Tag Archives: breach of contract

“But They Breached First”… Why You May Still Be Obligated To Peform

It is not uncommon for a general contractor or subcontractor to stop working on a project when they are not paid for work previously performed and invoiced. However, professionals in this situation should be careful to make sure their contract does not have any provision that forbids them from stopping their work.  They should also make sure that they are in compliance with the Texas Property Code.

According to Sec. 28.009 of the Texas Property Code:

(a)  If an owner fails to pay the contractor the undisputed amount within the time limits provided by this chapter, the contractor or any subcontractor may suspend contractually required performance the 10th day after the date the contractor or subcontractor gives the owner and the owner’s lender written notice:

(1)  informing the owner and lender that payment has not been received;  and

(2)  stating the intent of the contractor or subcontractor to suspend performance for nonpayment

The code makes it clear that work can be stopped only after giving notice. Failure to provide this notice could result in a court finding that stopping work resulted in a breach of Contract. Generally speaking, under traditional contract principles if both parties breach a contract, the first party to breach is the party that will be responsible for damages. However, it is critical that the non-breaching party determine whether the initial breach was “material”.

The Texas Supreme Court recently addressed this issue in Bartush v. Cimco, No. 16-0054, 2017 WL 1534053 (Tex. 2017) (April 28, 2017). In that case Bartush hired Cimco to install a new refrigeration system in its manufacturing plant. They system that Cimco installed failed to properly cool. Bartush refused to pay the remaining contract balance alleging that Cimco had breached and the breach excused Bartush’s performance.

At trial, the jury found that both parties breached the contract but that Cimco breached first and awarded Bartush damages for the cost of repairing the system. Cimco appealed and won. The appellate court held Bartush for the contract balance because the court held that Cimco’s breach was not material.

The Texas Supreme Court affirmed the appellate court’s decision that Cimco’s breach was not material. Relying on Mustang Pipeline Co. v. Driver Co., 134 S.W.3d 195 (Tex. 2004), the Court explained that: (i) a contractor’s material breach excuses the owner from making further payments; but (ii) a non-material breach simply gives rise to a claim for damages. The Court stated that “while a party’s nonmaterial breach does not excuse further performance by the other party, neither does the second breach excuse the first.”

In applying the principle above, the Court concluded that although Cimco was the first to breach, the breach was not material and did not excuse Bartush’s obligation to pay the remaining contract balance. The Court also stated that, Bartush’s subsequent breach did not excuse Cimco’s obligation to install a working refrigeration system. Consequently, Cimco’s contract balance should have been offset by Bartush’s repair balance.

Clearly, parties to a contract have a great deal to consider before deciding to forego performing their obligations under a contract. It is best to consult counsel with actual contract litigation experience before refusing to perform. However, if a party has breached and it is too difficult to determine whether the breach is material, it is best to continue to fulfill any contractual obligations so long as the breaching party is not insolvent. This is because the party that fully performs, has clean hands, presents well to a court or jury, and is generally entitled to damages.

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

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P3 Projects and Difficulties With Remedies

Most construction projects are either public or private in nature. When the government owns the property forming the basis of the project, the project is considered public and when a private individual or company owns the property, it’s considered a private project. The classification is generally most important in two contexts, remedies in the event of non-payment and the application of prompt payment statutes.

With regard to the remedies, in a private construction project if a contractor is not paid, it will file a statutory lien against the property to protect its interest. However, on a public project, a contractor cannot file a lien because generally, the government has laws in place stating that no private individual or entity can file a lien against public property. Consequently, on public projects the solution is a bond. The bond gives the contractor assurance of payment.

Many states, including Texas, have prompt payment statutes that require the general contractors to pay subs within a certain timeframe of receiving their invoice. In Texas, these periods vary depending on who is paying and whether the project is private or public. However, this classification is not always straightforward.

Although most projects are either private or public, there are some projects that mix public and private construction, funding, development, etc. and those projects are called Public Private Partnerships (P3) projects. P3 projects can be complicated because often times, the law doesn’t specifically outline how to handle or classify the p3 project. This makes it difficult to know which nonpayment remedies apply to these projects.

The best solution for avoiding these problems may be to address them during formation. P3s are creatures of contract which means that in many cases the contract can control the remedies available. Also, general contractors and subcontractors will want to try to classify the project early on so that they know their remedies.

For more information on P3 projects and breach or nonpayment remedies contact Stephens & Bell at 832 930 0529 or visit www.StephensBell.com

Construction Payments, Why Misapplication Could Mean Big Problems

Whether you’re a prime contractor, subcontractor, owner, officer, director, or agent of a contractor, subcontractor, or owner who receives construction payments or who has control or direction of construction payments, you are a trustee under Tex. Prop. Code § 162.002. This means that you have a responsibility to correctly apply trust funds.

Misapplication of Trust Funds

Under the statute, a trustee who, intentionally or knowingly or with intent to defraud, directly or indirectly retains, uses, disburses, or otherwise diverts trust funds without first fully paying all current or past due obligations incurred by the trustee to the beneficiaries of the trust funds, has misapplied the trust funds. Tex. Prop. Code § 162.031. Plainly stated, this means that if you fail to pay any artisan, laborer, mechanic, contractor, subcontractor, or materialman who labors or who furnishes labor or material for the construction or repair of an improvement on specific real property you have misapplied trust funds and opened yourself up to consequences of this action; but what are the consequences?

Consequences of Misapplication

There are criminal and civil consequences to misapplying trust funds. Under Tex. Prop. Code § 162.032:

(a)  A trustee who misapplies trust funds amounting to $500 or more commits a Class A misdemeanor.

(b)  A trustee who misapplies trust funds amounting to $500 or more with intent to defraud, commits a felony of the third degree.

(c)  A trustee who fails to establish or maintain a construction account in violation of Section 162.006 or fails to establish or maintain an account record for the construction account in violation of Tex. Prop. Code § 162.007 commits a Class A misdemeanor.

Obviously, there are multiple claims that can be brought against a Trustee who misapplies funds. Breach of contract, fraud, and breach of fiduciary duty are just a few claims that are likely to be in a plaintiff’s petition.

What Should You Do

Understand your role and responsibility as a Trustee. Be diligent with your accounting and pay all beneficiaries before withholding or retaining any trust funds as your own. Consult with your attorney if there is any confusion regarding payment and your rights to funds from the trust.

Nothing here is intended to be legal advice and should not be interpreted as such. If you or someone you know is has a potential construction dispute or would like advice regarding construction, give us a call at 832-930-0529. You can also visit our website http://www.StephensBell.com

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

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.