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 firstname.lastname@example.org
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
Texas courts generally apply the Spearin doctrine that the owner implicitly warrants to the contractor the sufficiency of the drawings and specifications. See 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).
A contractor agreed, for a lump sum, to build a dry-dock in a Navy Yard in accordance with plans and specifications prepared by the Government and which provided, incidentally, for reconstructing a sewer which intersected the site. See Spearin, 248 U.S. 132 at 133. The plans also prescribed the new location, dimensions, and materials. Id. The contractor rebuilt the sewer to the correct specifications, and it was accepted by the Government. See Id. However, due to a dam in a connecting sewer, within the Yard but beyond the limits of the operations, and also due to the general conditions of drainage, which were known to the Government but not to the contractor, back waters burst the new sewer, during heavy rain and high tide, and flooded the dry-dock excavation, causing damage and impeding the work. See Id.
The contractor, declined to proceed unless the Government paid or assumed the damage and made the sewer safe or assumed responsibility for future damage due to insufficient capacity, location and design. Id. The Government annulled the contract. Id. The contractor brought a suit to recover the amount that he spent on the project and to recover damages for the contract’s annulment. Id.
The United States Supreme Court affirmed the lower court’s ruling for the contractor. See Id. at 132. The Court stated that the drawings and specifications, prescribing the character, dimensions, and location of the sewer imported a warranty that if constructed in compliance with the drawings, the sewer would prove adequate. Id. at 133. The Court explained that the warranty was not overcome by general clauses requiring the contractor to examine the site, check-up the plans, and assume responsibility for the work until completion and acceptance. Id.
What It Means For You
According to this archaic case from 1918, there is an implied warranty that if a contractor constructs a project to the specifications of the owner, the completed project will prove to be adequate. If this is not the case, the contractor may quit the job and recover costs. Of course, nearly 100 years later, a standard AIA contract has all but completely negated this doctrine with various clauses. However, it is good to know that some measure of protection is afforded to contractors through decades of precedent.
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.
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 email@example.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.
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.
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.
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.
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.