Tag Archives: contractors

“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

You’d Better Get Both

Often times in residential projects both general contractors and subcontractors find themselves in situations where they believe it is best for them to file a lien. Unfortunately, many of these liens are invalid due to the fact that the builder is unaware that the property is the owner’s homestead.

The fact that the property is considered homestead property does not automatically invalidate the builder’s lien. However, the builder’s ignorance to the homestead status makes it very unlikely that the builder complied with Sec. 53.254. of the Texas Property Code. Failure to comply with this section of the code invalidates the lien on a homestead.

The critical requirements of the section are enumerated in the statute and include required notices. However, one of the most common ways that builders fail to comply with the statute is that they fail to get a signature from both the husband and the wife in situations where the owners are married.  Many builders believe that one spouse’s commitment to the work binds both spouses and the property.  This is simply not the case. To affix a lien to the property it must be compliant with the code and this means that it must be signed by both spouses.

Given the importance of this step, it is probably best that a builder that regularly handles residential projects, incorporate a signature space on its contract for both spouses and ensure that both are signed before commencing any work

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

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

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.