Monthly Archives: July 2014

Forum Selection Clauses: Don’t Blindly Give Up Home Field Advantage

WHAT HAPPENED

A Subcontractor brought action against a contractor, alleging that the contractor failed to pay subcontractor for work performed on construction of child-development center at Army base in Texas.  Atl. Marine Const. Co., Inc. v. U.S. Dist. Court for W. Dist. of Texas, 134 S. Ct. 568, 187 L. Ed. 2d 487 (2013). Id. The United States District Court for the Western District of Texas, Lee Yeakel, J., denied the contractor’s motion to dismiss or to transfer case, pursuant to forum-selection clause in contract, to Eastern District of Virginia. Id.  A key argument in the decision was that the subcontractor identified seven non-party witnesses that may have provided relevant testimony who resided in Texas and any trial subpoenas for witnesses to travel more than 100 miles would be subject to motions to quash and be held unenforceable under Rule 45(c)(3)(ii).

THE LAW

The Texas Supreme Court reviewed this case and stated that when a forum selection clause is in the contract but a plaintiff files suit in a different forum, and a 28 U.S.C.A. § 1404 motion is filed by the defendant, district courts are to require the party acting in violation of the forum-selection clause, to show that public-interest factors overwhelmingly disfavored a transfer. See Id. at574.

With regard to the sub-contractors key argument that it’s witnesses would be burned by the venue transfer, the Court state when the subcontractor entered into a contract to litigate all disputes in Virginia, it knew that a distant forum might hinder its ability to call certain witnesses and might impose other burdens on its litigation efforts. See Id. at 584.  It nevertheless promised to resolve its disputes in the forum selected in the contract and the District Court should not have given any weight to sub-contractors claims of inconvenience. See Id.

WHAT IT MEANS FOR YOU

As always, you should have an attorney review contracts with an eye on litigation. Personally, when reviewing client contracts I analyze the contract with litigation in mind and a “worst that can happen” mind state. I then point out all the potential exposure to my clients and let them decide what risks they are comfortable taking and those that they are not. Lastly, upon the instruction of my client, I will try to limit some of those exposures by negotiating what I call “subtle non-material modifications” to the contract. Obviously, there are many things that some companies will not bend on. However, as the old adage goes, you won’t know unless you ask.

Nothing here is intended to be legal advice nor should it be construed as such. If you have questions or would like to discuss an issue with your company, please call 832-930-0529 or visit http://www.kestephenslaw.com.

Advertisements

Forum Selection Clauses: Don’t Blindly Give Up Home Field Advantage

WHAT HAPPENED

A Subcontractor brought action against a contractor, alleging that the contractor failed to pay subcontractor for work performed on construction of child-development center at Army base in Texas.  Atl. Marine Const. Co., Inc. v. U.S. Dist. Court for W. Dist. of Texas, 134 S. Ct. 568, 187 L. Ed. 2d 487 (2013). The United States District Court for the Western District of Texas, Lee Yeakel, J., denied the contractor’s motion to dismiss or to transfer case, pursuant to forum-selection clause in contract, to Eastern District of Virginia. Id.  A key argument in the decision was that the subcontractor identified seven non-party witnesses that may have provided relevant testimony who resided in Texas and any trial subpoenas for witnesses to travel more than 100 miles would be subject to motions to quash and be held unenforceable under Rule 45(c)(3)(ii). See Id.

THE LAW

The Texas Supreme Court reviewed this case and stated that when a forum selection clause is in the contract but a plaintiff files suit in a different forum, and a 28 U.S.C.A. § 1404 motion is filed by the defendant, district courts are to require the party acting in violation of the forum-selection clause, to show that public-interest factors overwhelmingly disfavored a transfer. See Id. at 574.

With regard to the sub-contractors key argument that it’s witnesses would be burned by the venue transfer, the Court state when the subcontractor entered into a contract to litigate all disputes in Virginia, it knew that a distant forum might hinder its ability to call certain witnesses and might impose other burdens on its litigation efforts. See Id. at 584.  It nevertheless promised to resolve its disputes in the forum selected in the contract and the District Court should not have given any weight to sub-contractors claims of inconvenience. See Id.

WHAT IT MEANS FOR YOU

As always, you should have an attorney review contracts with an eye on litigation. Personally, when reviewing client contracts I analyze the contract with litigation in mind and a “worst that can happen” mind state. I then point out all the potential exposure to my clients and let them decide what risks they are comfortable taking and those that they are not. Lastly, upon the instruction of my client, I will try to limit some of those exposures by negotiating what I call “subtle non-material modifications” to the contract. Obviously, there are many things that some companies will not bend on. However, as the old adage goes, you won’t know unless you ask.

Nothing here is intended to be legal advice nor should it be construed as such. If you have questions or would like to discuss an issue with your company, please call 832-930-0529 or visit http://www.kestephenslaw.com.

Architect Screws Up the Plans? Guess Who’s left holding the bag? CONTRACTORS!

The LAW
Essentially, the economic loss rule states that with regard to unintentional torts such as negligence, and negligent misrepresentation, there can be no recovery for the plaintiff unless the plaintiff suffers some form of physical injury. See LAN/STV v. Martin K. Eby Const. Co., Inc., 11-0810, 2014 WL 2789097 (Tex. June 20, 2014). Purely financial loss is insufficient. See Id.

WHAT HAPPENED
When analyzing the latest Texas Supreme Court case on the issue, it becomes apparent that contractors should beware! In LAN/STV, an architect completed plans for a project on behalf of the owner. The owner then incorporated those plans to solicit competitive bids. Naturally the contractors based their bids on the architect’s plans and one contractor was awarded the project. However, early into the project the contractor realized that the plans were completely flawed. The flawed plans delayed the job and cost the contractor 14 million in revenue.

The contractor sued the owner for breach of contract but eventually settled out of court for 4.7 million. The contractor then tried to sue the architect but as is typical in the construction industry, the contractor did not have a contractual relationship with the architect because the contractor only entered into an agreement with the owner. Consequently, there was no contract remedy such as breach of contract through which the contractor could obtain damages from the architect.

The contractor decided to sue under a tort theory of negligent misrepresentation. The Texas Supreme Court Stated that “the law has long limited the recovery of purely economic damages in an action for negligence”, and concluded that “the economic loss rule does not allow recovery.” LAN/STV v. Martin K. Eby Const. Co., Inc., 11-0810, 2014 WL 2789097 (Tex. June 20, 2014).

WHAT IT MEANS FOR YOU
What this means for you is that you must protect yourself during the bargaining process. If you are the general contractor, it is probably wise that while bargaining with the owner, you insist on protection from the architect. This protection can come in the form of insurance, which you can include in the cost of your bid or a indemnification clause that you put in the contract. The same applies to sub-contractors.

Nothing here is intended to be legal advice nor should it be construed as such. If you have questions or would like to discuss an issue with your company, please call 832-930-0529 or visit http://www.kestephenslaw.com.

WARNING TO GENERAL CONTRACTORS! BE CAREFUL WITH YOUR CONTRACT

WARNING TO GENERAL CONTRACTORS! BE CAREFUL WITH YOUR CONTRACT

July 9, 2014

“General Contractor’s Agreement To Perform In Good And Workmanlike Manner Is Not An Assumption Of Liability For Defective Work.

FACTUAL BACKGROUND

In 2008, a contractor entered an agreement to serve as general contractor to renovate and build additions to a school in Corpus Christi, including constructing tennis courts. Shortly after construction of the tennis courts was completed, there were complaints that the courts started flaking, crumbling, and cracking, rendering them unusable for their intended purpose of hosting competitive tennis events. The original contract included an agreement to complete the work in a “good and workmanlike manner”. The contractor’s insurance policy had an exclusion for contractual liability “assumed in a contract.”

The owner of the Courts filed suit in Texas state court. Its damage claims were based on faulty construction of the courts and its theories of liability were breach of contract and negligence. Naturally, the insurer argued that the contractual liability exclusion applied.

THE LAW

It is well settled Texas law that a “common law duty to perform with care and skill accompanies every contract. See Montgomery Ward & Co. v. Scharrenbeck, 146 Tex. 153, 204 S.W.2d 508, 510 (1947); see also Melody Home Mfg. Co., 741 S.W.2d at 354.7.  On January 17, 2014, in Ewing Const. Co., Inc. v. Amerisure Ins. Co., 420 S.W.3d 30, 32 (Tex. 2014), the Texas Supreme Court decided the facts above when it answered a certified question from the U.S. Fifth Circuit Court of Appeals. The question was:

Does a general contractor that enters into a contract in which it agrees to perform its construction work in a good and workmanlike manner, without more specific provisions enlarging this obligation, “assume liability” for damages arising out of the contractor’s defective work so as to trigger the Contractual Liability Exclusion?

Ewing Const. Co., Inc. 420 S.W.3d at 32.

THE DECISION

During its analysis the Texas Supreme Court referred to its prior holding in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s, London, 327 S.W.3d 118 (Tex. 2010). There the Court held that a contract exclusion did apply. However, the Court reasoned that the contractor in Gilbert assumed—to repair or pay for damage to property of third parties…“resulting from a failure to comply with the requirements of this contract”—extended “beyond Gilbert’s obligations under general law.” Gilbert, 327 S.W.3d at 127.

In applying Gilbert’s reasoning in the present case the Court held that a general contractor who agrees to perform its construction work in a good and workmanlike manner, without more, does not enlarge its duty to exercise ordinary care in fulfilling its contract, thus it does not “assume liability” for damages arising out of its defective work so as to trigger the Contractual Liability Exclusion. We answer the first question “no” and, therefore, need not answer the second question. Ewing Const. Co., Inc. v. Amerisure Ins. Co., 420 S.W.3d 30, 38 (Tex. 2014)

WHAT IT MEANS FOR YOU

This decision should be a warning for all general contractors. Do not expand your duties beyond that of the common law unless you are positive that your insurance policies cover those expanded duties. Have a good lawyer draft and a review your contracts so that you are not unknowingly exposing yourself to additional liability.

For questions or contract issues feel free to email me info@kestephenslaw or call my office at 832-930-0529.