Construction companies and professionals depend on legal advice to protect their bottom line. Hiring the right construction attorney to build the right legal framework for risk management is one of THE most important steps you can take for your company. Remember, to protect your bottom line from the legal crises that can threaten what you’ve built.
Construction Law in Texas can be complicated and disputes are common in the industry.
The following are the most typical examples of disputes that can quickly turn into a crises for construction companies, subcontractors, or suppliers:
- Delay Claims
- Deficiency Notice
- Construction Defects
- Flow Down Clause
- Contingent Payment Clauses
- Indemnification Clause
- Change Orders
- Homeowner Claims (RCLA)
- Halt Work Notice
- The Prompt Payment Act
- Warranty Claims
- Trust Fund Claims
Delay claims are one of the most disputed issues in construction. It is an issue that frequently comes up in any type of construction dispute. These claims arise when it is alleged that a party did or did not perform some part of the contract, thus delaying the contract’s completion. If for some reason it takes longer to complete a portion of the job than was contractually agreed to, this additional time means extra costs for which one party will seek reimbursement or withhold payment to reimburse the cost.
This argument is largely centered on the argument that one trade’s delay will domino into effecting the next trade and it will move down the line essentially effecting the entire construction process.
Many contracts have deadlines for performance built into it. They also might have a penalty (usually calculated per day) for missing those deadlines. Other times, the contracts state that they are run pursuant to a construction schedule, which is to be provided by the general contractor. In those situations, disputes can arise as to whether the schedule is reasonable. Also, most of the time the general contractor has the right to modify the schedule without notice. This can certainly cause problems for the unsuspecting subcontractor.
There are two general categories of delays: (1) Excusable; and (2) Inexcusable Delays. Excusable delays are delays that cause damages which the owner might be responsible, such as weather. Inexcusable delays are delays which include compensable delays where contractors may recover damages for extra costs created by the delay and receive extensions. Some delays are unforeseeable and are attributable to neither party and are generally noncompensable.
The following damages might be recovered for inexcusable delays:
- Rental charges;
- Office expenses and overhead;
- Lost productivity / lost profits;
- Interest; and
Other expenses incurred due to the delay.
A deficiency notice is a notice of failure to perform the contract in some way. These can take many forms such as a notice of failure to make sufficient progress, notice that some portion of the contract is not being followed, notice that there is a specific deficiency (or defect) in the construction while it is being built, notice that there is not sufficient man-power on the job, etc. These notices are greatly dependent on what is required by the parties’ contract.
Upon receipt of any notice such as this, our Firm recommends an immediate response even if it can be proven that the notice was completely unwarranted, or if you talked to the General Contractor and you believe you worked out the differences, you still must respond in writing to the notice. Additionally, you must respond within the timeframe required by the contract. You should provide a detailed explanation as to why you disagree with the Notice or what steps have been taken to remedy the complaint or, if appropriate, what steps are planned in the future to be taken to remedy the complaint. It is extremely important that each and every dispute is well documented from both sides. If there is a financial component to the dispute, it must be followed up with a change order (even if it is a deductive change order).
This is an essential backbone of many lawsuits as many of the disputes are not resolved while the project is still construction. KMDA not only provides assistance in responding to any notice of deficiency but also KMDA’s attorney mediators are very skilled at resolving these disputes before they result into litigation.
There are many parties to a construction project. Whether it be a developer, general contractor, engineer, design professional, supplier, subcontractor, or owner, there are many hands involved in the construction chain. With so many moving parts, it is easy to see how oversight can happen somewhere within that chain by at least one party. Then, if the parties are not able to work it out, litigation ensues.
There are numerous statutes in place that relate to residential construction defects and disputes. The most substantial and common statute is the Residential Construction Liability Act. This is a very detailed process that attempts to give all sides all of the information, an opportunity to inspect, and the requirement that reasonable offers for settlement be made. This process is very lengthy and is often a time to be very persuasive.
Residential construction can be especially high risk as there are a myriad of protections in place for homeowners. However, all residential defects are governed by the Residential Construction Liability Act which affords builders some protection. Listen to one of our attorneys discuss defect litigation below.
Our firm is experienced in litigating and resolving defect disputes across Houston & surrounding areas. Our focus is always a cost effective and positive result for the client. We are comfortable working with experts to figure out the exact cause of patent and latent defects and developing a trial or arbitration strategy to bring about a desired result.
Typically, the complex contractual relationships of multiple parties make it necessary that there be an analysis of insurance coverage, additional insured requirements and endorsements as well as construction contract language. We are familiar with these contracts, CGL policies and insurance companies’ actions when litigation becomes necessary.
We are prepared to assist you with any of the following:
- Design Defects
- Water leakage or damage
- Defective roofing, flashing or window installation
- Electrical and mechanical defects
- Product and material defects and failures
- Manufacturing defects in buildings components
- Physical damage to buildings
- Structural damage or errors
- Lateral or sub- adjacent support claims’
- Deceptive Trade Practices Act Claims
- Breach of Warranties
- Residential Construction Liability Act Claims
A clause in a contract, which incorporates by reference another contract, and binds the party to the terms in that other contract to the same extent as the original parties, is referred to as “flow down” clause. These clauses are widely used in subcontractor agreements where subcontractors often agree to the terms between the General Contractor and the Owner. Many times, the Subcontractor will not actually receive a copy of the contract that it is “bound” to and is very surprised when a dispute arises and all the sudden the General Contractor notifies them of a condition or clause that they must abide by that was in the Original GC Agreement. This could be an arbitration clause, or a timing clause, etc. The sky can be the limit. In short, these Flow Down clauses pose numerous obligations to the Subcontractor that the Subcontractor did not initially agree upon (and sometimes did not bid the particular condition) yet Subcontractor is contractually bound to follow the clause, often to its detriment. These can open the Subcontractor up to substantial liability and the Subcontractor is usually blind as to what they are agreeing to.
Contingent Payment Clauses are often found in agreements between general contractors and subcontractors, and make payment to the subcontractor “contingent” on the general contractor’s receipt of payment by the owner. Such clauses essentially pass credit risk to the subcontractor. A Contingent Payment Clause is a contractual provision that makes payment contingent upon the happening of some event. In construction subcontracts, the typical contingent payment clause makes the subcontractor’s payment contingent upon the payment of the subcontractor by the owner.
There are usually two (2) types of contingent payment clauses:
- Links payment to the timing of when payment is made by the owner (Paid When Paid); or
- Specifies that payment by the owner is required in order for the subcontractor to ever receive payment. (Paid if Paid)
For over thirty years, most state courts have held that contractors cannot indefinitely withhold payment from subcontractors based upon a “pay-when-paid” clause. Instead, “pay-when-paid” clauses merely leave the time of payment uncertain. An example of a Pay-When-Paid Clause: “Contractor shall pay Subcontractor within seven days of Contractor’s receipt of payment from the Owner.”
In contrast, a so-called “pay-if-paid” clause makes the subcontractor’s payment absolutely conditional upon the owner’s payment. Because of the harshness of such a provision, most states only enforce “pay-if-paid” clauses if the contract unambiguously expresses that the parties intended for the subcontractor to only be paid if the contractor is paid. An example of a Pay-If-Pay Clause: “The obligation of contractor to make payment under this agreement, whether a progress or final payment, or for extra or change orders or delays to the work, is subject to the express condition precedent of payment therefore by the owner.”
The scariest clause a subcontractor can face in a subcontract agreement is the dreaded indemnification clause. However, an enforceable indemnification clause can also act to protect you against lower-level subcontractors.
Why is an indemnity clause important?
An indemnity clause is a contractual provision where one party undertakes to indemnify (reimburse, compensate) the other party for damage or loss. Why all type of businesses use indemnification clauses, they are a fundamental part of many construction contacts because parties such as general contractors are able to use such clauses to control their risk of liability while another party, such as subcontractors, assume the responsibility.
The real problem is that many subcontractors will not try to negotiate the terms of the indemnification clause because they do not want to risk losing the job. While Texas does offer some statutory protections, there could be a substantial cost for not negotiating these indemnity clauses. It is always beneficial to negotiate the terms up front. After all, any time you have a lengthy Court case to try and enforce such a provision, it will be extremely expensive.
Protections in Texas – Indemnity Clauses
Texas is one of the many states that have special laws to protect individuals and businesses from overbroad indemnity clauses. Often, general contractors’ contracts try to place all of the risk on the subcontractors (even for the general contractor’s own mistakes)! Texas has created a law to attempt to even the playing field a limit such an indemnification clause. The Texas Anti-Indemnity Statute (Texas Insurance Code § 151.102) took effect in January 2012 after HB 2093 passed. This law prohibits certain contracts, which attempt to shift the liability for negligence, and other similar torts from the indemnitee to a third party – especially those relating to construction. While many of these contracts are still running around out there, many of them would probably be ruled void.
Indemnification Clauses in your Contracts
Whether you have these clauses in your own contracts or are signing contracts with these clauses, you should hire an attorney with experience in this area to review these subcontract agreements. An experienced attorney can help you negotiate your contract directly or help re-draft your existing agreement to make sure it complies with the law and is enforceable. If you require legal help, contact KMDA and one of our staff members will be happy to help you.
So many disputes arise over change orders, or the lack thereof. Most contracts contain a specific provision on how to process changes in the work; however, they are rarely followed by either party. A well drafted provision will require the parties to execute a change order that describes the change, the increase or decrease to the contract price, and whether the contractor will receive additional time. Most provisions will also state that a failure to obtain a fully executed change order before the work is performed will result in the waiver of payment for the additional work. One recognizable exception to the requirement of a written change order, is if the parties have knowingly waived the provision through their conduct. I.e. where there is multiple changes performed throughout the course of the project without the course of the project without a written change order. Under these circumstances, the contractor might argue that the parties waived the provision or that the verbal requests were separate verbal agreements apart from the contract.
Although, a majority of our representation involves general contractors and sub-contractors we do also represent homeowners. We believe we are able to efficiently help homeowners because we have a different point of view than most attorneys who only represent homeowners. Such representation can often lead to a too narrow of focus that can result in bad advice to a homeowner. Day to day we see all manner of disputes from both sides so we try and use that knowledge to resolve the disputes as quickly as possible. Because we understand the laws the builders are to follow, we can help protect homeowners from the beginning by reviewing and negotiating their contracts to be more realistic for both parties and thereby helping mediate any disputes that come up between the builder and the homeowner. In the end, most disputes are often communication issues that can be resolved with a person that knows the residential building industry and can work with both sides as a facilitator to resolve the dispute.
We are able to help homeowners with:
- Construction contract review and negotiation.
- Builder/contractor disputes.
- Mechanic’s Liens.
- Construction defects.
- Residential Construction Liability Act (RCLA) process.
- Retainage or trapped fund claims.
Construction projects are always stressful and sometimes it can escalate smaller issues and lead them into larger issues. Taking the step of hiring an attorney may be a big one but sometimes a third party can help stop the breakdown of the process while helping make sure the Homeowner is protected and the builder is following their duties under the Property Code, or just help ease homeowner fears.
The Prompt Payment Act, Texas Property Code Sec. 28.002(b), also provides that a contractor who receives payment under 28.002(a) (above) must pay its subcontractors the portion of the owner’s payment, including interest, within 7 days of receiving the Owner’s payment. Section (a) provides that an owner must pay its contractor within 35 days of receiving a payment request for work performed in improving the owner’s property. If an Owner fails to pay the contractor the undisputed amount within the time limits set forth above, the contractor or and subcontractor may suspend performance after providing 10-days notice to the Owner and the Owner’s Lender. There is a portion of the code that relates to work that is disputed. However, the Owner cannot just simply not pay the invoice. The Code provides a process that must be followed, otherwise, the contractors can halt work in those situations as well.
These Property Code sections do not apply to residential construction including duplex, triplex or quadruplexes or construction for a governmental entity.
The Texas Prompt Payment Act is a great tool to ensure contractors, subcontractors, and suppliers receive timely payment for the work they perform or the goods they supply. However, there is much more to the Act than just payment deadlines and late payment interest.
- Owners must pay their general contractors undisputed amounts owed within 35 days of receipt of a written request for payment;
- General contractors must pay their subcontractors (or suppliers) within 7 days after receiving payment from owner; and
- Those subcontractors must pay their subcontractors (second tier subcontractors) within 7 days after receiving payment from general contractor.
If timely payments are not made, interest is added to the amount owed at 1.5% per month (18% per year) until paid. For public construction work, the time-periods for making payment change to 31 days for general contractors and 10 days for subcontractors. Calculation of interest also changes for public construction work to the Wall Street Journal’s prime rate plus 1% per month.
There are several incentives for using this Act to collect your debt. One of the vital incentives is that if one sues under the Act, the court may order the recovery of reasonable attorney’s fees. A contractor can provide a Halt Work Notice to literally walk off the job and stop work until payment is received. There are very specific rules in place when the debtor is claiming that the non-payment is because of some failure or breach on other parties’ part. These rules include proper and specific notice of the breach, the opportunity to cure, and there are also specific rules relating to how much can be withheld from the payment due to a “good faith dispute.” For instance, the debtor is not allowed to simply not pay the entire amount due when the dispute would account for one-quarter of the invoice.
It is important to note that the rules are slightly different for Public and Residential Projects. Like anything in Texas, “it’s complicated” can be true depending on the project. KMDA would be happy to assist you in reviewing your project and determining which rules apply to your situation as well collecting your past due amount pursuant to the Prompt Payment Act. Feel free to call us at 972-434-8009.
Construction contracts often contain express warranties that give rise to contractual liability when they are breached. Sometimes the law imposes implied warranties that can be disclaimed, or, in the case of residential contracts, some implied warranties are inherent and cannot be waived. Whether you are a contractor or a project owner, understanding these issues during contract formation, execution, and beyond is critical. The issues surrounding implied warranties most often arise in the context of residential construction.
There are generally two implied warranties that apply to residential construction cases: The Implied Warranty of Habitability and The Implied Warranty of Good Workmanship. The Implied Warranty of Good Workmanship provides a warranty to the owner of a construction project, repair or modification of existing property that it will be performed in a “good and workmanlike manner.” “Good and workmanlike” means the quality of work must be equal to the work performed by someone who has “the knowledge, training, or experience necessary for the successful practice of a trade or occupation” when judged by someone who is “capable of judging such work.” The Implied Warranty of Habitability provides that the good and workmanlike performance of the builder must result in a building that is habitable for residential use and that is safe, sanitary, and fit for human habitation at the time of the sale of a new house. Unlike the Implied Warranty of Good Workmanship, it cannot be waived by the contract and is inherent in the residential construction project.
The Texas Construction Trust Fund Act, is codified and can be found in Chapter 162 of the Texas Property Code. The Act was created to primarily protect subcontractors. It provides that payments “made to a contractor or subcontractor . . . for the improvement of specific real property in this state” are trust funds, to be held in trust for subcontractors or suppliers of labor and materials. Tex. Prop. Code § 162.001(a). A contractor who receives such funds must therefore hold such funds in trust for the benefit of its subcontractors. If a contractor receives funds and “intentionally or knowingly or with intent to defraud, directly or indirectly retains, uses, disburses, or otherwise diverts trust funds without fully paying all current or past due obligations” to the subcontractor, the contractor has misapplied these funds. Id. at § 162.031(a).
A well-seasoned construction attorney will tell you that the most important part of the Act is the ability to obtain personal liability from any “owner, officer, director, or agent” of the company if they receive construction trust funds and have control over them. See Tx. Prop. Code § 162.002.
One may even be able to successfully litigate a Trust Fund claim against an owner if the owner takes out a loan for the purpose of improving specific real property, and the loan is secured by a lien on the property, either in whole or in part. Prop. Code § 162.001(b). An owner who receives such funds and diverts them in accordance with Chapter 162, rather than using them to pay contractors, creates liability under the Act.
This is one of the few statutes that has some teeth for a contractor that has not received payment. A finding of misapplication of trust funds amounting to $500 or more is a Class A misdemeanor, with up to one year of jail time. If, on the other hand, the trier of fact finds misapplication with an intent to defraud, this is a third degree felony, and can result in up to 10 years in prison.
The Act does provide an affirmative defense to a trustee who uses trust funds on “actual expenses directly related to the project” at issue. Prop. Code § 162.032(a). This can get extremely tricky. Many times the trustee has not segregated their expenses and cannot demonstrate what was spent on a particular project. However, if they are able to show that the amount paid for that project has actually been spent on that project, then they have met the requirements for the affirmative defense.
As you can see by other topics herein, Residential projects are often their own beast. While most of these rules are applicable to Residential Projects, the Property Code has a few other requirements which relate to Residential Projects and the Texas Trust Fund Act. The most specific and most often violated requirement relates to the additional accounting procedures. If you are a residential contractor, it is important to note that you must account for every penny paid to you. The affirmative defense is much harder to prove in a Residential Project setting, as every cent has to be accounted for.
If you are in a situation where someone owes you or your company money and you believe they have been paid, this would be a Texas Trust Fund Act claim. We can help you with asserting your claim and, if necessary, we have tried dozens of these cases in Court. There is an art to proving these cases which takes a skilled review of the other parties’ documents. Most of the time there is a “show me the money” document trail. Feel free to call us at 972-434-8009.
550 S. Edmonds Ln Ste 210
Lewisville, TX 75067