construction meets texas law: selected statutory overrides

Construction Meets Texas LawSelected Statutory Overrides

Sean M. McChristianPorter Hedges LLP

1000 Main Street, 36th FloorHouston, Texas 77002

Construction Law Foundation of Texas, 29th Annual Construction Law Conference

Introduction

“Essentially, construction law is the law of contracts which, itself, is derived from the common law, as modified by statute.”

Canterbury and Shapiro, TX Construction Law Manual § 1:1 (3d ed.).

Construction Law Foundation of Texas29th Annual Construction Law Conference

Introduction

• Contractual Notice PeriodsTEX. CIV. PRAC. & REM. CODE § 16.071(a)

• Recipient of NoticeTEX. CIV. PRAC. & REM. CODE § 16.071(b)

• Contractual Limitations PeriodsTEX. CIV. PRAC. & REM. CODE § 16.070


Introduction

• Forum and Choice of Law in Construction Contracts

TEX. BUS. & COM. CODE § 272.001• Contingent Payment of Subcontractors and

SuppliersTEX. BUS. & COM. CODE §§ 56.001-.057


Introduction

• Prompt Payment to Contractors and Subcontractors

TEX. PROP. CODE §§ 28.001-.010• Prompt Payment by Governmental Entities

and their ContractorsTEX. GOV'T CODE §§ 2251.001–.055


Introduction

• Limits on Indemnification and Additional Insureds

TEX. INS. CODE §§ 151.001-.151• Indemnity – Architects and Engineers

TEX. CIV. PRAC. & REM. CODE §§ 130.001-.005

TEX. LOC. GOV’T CODE § 271.904


Contractual Notice Periods

Most construction contracts require written notice of changes, differing site conditions, extra work, or other events which may affect the time or cost of performance.



§ 15.1.2 NOTICE OF CLAIMSClaims by either the Owner or Contractor must be initiated by written notice to the other party and to the Initial Decision Maker with a copy sent to the Architect, if the Architect is not serving as the Initial Decision Maker. Claims by either party must be initiated within 21 days after occurrence of the event giving rise to such Claim or within 21 days after the claimant first recognizes the condition giving rise to the Claim, whichever is later.



§ 15.1.4 CLAIMS FOR ADDITIONAL COSTIf the Contractor wishes to make a Claim for an increase in the Contract Sum, written notice as provided herein shall be given before proceeding to execute the Work.

§ 15.1.5 CLAIMS FOR ADDITIONAL TIME§ 15.1.5.1 If the Contractor wishes to make a

Claim for an increase in the Contract Time, written notice as provided herein shall be given.



A contract stipulation that requires a claimant to give notice of a claim for damages as a condition precedent to the right to sue on the contract is not valid unless the stipulation is reasonable. A stipulation that requires notification within less than 90 days is void.

TEX. CIV. PRAC. & REM. CODE § 16.071(a).



American Airlines Employees Federal Credit Union v. Martin, 29 S.W.3d 86 (Tex. 2000)• Deposit agreement required customers to give notice

of unauthorized transactions within 60 days of mailing of statement, or waive any objections.

• Purpose - prevent further unauthorized transactions• If the customer gives prompt notice, the funds might

be recovered and the customer may never have a claim for damages.



American Airlines Employees Federal Credit Union v. Martin, 29 S.W.3d 86 (Tex. 2000)• Holding - did not violate Section 16.071 because the

statute does not apply when the notice to be given is not notice of a claim for damages, but rather notice of unauthorized transactions.

How does this apply to construction?



Withdrawn Opinion in Cajun Constructors, Inc. v. Velasco Drainage District• Pump station expansion project in Brazoria County, Texas. • Agreed Completion Date and LD’s of $750.00 per day.• Cajun submits multiple claims during project.• Project completed 275 days late.• Velasco withheld over $200k from final payment.• Cajun sues saying claims wrongfully denied.



Three notices required by contract:1. Written notice of the general nature of a claim

within 30 days of the start of the event giving rise to the claim.

2. Written notice of the amount or extent of the claim within 60 days of the start of the event.

3. Engineer’s decision on claim is binding unless give written notice of intent to appeal from the decision within 30 days of the decision and file suit within 60 days.


Contractual Notice Periods• Fourteenth Court of Appeals – – First and second provisions require notice of an event that

may or may not ripen into a claim for damages.– Notice of intent to appeal and of filing suit requires notice

before a claim for damages is alleged in court. – First and second notice provisions concern claims for

adjustment that allow the parties to investigate and settle disputes while construction continues; however, requiring claimant to submit a notice of appeal within 30 days and file suit within 60 days restricts a claim for damages and is subject to section 16.071(a).


Recipient of NoticeNotice provisions may require notice to be sent to specific individuals at specific address.

Example – (a) Notices and other communications required or permitted under this Agreement will be in writing and mailed via certified mail, return receipt requested to the addressee at the address set forth below:

Mr. Company President1000 Main StreetAnytown, Texas 77000


Recipient of Notice

§ 15.1.4 CLAIMS FOR ADDITIONAL COSTIf the Contractor wishes to make a Claim for an increase in the Contract Sum, written notice as provided herein shall be given before proceeding to execute the Work.

§ 15.1.5 CLAIMS FOR ADDITIONAL TIME§ 15.1.5.1 If the Contractor wishes to make a

Claim for an increase in the Contract Time, written notice as provided herein shall be given.


Recipient of Notice

If notice is required, the claimant may notify any convenient agent of the company that requires the notice.

TEX. CIV. PRAC. & REM. CODE § 16.071(b).


Recipient of Notice• No reported Texas cases regarding who may be considered a

“convenient agent of the company” requiring notice.

• Likely be analyzed according to general agency principles.

• If to Owner - owner’s rep, the architect, the engineer, or anyone else administering the contract on behalf of the owner may qualify.

• If to contractor or subcontractor - a superintendent, site supervisor, site manager, project manager, or project coordinator may qualify.


Contractual Limitations

• Statute of limitations for a breach of contract action is generally four years from the day the cause of action accrues.

• Parties may contract for a different period in which to file a breach of contract action.



[A] person may not enter a stipulation, contract, or agreement that purports to limit the time in which to bring suit on the stipulation, contract, or agreement to a period shorter than two years. A stipulation, contract, or agreement that establishes a limitations period that is shorter than two years is void in this state. TEX. CIV. PRAC. & REM. CODE § 16.070(a).



• Two years doesn’t mean two years.

• Requirement that suit be filed before the expiration of two years or within two years is one day short of two years.

• Limitations period must be at least two years and one day.


Contractual Limitations• Two years and one day may not be enforceable depending on

triggering event.

• Under section 16.070(a), the “time in which to bring suit” cannot be shorter than two years.

• A party is unable to bring suit until the party's cause of action has accrued.

• To comply with section 16.070(a), contractual limitations period cannot end until after two years after the day the cause of action for breach of the agreement has accrued.


Contractual LimitationsSpicewood Summit Office Condominiums Ass'n, Inc. v. Am. First Lloyd's Ins. Co., 287 S.W.3d 461, 464 (Tex. App.--Austin 2009, pet. denied).

• Insurance policy required suit to be filed within two years and one day after the date on which the direct physical loss or damage occurred.

• To be valid, insured must have been able to sue its insurer on the date of loss.

• Insurer did not have to accept or deny claim until insured gave notice of loss, the insurer had time to investigate, and insured submitted proof of loss and other information.

• Insured not entitled to sue the insurer on the date of loss because, without more, no breach of the insurance agreement had yet occurred, and the insured did not yet have a cause of action for breach of contract.



Application to surety bonds and construction contracts – • Limitations period cannot start before surety

has obligation to discharge its duties.• Construction contract cannot require suit to

be filed prior to completion of change order process.


Forum and Choice of LawTEX. BUS. & COM. CODE § 272.001. VOIDABLE CONTRACT PROVISION.

(a) This section applies only to a contract that is principally for the construction or repair of an improvement to real property located in this state.

(b) If a contract contains a provision making the contract or any conflict arising under the contract subject to another state's law, litigation in the courts of another state, or arbitration in another state, that provision is voidable by the party obligated by the contract to perform the construction or repair.


Forum and Choice of Law

A contract is principally for the construction or repair of an improvement to real property located in this state if the contract obligates a party, as the party's principal obligation under the contract, to provide labor or labor and materials as a general contractor or subcontractor for the construction or repair of an improvement to real property located in this state.

TEX. BUS. & COM. CODE § 272.002(a).


Forum and Choice of LawA contract is not principally for the construction or repair of an improvement to real property located in this state if the contract:

(1) is a partnership agreement or other agreement governing an entity or trust;

(2) provides for a loan or other extension of credit and the party promising to construct or repair the improvement is doing so as part of the party's agreements with the lender or other person who extends credit; or

(3) is for the management of real property or improvements and the obligation to construct or repair the improvement is part of that management.

TEX. BUS. & COM. CODE § 272.002(b).



Under Section 272.001, Texas contractors and subcontractors should have the power to void a provision making a construction contract for a Texas construction project or any conflict arising under the contract: (1) subject to another state's law, (2) litigation in the courts of another state, or (3) arbitration in another state.



Cleveland Construction, Inc. v. Levco Construction, Inc.,359 S.W.3d 843 (Tex. App.--Houston [1st Dist.] 2012, pet. dism'd).

• Whole Foods hired Cleveland Construction to build new store in Houston.

• Cleveland Construction subcontracted with Levco.

• Subcontract required all claims to be resolved by arbitration in Lake County, Ohio.


Forum and Choice of LawCleveland Construction, Inc. v. Levco Construction, Inc.,359 S.W.3d 843 (Tex. App.--Houston [1st Dist.] 2012, pet. dism'd).

• Levco sued in state court and Cleveland Construction moved to compel arbitration.

• Motion to compel arbitration denied.

• On appeal, Levco argued arbitration provision was voidable at the election of Levco under Texas Business and Commerce Code § 272.001.

• First COA held - Applying section 272.001 as Levco asks us to do here would prevent us from enforcing a term of the parties' arbitration agreement—the venue—on a ground that is not recognized by the FAA or by general state-law contract principles. … We hold that the FAA preempts application of this provision under the facts of this case.


Contingent Payment of Subcontractors and Suppliers

TEX. BUS. & COM. CODE §§ 56.001-.057

• Protects subcontractors and suppliers by defining circumstances in which contingent payment clauses are unenforceable.

• Contingent Payment Clause - a provision in a contract for construction management, or for the construction of improvements to real property or the furnishing of materials for the construction, that provides that the contingent payor's receipt of payment from another is a condition precedent to the obligation of the contingent payor to make payment to the contingent payee for work performed or materials furnished.



Chapter 56 does not apply to a contract is that is solely for:

(1) design services;

(2) the construction or maintenance of a road, highway, street, bridge, utility, water supply project, water plant, wastewater plant, water and wastewater distribution or conveyance facility, wharf, dock, airport runway or taxiway, drainage project, or related type of project associated with civil engineering construction; or

(3) improvements to or the construction of a structure that is a: (A) detached single-family residence; (B) duplex; (C) triplex; or (D) quadruplex.



A contingent payment clause in a contract within the scope of Chapter 56 is not effective against a subcontractor or supplier in the following situations:

(1) When the project owner fails to pay the general contractor because of the conduct or work of the contractor, unless such nonpayment is the result of a failure by the subcontractor or supplier to meet their contract requirements;

(2) As to work performed or materials delivered, after the contractor receives written notice from the subcontractor or supplier objecting to further enforcement of the contingent payment clause, and the notice of objection has become effective;

(3) When the contractor is in a “sham relationship” with the project owner; or

(4) If enforcement of the contingent payment clause would be unconscionable.


Prompt Payment to Contractors and Subcontractors

TEX. PROP. CODE §§ 28.001-.010

A contractor's and subcontractor’s right to prompt payment is a part of every contract to improve real property.



If an owner or a person authorized to act on behalf of the owner receives a written payment request from a contractor for an amount that is allowed to the contractor under the contract for properly performed work or suitably stored or specially fabricated materials, the owner shall pay the amount to the contractor, less any amount withheld as authorized by statute, not later than the 35th day after the date the owner receives the request.

TEX. PROP. CODE § 28.002(a).

• Single-Family Residence Exception - Time for payment may be 61st day after the date the owner receives the payment request.

• All other attempted waivers of Chapter 28 are void.



• Penalty for an owner that fails to submit payment in a timely fashion is the accrual of interest at the rate of 1-1/2 percent each month until paid or entry of judgment.

• Contractor also has the right to suspend work after notice unless contract is for: (1) construction of or improvements to a detached single-family residence, duplex, triplex, or quadruplex; or (2) improvements to real property for a governmental entity.



A contractor who receives a payment … from an owner in connection with a contract to improve real property shall pay each of its subcontractors the portion of the owner's payment, including interest, if any, that is attributable to work properly performed or materials suitably stored or specially fabricated as provided under the contract by that subcontractor, to the extent of that subcontractor's interest in the owner's payment. The payment required by this subsection must be made not later than the seventh day after the date the contractor receives the owner's payment.

A subcontractor who receives a payment … from a contractor in connection with a contract to improve real property shall pay each of its subcontractors the portion of the payment, including interest, if any, that is attributable to work properly performed or materials suitably stored or specially fabricated as provided under the contract by that subcontractor, to the extent of that subcontractor's interest in the payment. The payment required by this subsection must be made not later than the seventh day after the date the subcontractor receives the contractor's payment. TEX. PROP. CODE § 28.002(b)-(c).



• Penalty for contractor or subcontractor that fails to submit payment in a timely fashion is the accrual of interest at the rate of 1-1/2 percent each month until paid or entry of judgment.

• Subcontractors also have the right to suspend work after notice but only when the owner fails to pay the general contractor the undisputed amount.



Good Faith Withholding Exception

• If a good faith dispute exists concerning the amount owed for construction of or improvements to a detached single-family residence, duplex, triplex, or quadruplex, the owner, contractor, or subcontractor may withhold not more than 110 percent of the difference between the amount the obligee claims is due and the amount the obligor claims is due.

• If the dispute does not relate to construction of or improvements to a detached single-family residence, duplex, triplex, or quadruplex, then no more than 100 percent of the difference may be withheld.



Good Faith Withholding Exception

• If payment is withheld in good faith, does the amount withheld accrue interest?

• Two courts have held that no matter whether the withholding party had a good faith basis for withholding the payment, the withheld amount will still accrue interest if the withholding party is ultimately found to be at fault for the breach.

Patel v. Creation Const., Inc., 05-11-00759-CV, 2013 WL 1277874, at *3 (Tex. App.--Dallas Feb. 27, 2013, no pet.) (mem. op.).

Landmark Org., LP. v. Dephini Constr. Co., No. 13–04–00371–CV, 2005 WL 2560022, at *5 (Tex. App.--Corpus Christi Oct. 13, 2005, pet. denied) (mem. op.).


Prompt Payment by Governmental Entities and their

Contractors• The Payment for Goods and Services Act (the “Act”)

requires governmental entities, and those who contract with them, to make timely payments for goods and services purchased by contract. See generally TEX. GOV'T CODE §§ 2251.001–.055.

• A person may not waive any of the rights or remedies granted by the Act, and all purported waivers of any of the rights or remedies granted by the Act are void. Id. at § 2251.004.



ContractorsPayment by a governmental entity is overdue on the 31st day after the later of:

(1) the date the governmental entity receives the goods under the contract;

(2) the date the performance of the service under the contract is completed; or

(3) the date the governmental entity receives an invoice for the goods or service.

However, if the governing body of the political subdivision meets only once a month or less, then payment is overdue on the 46th day after the last of the events described above.



ContractorsIf a government contractor receives a payment from a governmental entity, then the government contractor must pay a subcontractor its share of the payment not later than the 10th day after the date of payment, and the payment is overdue on the 11th day.

If a subcontractor receives a payment from a government contractor, then the subcontractor is likewise required to pay its subcontractors their share of the payment not later than the 10th day after the date of payment, and the payment is overdue on the 11th day.



ContractorsRemedies –

• Overdue payments accrue interest at the rate of 1% plus the prime rate as published in the Wall Street Journal on the first day of July of the preceding fiscal year that does not fall on a Saturday or Sunday.

• Government contractors and subcontractors also have a right to suspend work after notice.

• Award of attorney’s fees mandatory in action to enforce.


Limits on Indemnification and Additional Insureds

Texas Anti-Indemnity Act did away with the two-part fair notice test that formerly determined whether broad and intermediate form indemnity agreements in construction contracts were enforceable.

• Broad Form Indemnity - requires a party to indemnify another party for that other party's negligence.

– Example - a clause that requires a subcontractor to indemnify a contractor for the contractor’s negligence.

• Intermediate Form Indemnity - requires a party to indemnify another party for that other party's negligence, unless the injury or damages were caused by the other party’s sole negligence.

– Example - a clause that requires a subcontractor to indemnify a contractor for the contractor’s negligence, unless the injury or damages were caused by the contractor’s sole negligence.



Except as provided by Section 151.103, a provision in a construction contract, or in an agreement collateral to or affecting a construction contract, is void and unenforceable as against public policy to the extent that it requires an indemnitor to indemnify, hold harmless, or defend a party, including a third party, against a claim caused by the negligence or fault, the breach or violation of a statute, ordinance, governmental regulation, standard, or rule, or the breach of contract of the indemnitee, its agent or employee, or any third party under the control or supervision of the indemnitee, other than the indemnitor or its agent, employee, or subcontractor of any tier.

TEX. INS. CODE § 151.102.

Chapter 151 “may not be waived by contract or otherwise.”



Employee Claim Exception - exempts provisions in a construction contract that require a party to indemnify another party or third party against a claim for the bodily injury or death of an employee of the indemnitor, its agent, or its subcontractor of any tier.



• Chapter 151 applies when the indemnitor is provided or procures insurance.

• Various indemnity provisions listed in TEX. INS. CODE § 151.105 are not subject to Chapter 151, including an indemnity provision in a construction contract, or in an agreement collateral to or affecting a construction contract, pertaining to:– a single family house, townhouse, duplex, or land

development directly related thereto; or– a public works project of a municipality.



• Chapter 151 voids provisions in construction contracts that require the purchase of additional insured coverage, or any coverage endorsement, or provision within an insurance policy providing additional insured coverage, if it requires or provides coverage the scope of which is prohibited under Chapter 151.

• However, this prohibition does not apply to a provision in an insurance policy, or an endorsement to an insurance policy, issued under a consolidated insurance program if the provision or endorsement lists, adds, or deletes named insureds to the policy.


Indemnity – Architects and Engineers

TEX. CIV. PRAC. & REM. CODE §§ 130.001-.005

• Contractor cannot be required to indemnify an architect or engineer from personal injuries, deaths, or property injuries caused by the architect’s or engineer’s defective plans, designs, or specifications.

• Architect or engineer cannot be required to indemnify an owner for liability that results from the owner’s negligence




An architect or engineer can only be required to indemnify a governmental agency for damage caused by or resulting from the following committed by the engineer or architect or its agent, consultant under contract, or another entity over which the engineer or architect exercises control:• an act of negligence, • intentional tort, • intellectual property infringement, or • failure to pay a subcontractor or supplier.

Note - Section 271.904 applies to public works projects of a municipality that are not subject to the Anti-Indemnity Act.




An architect or engineer cannot be required to indemnify a party, including a third party, against a claim based wholly or partly on the negligence of, fault of, or breach of contract by the governmental agency, the agency's agent, the agency's employee, or other entity over which the governmental agency exercises control.

Two caveats:

1. A contract may require the engineer or architect to reimburse the governmental agency for the agency's attorney fees in proportion to the engineer's or architect's liability.

2. The governmental agency may require the engineer or architect to name the agency as an additional insured under the engineer's or architect's general liability insurance policy and provide any defense provided by the policy.


Questions or Comments?

Sean M. McChristianPorter Hedges LLP

1000 Main Street, 36th Fl.Houston, Texas 77002

(713) [email protected]


mailto:[email protected]