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When Dreams Turn to Nightmares: Why You Should Never Bet The Business On A Single Project

It’s the kind of project a Texas contractor would love to be involved in. There’s a huge plant going up. The project is approved by all required government entities. The state governor endorses it and it appears to be backed by more money than the Dallas Cowboys! What’s not to love right? Well, unfortunately, all that glitters is not always gold and for a number of Texas companies, this dream project became a nightmare.

In 2011, Mossi & Ghisolfi Group, an Italian petrochemical company decided to bring a multibillion dollar plastic plant to Corpus Christi. The project started in 2013 and was supposed to be finished in 2016 but stalled due to non-payment issues. Now, over 40 mechanic’s liens worth more than 100 million dollars have been field on the project and Texas contractors are suffering.

As is the case in many of these situations, contractors cannot make payroll due to the fact that they scaled up their workforce for the project. Some are on the brink of going under due to the situation. For others the lack of cash flows has required them to turn down other work and they are forced to due small jobs to survive.

In looking at these situations, the question that we are typically asked is whether this situation is preventable and the unfortunate answer, is probably not. On a project this large, everything normally checks out during due diligence and contractors feel secure doing the project. Also, because the project is so large, it is unlikely that an owner or General Contractor will be willing to issue a lump sum payment. Progression invoices and payment applications (pay apps) are the standard in these situations.

The only silver lining is that with such a big company, solvency should not be an issue. If the liens are properly perfected and the contractor has good representation, they should eventually be able to collect payment. The challenge for the contractors will be in finding enough liquidity to afford to hire counsel and wait out the litigation.

It is not uncommon in these situations for a large non-paying entity to contest the quality of the work done by the contractor and use this as a reason to reduce the total amount owed. This is also grounds for the lien to be contested and litigated. A typical strategy is to try and drain the cash strapped contractor until it taps out by accepting a fraction of their original invoice in exchange for a lien release.

When this happens, it is important that the contractors stand behind the quality of their work and if necessary foreclose on their liens if they want to be paid in full. This is also why it is good practice for contractors to keep a pool of retained earnings and allocate a portion of the budget to dispute resolution.

Nothing in this article is to be considered legal advice. If you have questions or need representation due to nonpayment on a construction project , please call 832-930-0529 or email us at info@stephensbell.com

The Texas Residential Construction Liability Act and Its Benefits to General Contractors: Part 1

If you’ve been building long enough, you know that every project comes with its challenges. Whether it’s unforeseen additional work requiring a change order or project delays due to material shortages, there is typically a fire to put out. Unfortunately, when it comes to residential construction defects, many challenges progress into full blown disputes that are eventually litigated.

Texas Residential Construction Liability Act

Chapter 27 of the Texas Property code is known as the Texas Residential Construction Law Act (RCLA). The RCLA was enacted in 1989 in response to a growing trend of favorable verdicts for homeowners when pursuing claims against contractors for defects.  The act is applicable to:

  • any action to recover damages or other relief arising from a construction defect, except a claim for personal injury, survival, or wrongful death or for damage to goods; and
  • any subsequent purchaser of a residence who files a claim against a contractor. Prop. Code § 27.002

The act requires the homeowner to take certain procedural steps before pursuing litigation against a contractor. In the past, homeowners have tried to bypass these requirements by alleging that the contractor responsible for the alleged defect is not a “contractor” as is defined by the statute. Fortunately, the act defines a contractor as follows:

any person contracting with an owner for the construction or sale of a new residence constructed by that person or of an alteration of or addition to an existing residence, repair of a new or existing residence, or construction, sale, alteration, addition, or repair of an appurtenance to a new or existing residence. Tex. Prop. Code Ann. §27.001(5)

As you can see, this definition is broad and covers nearly every possible person working on a residential project.

Owners have also tried to circumvent the requirements of the RCLA by alleging that the dispute is not as a result of a construction “defect” as is defined by the statute. However, defect is also defined by the act as:

a matter concerning the design, construction, or repair … of an alteration of or repair … to an existing residence … on which a person has a complaint against a contractor.” Tex. Prop. Code Ann. §27.001(4)

Again, the definition acts as a catch all definition concerning residential construction complaints. Given the broad definitions and applicability, it is very likely that if a contractor is sued by a homeowner concerning a residential project, the action falls under the RCLA. In part 2 of this series you will see why this benefits you as a contractor.

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.StephensBell.com

Using a Cost-Plus Contract? Here’s How to Avoid Litigation

There are a number of different  construction contracts used by general contractors. The differences in the contract are usually predicated on the type of project and the obligations of the parties. One construction contract that has become popular is the cost-plus contract.

In a cost-plus contract, the buyer pays the contractor for the cost of the materials and labor used to complete the project. A contractor’s fee is also charged to the buyer or developer on top of the costs and is usually calculated as a percentage of the total amount of the labor and materials. For example, if a home cost $100,000.00 to build. The general contractor may elect to charge a fee of 10% of cost and bring the total price of the project to $110,000.00.

As you can see, in a typical cost-plus contract, the more expensive the project the more money the general contractor makes.  It is for this reason that buyers and developers are becoming less comfortable with these agreements and more cost-plus contracts are becoming the subject of litigation. Contractors using these contracts needs to be prepared to litigate them and this is not always an easy task.

In cost-plus contract litigation, the developer typically alleges that the contractor reported inflated costs to inflate its fee or the contractor failed to act as a reasonable contractor in controlling cost on the project. A contractor can place themselves in a position to contest these allegations by following a few simple rules.

Get Approval

One way to be proactive and create a defense to allegations of cost inflation or failure to control costs is to require written approval from the developer or buyer for anything on the project that is more expensive than originally estimated. Make sure that the developer acknowledges that there is an increase in cost; that they have seen reasonable documentation confirming the increase in costs; that they do not want the contractor to seek a less expensive alternative; and they approve the work to be performed despite the increase in cost. This will make it very difficult for a developer or buyer to allege a lack of effort in controlling costs.

Explain Your Actions In Detail

It is important that contractors remember that buyers, developers, and contractors are sometimes on different frequencies. The buyer is simply looking to keep costs down so that they can get a good deal on the property and the developer is looking to keep costs down to increase profit margins when the property is sold.  Meanwhile, the contractor must concern its self with warranties and the meeting of certain statutory regulations because ultimately it is the contractor that will be liable for violating the law. Due to the need to comply with certain regulations and provide the best overall product, sometimes the contractor may elect to take an action that increases costs. In this scenario the costs should been agreed to by the developer. It is also important to explain to the developer why costs are increasing.

For example, assume a residential property is being built in an area and the price of the project is estimated at $5,000,000.00 with $500,000.00 allocated to the foundation. After running some tests, the general contractor realizes that the soil makes the home more prone foundational problems and as a result, it wishes to use the best foundation firm in town at a price of $250,000.00 more than the original foundation estimate. A simple written explanation to the owner and a written acknowledgment of the owner’s understanding would be very helpful in a litigation situation.

Be Diligent In Your Accounting

In a claim of fraud against a contractor due to an allegation of falsely reporting costs on a project, the easiest way to defeat the claim is to keep accurate accounting figures and maintain strict documentation to support the numbers. When working on a cost-plus contract, all receipts, check copies, invoices, and related documents should be filed and well maintained. Your ability to be completely transparent with the buyer or developer will help keep you from being a party to a fraud claim.

Nothing here is intended to be legal advice. If you are facing a construction issue and need representation information, visit our website http://www.StephensBell.com; call 832 930 0529; or email us at info@stephensbell.com

Contractor Protection Beyond SOL

If you’re a construction professional in Texas you’ve probably heard the term SOL or “Statute of Limitation”. For those that have not, Statutes of limitation are laws creating time limits for plaintiffs to bring suit against defendants for various reasons. The statutes generally differ depending on cause of action forming the basis for the suit. For example, generally injury claims must be brought within two years of the discovery of the injury while breach of contract claims are allowed within four years of the breach.

However, what is less commonly mentioned in the construction space is the statute of repose. Tex. Civ. Prac. & Rem. Code Ann. §§ 16.008 and 16.009 bar actions against persons who either design or make improvements to real property, unless brought within 10 years. The sections apply to suits for injury, damage, or loss to real property and to suits for personal injury.

Why is any of this important? Well, with a statute of repose, the time period begins running when the improvement is substantially completed rather than when a cause of action accrues. See Tumminello v. U.S. Home Corp., 801 S.W.2d 186, 187-88 (Tex. App.–Houston [1st Dist.] 1990, writ denied). Therefore, a statute of repose can cut off a right of action before an injured party discovers or reasonably should have discovered the defect or injury. Johnson v. City of Fort Worth, 774 S.W.2d 653, 654 n.1 (Tex. 1989) (per curiam). What this means is that even though a potential party’s statute of limitation has not expired because they have not discovered their injury, if the work causing the injury has been completed for 10 or more years, the claim is likely to be barred.

This is why it is important to accurately document the work being completed on every project. Documentation of each individual subcontractor’s substantial completion of their work can offer protection against a later suit. It is good practice for every contractor to keep these records and store them as they could great evidence to prevent future problems.

Nothing here is to be considered legal advice. If you are in the midst of a construction dispute you may want to consider giving us a call at 832-930-0529 or visiting http://www.StephensBell.com

FUNDAMENTAL CONTRACTOR PROTECTION UNDER THE TEXAS CONSTITUTION

FUNDAMENTAL CONTRACTOR PROTECTION UNDER THE TEXAS CONSTITUTION

In Texas, Article XVI, Section 37 of the Texas Constitution reads as follows:

“Mechanics, artisans and material men, of every class, shall have a lien upon the buildings and articles made or repaired by them for the value of their labor done thereon, or material furnished therefore…”

WHAT DOES THIS MEAN?

The Texas Constitution may protect you from nonpayment for your labor and materials. Texas’ Constitution grants certain qualifying contractors an automatic lien if they are not paid on a project. The beautiful thing about this type of lien is that it does not require the contractor to serve any specific kind of notice nor does the contractor have to file an affidavit. It is also important to mention that the Texas Practice & Remedies Code allows contractors to recover attorneys’ fees in a claim for rendered services, performed labor or furnished material.

WHO QUALIFIES?

In order to qualify for the Constitutional lien:

  1. Contractors/ subcontractors must be in privity of contract with the owner.
  2. The project cannot be a public works project or building.
  3. The project cannot consist of landscaping and other similar work.

BE CAREFUL!

Despite the protections under the Texas Constitution, it would be prudent for every contractor to follow the Texas Property Code and perfect a statutory lien. This is because if a third-party purchases property without knowledge of the contractor’s constitutional lien and the third-party does not have actual or constructive notice of the lien, the Constitutional lien will be unenforceable. This is in contrast to statutory liens filed pursuant to the Property Code.

IN A NUTSHELL

The constitutional lien is a basic form of protection for qualifying contractors. However, to cover all bases and afford yourself maximum protection, comply with the Texas Property Code and perfect all liens.

Should you have any questions regarding your business, please feel free to reach out to our office at 832-930-0529 or info@kestephenslaw.com.

None of the information given here is intended to be legal advice and it should not be construed as such.

An Ounce Of Prevention Is Worth A Pound Of Cure: Why Your Business Needs a Lawyer

Time and time again I hear small business owners say that they cannot afford a lawyer. They usually follow that statement with something like “Hopefully, I’ll never need one”. This is simply a HUGE mistake and a bad business practice.

Would you invest 50% of your companies earnings in the stock market but wait until you’ve lost most of the money before you hire an investment banker? Would you wire your business for electricity but wait until after the building catches on fire before you decide to consult an electrician? No? Then why spend thousands of dollars into building a business only to lose it, or a large amount of its revenue in a lawsuit because you did not consult a lawyer, and tried to do all the legal work?

An attorney should be an essential part of your business. In the start-up phase of your company, you should anticipate ongoing legal expenses. You should desire to have an ongoing business relationship with an attorney so that he or she can provide regular consultations to help your company avoid criminal and civil liability. Waiting until after you are sued or sanctioned to consult a lawyer is like waiting until you are very sick before going to the hospital. Little good can come from it and the money that was saved by avoiding legal consultation is often lost in a judgment or defending suit. This is is especially true if your business does transactions with other businesses.

BUT LAWYERS ARE SOOOOO EXPENSIVE!

It is true that business attorneys are not cheap and they shouldn’t be. The practice of business law is very complex and meticulous. If a business attorney is billing anything less than $150.00 per hour you may want to question the quality of service. However, It is possible to save money and find a good business attorney.

Attorneys at large firms are VERY expensive. Big law firms have big overhead and pay big salaries. Those costs get passed to you. You also pay for the firm’s reputation. Even the young lawyers at big firms are billed to companies at $400-$600 per hour right out of law school. However, smaller firms have less overhead and less attorneys salaries to pay out. They can often offer billing at lower rates such as $150-$400 depending on the attorneys experience. In addition, some smaller firms are sometimes willing to offer lower rates for a commitment to ongoing business.

OK SO WHAT SHOULD I DO NOW?

Contact a lawyer immediately! Inform them that you are looking to build a business relationship and that you are seeking regular legal counsel for your company. The meeting can be very informal. In fact, I often take meetings of this variety during lunch. I save the office meetings for the more serious issue specific cases where a company is already being sued.

During the meeting, you should get a feel for the attorney and see if you feel that you all can have a workable relationship. Also, check and see if the attorney has experience in your industry. If all goes well, offer to allow the attorney to come and see how the business is operated so the he or she can become more familiar with the company. I often make site visits and see the way my clients business is ran. Your goal should be to help the attorney help you avoid liability. Do not look at the lawyer as an expense. Consider the lawyer to be long term investment and asset to your business.

Should you have any questions regarding your business, please feel free to reach out to our office at 832-930-0529 or info@kestephenslaw.com.

None of the information given here is intended to be legal advice and it should not be construed as such.

Zachry Constr. Corp. v. Port of Houston Auth.: Limits On Contractual Freedom In Construction

Zachry Constr. Corp. v. Port of Houston Auth.

Limits On Contractual Freedom In Construction

Generally speaking, as long as your contract isn’t illegal or unconscionable, courts have a tendency to allow parties to enter into agreements at their own risk. Courts reason that any mitigation of risk can and should be negotiated by the parties to the contract. However, in Zachry Constr. Corp. v. Port of Houston Auth., the Texas Supreme Court’s ruling demonstrates that sometimes public policy can dictate the validity of a contract’s provisions.

Background Facts

Zachry Construction Corporation (“Zachry”) and Port of Houston Authority (“Port”) entered into a contractual agreement whereby Zachary was to build a wharf on a ship channel. There was a very tight timetable which Zachary was aware of when they entered into the contract. To complete the project on time, Zachry developed a plan that required it to use a freeze wall.

At some point during the construction, Port decided it needed the wharf to be 332ft larger than it originally planned. Zachary elected to use another freeze wall but the Port had reservations regarding the use of the freeze wall. However, the Port waited until two weeks after a change order was issued based on Zachary’s plan and then demanded that Zachary submit a plan without the freeze wall.

Zachary completed the original section of the wharf and begin constructing the second section without the freeze wall. This delayed completion by two years and it caused $2.36 million in liquidated damages. Zachary eventually filed suit for $30 million in damages.  However, the Port pointed to a No-delay-damages provision which stated in part:

Zachry or any of its subcontractors or suppliers shall receive no financial compensation for delay or hindrance to the Work, regardless of the source of the delay;

Zachry was not entitled to financial compensation even if the source of the delay resulted from events of force majeure or the negligence, breach of contract, or other fault of the Port; and

Zachry’s sole remedy shall be an extension of time.

 

Generally speaking, there are five exceptions to the rule that a contractor may agree to assume the risk of construction delays and not seek damages under Texas law. The two exceptions relevant to this case are: where the delay

(ii) resulted from fraud, misrepresentation, or other bad faith on the part of one seeking the benefit of the provision;  

(v) was based upon active interference with the contractor or other wrongful conduct, including arbitrary and capricious acts, willful and unreasoning actions, without due consideration and in disregard of the rights of other parties.

Although Zachry was able to convince a jury that the intentional acts of Port voided the no delay damages provisions, the court of appeals stated that the “other fault” language in the no-delay-damages provision was intended to cover the kind of misconduct by the Port found by the jury. However, the Texas Supreme Court disagreed.

The Law

The Texas Supreme Court doubted whether “other fault” was intended to include the kind of deliberate, wrongful conduct in which the Port engaged. The court stated that experienced contractors can assess potential delaying events when estimating and bidding public works, but they cannot assess potential delays that may arise due to an owner’s direct interference, willful acts, negligence, bad faith fraudulent acts, or omissions. See Zachry, No. 12-0772, 2014 Tex. LEXIS 768, at *40-41.

Secondly and more surprisingly, the court stated that, a contractual provision exempting a party from contract liability for harm caused intentionally or recklessly is typically unenforceable on public policy grounds. The court reasoned that this case was comparable to cases where pre-injury waivers of future liability for gross negligence were void as against public policy. The court stated that its conclusion was supported by lower courts in Texas and 28 other U.S. jurisdictions. See Zachry, No. 12-0772, 2014 Tex. LEXIS 768, at *41-44.

What This Means

This case is important for a number of reasons. However, the biggest reason is that outside of this case, generally speaking, courts only interfered with waivers and other immunizations in tort or injury cases. The public policy exception’s extension to contract law is something that all contractors should be aware of.

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.StephensBell.com