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.
Showing posts with label Indemnity. Show all posts
Showing posts with label Indemnity. Show all posts
Tuesday, September 20, 2011
Tuesday, June 22, 2010
What Can the Construction Industry Learn from the BP Oil Spill?
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.
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.
Monday, February 22, 2010
Builders Should Learn From Olympic Luge Tragedy
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.
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.
Monday, January 4, 2010
Top 10 New Year’s Legal Resolutions for Everyone in Construction
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!
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!
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.
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.
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.
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.
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.
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 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:
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.
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.
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