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.