duties. This is notable because an intentional breach of fiduciary duty opens up the possibility for punitive damages.

The Statute does establish affirmative defenses to claims of misapplication of trust funds. It is a defense that the trust funds not paid to the beneficiaries were used by the trustee to pay its actual expenses directly related to the construction or repair of the improvement or have been retained by the trustee, after notice to the beneficiary, as a result of the trustee’s reasonable belief that the beneficiary is not entitled to the funds.

It is also a defense that the trustee paid the beneficiaries all trust funds they were entitled to receive no later than 30 days following written notice to the trustee of the filing of a criminal complaint or other notice of a pending criminal investigation.

The Texas Construction Trust Fund Act underscores the need for good business practices with respect to construction payments. This Statute increases the potential penalties that may arise for failing to appropriately manage these funds. The key is to handle construction payments and loan receipts with great care.

The Wizard Behind the Curtain

2008-08-13T12:55:00.000-07:00

One of the most memorable scenes in the Wizard of Oz was when we finally got to meet the notorious Wizard himself. When Toto pulled the curtain back, we saw that he wasn’t the brooding, intimidating figure that his image and reputation led us to believe he was. Instead, we saw a small, mild mannered gentleman who looked incapable of harming a fly. With a simple tug of a curtain, the grand image was blown.

Now, what does the Wizard of Oz have to do with construction and, for that matter, any business? A lot. As paperwork has evolved into computer-work, there has been a shift from focusing solely on paper documents to investigating electronically stored information ("ESI"). In litigation and arbitration, attorneys are not limiting discovery to paper documents. They are investigating electronic versions of e-mails, Word documents, spreadsheets, voicemails, and other forms of ESI.

Why? Because just like Toto pulled back the curtain on the Wizard, ESI allows the curtain to be pulled back on your paper file. There’s a lot more to every document, spreadsheet, and e-mail than just the words on the page. Buried in every file is data about who created it, who modified or accessed it, when it was created, who was bcc’d, etc. ESI reveals spreadsheets formulas that would otherwise generate raw numbers on paper. And those redline changes and comments on your Word document? Well, just read this business plan to find out how not to get a project funded. Then imagine reading a contractor’s bid that unknowingly included all the comments about the corners they can cut.

This isn’t meant to scare you back to a stone tablet and chisel, but it is a cautionary tale. Before you send that contract to the other side, be sure you’re not including your own personal commentary. That e-mail you thought you deleted–it’s still resting comfortably on the company’s server. You make efforts (and probably spend good money) to keep your confidential information confidential. Don’t accidentally hand over the keys to your file room. When it comes to ESI, what you see isn’t always what you get.

Pay When Paid Clauses

2008-08-06T09:10:00.000-07:00

"Pay When Paid" contract clauses have become a fairly common tool used by general contractors to limit financial liability to subcontractors in the event of an owner’s insolvency. In a nutshell, they provide that a GC’s obligation to pay the sub is contingent on the GC being paid by the owner. If the GC isn’t paid by the owner, the GC has no obligation to pay its sub. Though the wording will vary from contract to contract, Pay When Paid clauses generally look something like this:
Notwithstanding anything to the contrary herein, payment by the Owner to the General Contractor is a condition precedent to the ubcontractor’s right to payment from the General Contractor.

Partial payments for or on account of Work performed will be made by Contractor to Subcontractor as the Work progresses, provided however, that as a condition precedent to any such payment, like payment has been made by Owner to Contractor.
These clauses are pretty heavy handed since they are an attempt to shift the risk for nonpayment from the general (who contracted directly with the owner) to a sub (who might have little or no relationship with the owner). As such, the question is this: Are Pay When Paid clauses actually enforceable?

In Texas, Pay When Paid clauses are typically enforceable IF they create a condition precedent and not simply a covenant to pay. A condition precedent is an act or event, which occurs after the making of the contract, that must occur before there is a right to immediate performance and before there is a breach of contract. They basically create a contingency, where a party has no obligation to perform X until condition Y occurs first.

While there are no magic words that are necessary to create a condition precedent, terms such as "if," "provided that," "on the condition that," or some other phrase that conditions performance usually indicate an intent to create a condition precedent. Gulf Const. Co. v. Self, 676 S.W.2d 624, 627 (Tex.App.–Corpus Christi 1984).

It is important that the contract language is very clear on this. Because conditions precedent tend to be fairly harsh, courts do not favor finding them in contracts. For example, in a hospital construction project, a contract between between the GC and a sub included the following provision:

When the owner or his representative advances or pays the general contractor, the general contractor shall be liable for and obligated to pay the sub-contractor up to the amount or percentage recognized and approved for payment by the owner’s representative less the retainage required under the terms of the prime contract. Under no circumstances shall the general contractor be obligated or required to advance or make payments to the sub-contractor until the funds have been advanced or paid by the owner or his representative to the general contractor.

The court of appeals ruled that this clause only created a covenant regarding the terms and manner of payment, not a condition precedent to payment. Id. As such, the general contractor did not limit its financial liability. It was required to pay its subcontractors even though the owner failed to pay the GC.

Pay When Paid clauses are an effective way for general contractors to manage risk and limit financial liability when there is a question about an owner’s solvency. Like so many other terms, they are deal points to be negotiated. You don’t want to lose the protection you worked hard to acquire because of a poorly worded contract. The key to having an effective, enforceable Pay When Paid clause is to make sure it actually creates a condition precedent. Without that, the GC has probably done nothing but re-enforce its own obligation to pay.

Lien On Me: Texas Lien Laws

2008-07-29T14:54:00.000-07:00

One of the best tools a contractor has to ensure payment on a construction project is the lien. Filing liens may seem like a technical, burdensome legal process, but with a little forethought and by having the right procedures in place, it can be an efficient way to avoid litigation down the road.

The Texas Property Code establishes the requirements for filing mechanic’s lien, contractor’s lien, or materialman’s liens. According to the Code, a person has a lien if (1) the person labors, specially fabricates materials, or furnishes labor or materials for construction or repair of a house, building, improvement, levee, or railroad, and (2) the person labors, specially fabricates the material, or furnishes the labor or materials pursuant to a contract with the owner, owner’s agent, contractor, or subcontractor. In short, if you’ve built or improved a structure, there’s a good chance you can protect your interests with a lien.

The lien extends to the building, house, fixtures, and improvements, and it secures payment for the labor or material furnished. It also secures payment for specially fabricated materials even if they haven’t been delivered.

One of the biggest issues with liens involves properly perfecting them. If your lien is not properly perfected, then you’re probably not going to be able to take advantage of its protections. Even worse, if you file a lien without complying with the statutory requirement, you could face a hefty penalty.

To perfect a lien in Texas, you must file a "lien affidavit" with the county clerk of the county of the to-be-liened property not later than the 15th day of the fourth calendar month after the day the indebtedness accrues. The lien affidavit is fairly simple, but there are a few things that the Texas Property Code requires such as a general description of the work performed and materials furnished (if the claimant did not contract with the owner, this must include a statement of each month in which the work was done or materials furnished for which payment is sought), a description of the property to be liened, the name and last known address of the owner, and a statement identifying when notice of the claim was sent to the owner and how it was sent. You can see all the requirements of the lien affidavit here.

The rules are slightly different for subcontractors that want to place a lien on property. Subcontractors must still file the lien affidavit, but they must also give the original contractor (who contracted with the owner) written notice of the unpaid balance not later than the 15th day of the second month following each month in which all or part of the labor or materials was provided. The owner must be given this notice by the 15th day of the third month.

For subcontractors, the best practice is to send out a notice every month to both the general contractor and owner after payment is late. Make this a regular practice of your billing department. What happens too often is that the sub simply waits and waits for payment. Several months pass and by the time they realize they are not getting paid, it’s too late to file a lien – the notices were not timely sent. If the timing requirements are not satisfied, a lien cannot be filed. This is a rule that simply cannot be bent, and the penalties in Texas for wrongfully filing a lien can be up to $10,000.

Mechanic's liens or materialman's liens on residential construction/homesteads have a few more technical requirements, which will be discussed in future posts.

The key for any contractor seeking to protect its interests via lien is proper perfection. With a little advance planning and good billing practices, you can add this powerful remedy to your toolbox.