In an earlier post I explained the difficulties subcontractors face when trying to protect themselves against non-payment. Difficulties in complying with The Texas Property Code make perfection difficult for subs. However, The Texas Construction Trust Fund Act does give some protection.
According to the act, a contractor, subcontractor, or owner or an officer, director, or agent of a contractor, subcontractor, or owner, who receives trust funds or who has control or direction of trust funds, is a trustee of the trust funds and an 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 in this state is a beneficiary of any trust funds paid or received in connection with the improvement. Tex. Prop. Code § 162.002.
This means that essentially, almost anyone in connection with the project that receives trust funds is a trustee of the trust funds and anyone who provides labor or materials in connection with a project is a beneficiary. This begs the question, what are trust funds?
The statute answers the question below:
(a) Construction payments are trust funds under this chapter if the payments are made to a contractor or subcontractor or to an officer, director, or agent of a contractor or subcontractor, under a construction contract for the improvement of specific real property in this state.
(b) Loan receipts are trust funds under this chapter if the funds are borrowed by a contractor, subcontractor, or owner or by an officer, director, or agent of a contractor, subcontractor, or owner for the purpose of improving specific real property in this state, and the loan is secured in whole or in part by a lien on the property.
(c) A fee payable to a contractor is not considered trust funds if:
(1) the contractor and property owner have entered into a written construction contract for the improvement of specific real property in this state before the commencement of construction of the improvement and the contract provides for the payment by the owner of the costs of construction and a reasonable fee specified in the contract payable to the contractor; and
(2) the fee is earned as provided by the contract and paid to the contractor or disbursed from a construction account described by Section 162.006, if applicable.
(d) Trust funds paid to a creditor under this chapter are not property or an interest in property of a debtor who is a trustee described by Section 162.002.
Tex. Prop. Code § 162.001.
What this means is that most draw payments made to contractors are trust funds. These funds are to be used to pay subcontractors and cover building materials. In fact, a trustee who, intentionally or knowingly 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, is said to have misapplied trust funds. Depending on how much money was diverted or retained, this could result in a felony or a misdemeanor conviction. Tex. Prop. Code § 162.031 & § 162.032.
Nothing here is intended to be legal advice and should not be interpreted as such. Please consult a lawyer for any and all of your legal questions. If you believe someone has misapplied trust funds or if you’re accused of misapplying trust funds, give us a call at 832-930-0529 or email us at email@example.com. You can also visit our website www.StephensBell.com
If you’re a general contractor actively involved in any project, it is safe to assume that you have attempted to protect yourself from paying damages out of pocket in the event there is a problem with the project. However, as is the case with any kind of insurance, there are certain clauses that could leave you on the hook to pay for certain damages arising out of a project. One common clause is the “your work” exclusion.
What Is A “Your Work” Exclusion
Generally speaking, a CGL policy may have language that reads as follows:
This insurance does not apply to property damage to work performed by or on behalf of the Named Insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith.
Now, I understand that you’re probably thinking, “Wait a minute, isn’t this why I bought insurance, so that in the off chance that my company makes a mistake, I do not go bankrupt!” This is a perfectly logical thought. After all, other licensed professionals such as doctors, lawyers and CPAs purchase insurance for that very reason; to protect themselves when they drop the ball.
The Law Governing “Your Work” Exclusions
Unfortunately, the Texas Supreme Court has stated that although its purpose is to “protect the insured from liability for damages when [its] own defective work or product damages someone else’s property,” the typical CGL policy “cover[s] only ‘insurable risks’ and exclude[s] business risks.” Mid-Continent Cas. Co. v. JHP Development, Inc., 557 F.3d 207, 212 (5th Cir. 2009). The category of so-called “business risk exclusions” at issue in “your work” exclusion cases is the exclusion for faulty workmanship, which excludes coverage for an insured’s defective performance. See id. at 211-12 (citing cases; internal quotation marks omitted).
An Example of a “Your Work” Exclusion at Play
A recent case that evidences how the “your work” exception can come into play is Feaster v. Mid-Continent Casualty Co., No. 2015 WL 164041, (S.D. Tex. Jan. 13, 2015), appeal filed (5th Cir. Feb. 9, 2015). In Feaster, the insured was a home developer who constructed a home. After taking possession, the homeowners begin experiencing problems caused by defective structural work done by the home developer. The homeowners sued the developer and obtained a default judgement of over $300,000.00. The developer assigned its interest and claims against its insurance company to the homeowners who then sued the insurance company arguing that the exclusion was unconscionable, and thus unenforceable under Texas law, because it reduced the insurance companies policies to “phantom polices, not covering anything.” See id.
The Texas court disagreed, explaining that contrary to the developer’s contentions, the “your work” exclusion was neither unconscionable nor unenforceable under Texas law.
What It All Means
Essentially, it means you should read and understand your policy. If your policy includes a “Your Work” exclusion, you might attempt to negotiate some exceptions to the exclusion. It is not uncommon to add a subcontractor exception that would allow coverage if the work is defective due to a subcontractor. Also, whenever possible, get an attorney to review your insurance policies with you.
Nothing here is intended to be legal advice and should not be interpreted as such. Please consult a lawyer for any and all of your legal questions. Please feel free to call us at 832-930-0529 with any issues your company may be having. You can also visit our website www.StephensBell.com
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.
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 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
The builder-vendor of a house impliedly warrants that the house was constructed in a good and workmanlike manner and is suitable for human habitation Humber v. Morton, 426 S.W.2d 554, 555 (Tex. 1968); Codner v. Arellano, 40 S.W.3d 666, 672 (Tex. App.—Austin 2001, no pet.) (implied warranty to perform services to repair or modify existing property in good and workman-like manner may also arise under common law if mandated by public policy). The warranty of habitability requires that a house be safe, sanitary, and otherwise fit for humans to inhabit. The warranty of good and workmanlike construction requires that the construction be done in a manner in which an ordinarily prudent person engaged in similar work would have performed under similar circumstances. The idea of a reasonable standard of skill and diligence is implicit in the good and workmanlike standard. See Miller v. Spencer, 732 S.W.2d 758, 760 (Tex. App.—Dallas 1987, no writ) (warranties described, but not applied)]. The implied warranties of good and workmanlike construction and habitability may not be waived or disclaimed Melody Home Mfg. Co. v. Barnes, 741 S.W.2d 349, 355 (Tex. 1987)(emphasis added).
Generally, the concept of good workmanship, as used in a construction contract, has a relative meaning, depending on the context in which it is used. Chappell Hill Bank v. Lane Bank Equip., 38 S.W.3d 237, 243 (Tex. App.—Texarkana 2001, pet. Denied). When the contract requires the work to be completed to the owner’s satisfaction, courts will generally apply an objective test to determine whether the party required to be satisfied acted in good faith Chappell Hill Bank 38 S.W.3d at 243.
These implied warranties are automatically assigned to a subsequent purchaser of the house Gupta v. Ritter Homes, Inc., 646 S.W.2d 168, 169 (Tex. 1983) (purchaser of used house has cause of action under Deceptive Trade Practices Act to recover damages for latent defects not discoverable by purchaser’s reasonably prudent inspection at time of sale)]. This is true even if the builder of the home was the first occupant March v. Thiery, 729 S.W.2d 889, 892 (Tex. App.—Corpus Christi 1987, no writ).
The implied warranty of good workmanship extends to partially completed houses, as long as it is clear what portion of the house has been fully constructed by the builder. This is because a builder/vendor who constructs a building for residential purposes impliedly warrants that whatever construction he or she has done has been done in a good and workmanlike manner. March v. Thiery, 729 S.W.2d 889, 893 (Tex. App.—Corpus Christi 1987, no writ) (rejecting builder’s contention that because house was only 25 percent completed, every phase of construction must be considered to be only 25 percent completed).
There is no implied warranty of good and workmanlike service or implied warranty of habitability from a subcontractor or materials supplier with whom the property owner had no direct contractual relationship. Pugh v. General Terrazzo Supplies, Inc., 243 S.W.3d 84, 89–90 (Tex. App.—Houston [1st Dist.] 2007, pet. filed). The owner’s remedy is against the general contractor. Pugh v. General Terrazzo Supplies, Inc., 243 S.W.3d 84, 90 (Tex. App.—Houston [1st Dist.] 2007, pet. filed).
In the absence of a provision in the contract to the contrary, the builder also implicitly covenants that the construction will comply with all relevant municipal and county codes applicable to the intended use of the property. Tips v. Hartland Developers, Inc., 961 S.W.2d 618, 621–623 (Tex. App.—San Antonio 1998, no pet.) (recognizing rule, but holding that parties agreed to address compliance with fire codes in later change orders due to uncertainty of use and possible destruction of surrounding buildings).
Texas courts generally apply the Spearin doctrine that the owner implicitly warrants to the contractor the sufficiency of the drawings and specifications. Shintech Inc. v. Group Constructors, Inc., 688 S.W.2d 144, 151 (Tex. App.—Houston [14th Dist.] 1985, no writ); see generally United States v. Spearin, 248 U.S. 132, 39 S. Ct. 59, 63 L. Ed. 166 (1918)].
It is also important to note that the implied warranty of merchantability does not apply to the construction and sale of a house. Haney v. Purcell Co., Inc., 796 S.W.2d 782, 786 (Tex. App.—Houston [1st Dist.] 1990, den.).
Should you have any questions regarding your next construction project or any construction dispute, please feel free to reach out to me at 832-930-0529 or firstname.lastname@example.org.
None of the information given here is intended to be legal advice and it should not be construed as such. Special Thanks to Mathew Bender and Company for the thorough information.