Tag Archives: construction litigation

“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

THAT’S NOT YOUR MONEY YET! The Texas Construction Trust Fund Act

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 info@stephensbell.com. You can also visit our website www.StephensBell.com

 

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

IMPLIED WARRANTIES: ALMOST EVERYTHING YOU SHOULD KNOW ABOUT THEM!

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 info@kestephenslaw.com.

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.

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.