Friday, December 11, 2009

What Does Tiger Woods Have To Do With Construction Law?

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.

Wednesday, November 18, 2009

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

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.

Tuesday, November 10, 2009

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

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.

Thursday, September 17, 2009

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

"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.

Monday, August 31, 2009

OSHA Keeps an Eagle Eye on Texas

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.

Monday, August 17, 2009

What the Construction Industry Can Learn from the Healthcare Reform Debate

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.

Monday, July 27, 2009

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

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.

Tuesday, June 30, 2009

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

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.

Tuesday, June 9, 2009

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

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.

Monday, May 25, 2009

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

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.

Monday, May 11, 2009

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

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;


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.

Thursday, April 23, 2009

FINALLY, Some Positive Construction Economics News!

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.

Tuesday, April 21, 2009

Deadline to Implement Federal E-Verify Requirement Pushed Back

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.

Wednesday, April 8, 2009

Give 'Em A Brake

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.

Wednesday, March 25, 2009

The Texas Residential Construction Commission Isn’t Dead Yet

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.

Tuesday, March 24, 2009

The Limits of Limitation of Liability Clauses

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:


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.

Wednesday, March 11, 2009

The End of Indemnity (in Construction Contracts)?

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.

Monday, March 2, 2009

Texas Residential Construction Commission: Is the End in Sight?

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.

Tuesday, February 24, 2009

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

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.

Monday, February 16, 2009

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

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.

Wednesday, January 21, 2009

Construction Law CLE on Texas Payment Statutes

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.