Construction Meets Texas Law: Selected Statutory Overrides

Construction Meets Texas Law
Selected Statutory Overrides
Sean M. McChristian
Porter Hedges LLP
1000 Main Street, 36th Floor
Houston, Texas 77002
Construction Law Foundation of Texas, 29th Annual Construction Law Conference

Introduction
“Essentially, construction law is the law of
contracts which, itself, is derived from the
common law, as modified by statute.”
Canterbury and Shapiro, TX Construction Law
Manual § 1:1 (3d ed.).
Construction Law Foundation of Texas
29th Annual Construction Law Conference

Introduction
• Contractual Notice Periods
TEX. CIV. PRAC. & REM. CODE § 16.071(a)
• Recipient of Notice
TEX. CIV. PRAC. & REM. CODE § 16.071(b)
• Contractual Limitations Periods
TEX. CIV. PRAC. & REM. CODE § 16.070

Introduction
• Forum and Choice of Law in Construction
Contracts
TEX. BUS. & COM. CODE § 272.001
• Contingent Payment of Subcontractors and
Suppliers
TEX. BUS. & COM. CODE §§ 56.001-.057

Introduction
• Prompt Payment to Contractors and
Subcontractors
TEX. PROP. CODE §§ 28.001-.010
• Prompt Payment by Governmental Entities
and their Contractors
TEX. GOV'T CODE §§ 2251.001–.055

Introduction
• Limits on Indemnification and Additional
Insureds
TEX. INS. CODE §§ 151.001-.151
• Indemnity – Architects and Engineers
TEX. CIV. PRAC. & REM. CODE §§ 130.001-.005
TEX. LOC. GOV’T CODE § 271.904

Contractual Notice Periods
Most construction contracts require written
notice of changes, differing site conditions, extra
work, or other events which may affect the time
or cost of performance.

§ 15.1.2 NOTICE OF CLAIMS
Claims by either the Owner or Contractor must be
initiated by written notice to the other party and to
the Initial Decision Maker with a copy sent to the
Architect, if the Architect is not serving as the Initial
Decision Maker. Claims by either party must be
initiated within 21 days after occurrence of the event
giving rise to such Claim or within 21 days after the
claimant first recognizes the condition giving rise to
the Claim, whichever is later.

§ 15.1.4 CLAIMS FOR ADDITIONAL COST
If the Contractor wishes to make a Claim for an increase
in the Contract Sum, written notice as provided herein
shall be given before proceeding to execute the Work.
§ 15.1.5 CLAIMS FOR ADDITIONAL TIME
§ 15.1.5.1 If the Contractor wishes to make a
Claim for an increase in the Contract Time, written
notice as provided herein shall be given.

A contract stipulation that requires a claimant to
give notice of a claim for damages as a condition
precedent to the right to sue on the contract is
not valid unless the stipulation is reasonable. A
stipulation that requires notification within less
than 90 days is void.
TEX. CIV. PRAC. & REM. CODE § 16.071(a).

American Airlines Employees Federal Credit
Union v. Martin, 29 S.W.3d 86 (Tex. 2000)
• Deposit agreement required customers to give notice
of unauthorized transactions within 60 days of
mailing of statement, or waive any objections.
• Purpose - prevent further unauthorized transactions
• If the customer gives prompt notice, the funds might
be recovered and the customer may never have a
claim for damages.

American Airlines Employees Federal Credit
Union v. Martin, 29 S.W.3d 86 (Tex. 2000)
• Holding - did not violate Section 16.071 because the
statute does not apply when the notice to be given is
not notice of a claim for damages, but rather notice
of unauthorized transactions.
How does this apply to construction?

Withdrawn Opinion in Cajun Constructors, Inc. v.
Velasco Drainage District
• Pump station expansion project in Brazoria County, Texas.
• Agreed Completion Date and LD’s of $750.00 per day.
• Cajun submits multiple claims during project.
• Project completed 275 days late.
• Velasco withheld over $200k from final payment.
• Cajun sues saying claims wrongfully denied.

Three notices required by contract:
1. Written notice of the general nature of a claim
within 30 days of the start of the event giving rise
to the claim.
2. Written notice of the amount or extent of the
claim within 60 days of the start of the event.
3. Engineer’s decision on claim is binding unless
give written notice of intent to appeal from the
decision within 30 days of the decision and file
suit within 60 days.

• Fourteenth Court of Appeals –
– First and second provisions require notice of an event that
may or may not ripen into a claim for damages.
– Notice of intent to appeal and of filing suit requires notice
before a claim for damages is alleged in court.
– First and second notice provisions concern claims for
adjustment that allow the parties to investigate and settle
disputes while construction continues; however, requiring
claimant to submit a notice of appeal within 30 days and
file suit within 60 days restricts a claim for damages and is
subject to section 16.071(a).

Recipient of Notice
Notice provisions may require notice to be sent to specific
individuals at specific address.
Example –
(a) Notices and other communications required or permitted
under this Agreement will be in writing and mailed via certified
mail, return receipt requested to the addressee at the address
set forth below:
Mr. Company President
1000 Main Street
Anytown, Texas 77000

Recipient of Notice
§ 15.1.4 CLAIMS FOR ADDITIONAL COST
If the Contractor wishes to make a Claim for an increase
in the Contract Sum, written notice as provided herein
shall be given before proceeding to execute the Work.
§ 15.1.5 CLAIMS FOR ADDITIONAL TIME
§ 15.1.5.1 If the Contractor wishes to make a
Claim for an increase in the Contract Time, written
notice as provided herein shall be given.

Recipient of Notice
If notice is required, the claimant may notify any
convenient agent of the company that requires
the notice.
TEX. CIV. PRAC. & REM. CODE § 16.071(b).

Recipient of Notice
• No reported Texas cases regarding who may be considered a
“convenient agent of the company” requiring notice.
• Likely be analyzed according to general agency principles.
• If to Owner - owner’s rep, the architect, the engineer, or
anyone else administering the contract on behalf of the
owner may qualify.
• If to contractor or subcontractor - a superintendent, site
supervisor, site manager, project manager, or project
coordinator may qualify.

Contractual Limitations
• Statute of limitations for a breach of contract
action is generally four years from the day the
cause of action accrues.
• Parties may contract for a different period in
which to file a breach of contract action.

[A] person may not enter a stipulation, contract,
or agreement that purports to limit the time in
which to bring suit on the stipulation, contract,
or agreement to a period shorter than two
years. A stipulation, contract, or agreement that
establishes a limitations period that is shorter
than two years is void in this state.
TEX. CIV. PRAC. & REM. CODE § 16.070(a).

• Two years doesn’t mean two years.
• Requirement that suit be filed before the
expiration of two years or within two years is
one day short of two years.
• Limitations period must be at least two years
and one day.

• Two years and one day may not be enforceable depending
on triggering event.
• Under section 16.070(a), the “time in which to bring suit”
cannot be shorter than two years.
• A party is unable to bring suit until the party's cause of
action has accrued.
• To comply with section 16.070(a), contractual limitations
period cannot end until after two years after the day the
cause of action for breach of the agreement has accrued.

Spicewood Summit Office Condominiums Ass'n, Inc. v. Am. First Lloyd's Ins.
Co., 287 S.W.3d 461, 464 (Tex. App.--Austin 2009, pet. denied).
• Insurance policy required suit to be filed within two years and one day
after the date on which the direct physical loss or damage occurred.
• To be valid, insured must have been able to sue its insurer on the date of
loss.
• Insurer did not have to accept or deny claim until insured gave notice of
loss, the insurer had time to investigate, and insured submitted proof of
loss and other information.
• Insured not entitled to sue the insurer on the date of loss because,
without more, no breach of the insurance agreement had yet occurred,
and the insured did not yet have a cause of action for breach of contract.

Application to surety bonds and construction
contracts –
• Limitations period cannot start before surety
has obligation to discharge its duties.
• Construction contract cannot require suit to
be filed prior to completion of change order
process.

Forum and Choice of Law
TEX. BUS. & COM. CODE § 272.001. VOIDABLE CONTRACT PROVISION.
(a) This section applies only to a contract that is principally for the
construction or repair of an improvement to real property located in
this state.
(b) If a contract contains a provision making the contract or any conflict
arising under the contract subject to another state's law, litigation in
the courts of another state, or arbitration in another state, that
provision is voidable by the party obligated by the contract to perform
the construction or repair.

A contract is principally for the construction or
repair of an improvement to real property located
in this state if the contract obligates a party, as the
party's principal obligation under the contract, to
provide labor or labor and materials as a general
contractor or subcontractor for the construction or
repair of an improvement to real property located
in this state.
TEX. BUS. & COM. CODE § 272.002(a).
Construction Law Foundation of Texas, 29th
Annual Construction Law Conference

A contract is not principally for the construction or repair of an improvement
to real property located in this state if the contract:
(1) is a partnership agreement or other agreement governing an entity or
trust;
(2) provides for a loan or other extension of credit and the party promising to
construct or repair the improvement is doing so as part of the party's
agreements with the lender or other person who extends credit; or
(3) is for the management of real property or improvements and the
obligation to construct or repair the improvement is part of that
management.
TEX. BUS. & COM. CODE § 272.002(b).

Under Section 272.001, Texas contractors and
subcontractors should have the power to void a
provision making a construction contract for a
Texas construction project or any conflict arising
under the contract:
(1) subject to another state's law,
(2) litigation in the courts of another state, or
(3) arbitration in another state.

Cleveland Construction, Inc. v. Levco Construction,
Inc.,359 S.W.3d 843 (Tex. App.--Houston [1st Dist.] 2012,
pet. dism'd).
• Whole Foods hired Cleveland Construction to build
new store in Houston.
• Cleveland Construction subcontracted with Levco.
• Subcontract required all claims to be resolved by
arbitration in Lake County, Ohio.

Cleveland Construction, Inc. v. Levco Construction, Inc.,359 S.W.3d 843 (Tex.
App.--Houston [1st Dist.] 2012, pet. dism'd).
• Levco sued in state court and Cleveland Construction moved to compel
arbitration.
• Motion to compel arbitration denied.
• On appeal, Levco argued arbitration provision was voidable at the election
of Levco under Texas Business and Commerce Code § 272.001.
• First COA held - Applying section 272.001 as Levco asks us to do here
would prevent us from enforcing a term of the parties' arbitration
agreement—the venue—on a ground that is not recognized by the FAA or
by general state-law contract principles. … We hold that the FAA preempts
application of this provision under the facts of this case.

Contingent Payment of
Subcontractors and Suppliers
TEX. BUS. & COM. CODE §§ 56.001-.057
• Protects subcontractors and suppliers by defining circumstances in
which contingent payment clauses are unenforceable.
• Contingent Payment Clause - a provision in a contract for
construction management, or for the construction of improvements
to real property or the furnishing of materials for the construction,
that provides that the contingent payor's receipt of payment from
another is a condition precedent to the obligation of the contingent
payor to make payment to the contingent payee for work
performed or materials furnished.

Chapter 56 does not apply to a contract is that is solely for:
(1) design services;
(2) the construction or maintenance of a road, highway, street,
bridge, utility, water supply project, water plant, wastewater
plant, water and wastewater distribution or conveyance facility,
wharf, dock, airport runway or taxiway, drainage project, or
related type of project associated with civil engineering
construction; or
(3) improvements to or the construction of a structure that is a: (A)
detached single-family residence; (B) duplex; (C) triplex; or (D)
quadruplex.

A contingent payment clause in a contract within the scope of Chapter 56 is not
effective against a subcontractor or supplier in the following situations:
(1) When the project owner fails to pay the general contractor because of the
conduct or work of the contractor, unless such nonpayment is the result of a
failure by the subcontractor or supplier to meet their contract requirements;
(2) As to work performed or materials delivered, after the contractor receives
written notice from the subcontractor or supplier objecting to further
enforcement of the contingent payment clause, and the notice of objection has
become effective;
(3) When the contractor is in a “sham relationship” with the project owner; or
(4) If enforcement of the contingent payment clause would be unconscionable.

Prompt Payment to Contractors
and Subcontractors
TEX. PROP. CODE §§ 28.001-.010
A contractor's and subcontractor’s right to
prompt payment is a part of every contract to
improve real property.

and Subcontractors
If an owner or a person authorized to act on behalf of the owner
receives a written payment request from a contractor for an amount
that is allowed to the contractor under the contract for properly
performed work or suitably stored or specially fabricated materials,
the owner shall pay the amount to the contractor, less any amount
withheld as authorized by statute, not later than the 35th day after the
date the owner receives the request.
TEX. PROP. CODE § 28.002(a).
• Single-Family Residence Exception - Time for payment may be 61st
day after the date the owner receives the payment request.
• All other attempted waivers of Chapter 28 are void.

and Subcontractors
• Penalty for an owner that fails to submit payment
in a timely fashion is the accrual of interest at the
rate of 1-1/2 percent each month until paid or
entry of judgment.
• Contractor also has the right to suspend work
after notice unless contract is for: (1)
construction of or improvements to a detached
single-family residence, duplex, triplex, or
quadruplex; or (2) improvements to real property
for a governmental entity.

and Subcontractors
A contractor who receives a payment … from an owner in connection with a contract
to improve real property shall pay each of its subcontractors the portion of the
owner's payment, including interest, if any, that is attributable to work properly
performed or materials suitably stored or specially fabricated as provided under the
contract by that subcontractor, to the extent of that subcontractor's interest in the
owner's payment. The payment required by this subsection must be made not later
than the seventh day after the date the contractor receives the owner's payment.
A subcontractor who receives a payment … from a contractor in connection with a
contract to improve real property shall pay each of its subcontractors the portion of
the payment, including interest, if any, that is attributable to work properly performed
or materials suitably stored or specially fabricated as provided under the contract by
that subcontractor, to the extent of that subcontractor's interest in the payment. The
payment required by this subsection must be made not later than the seventh day
after the date the subcontractor receives the contractor's payment.
TEX. PROP. CODE § 28.002(b)-(c).

and Subcontractors
• Penalty for contractor or subcontractor that fails
to submit payment in a timely fashion is the
accrual of interest at the rate of 1-1/2 percent
each month until paid or entry of judgment.
• Subcontractors also have the right to suspend
work after notice but only when the owner fails
to pay the general contractor the undisputed
amount.

and Subcontractors
Good Faith Withholding Exception
• If a good faith dispute exists concerning the amount owed for
construction of or improvements to a detached single-family
residence, duplex, triplex, or quadruplex, the owner, contractor, or
subcontractor may withhold not more than 110 percent of the
difference between the amount the obligee claims is due and the
amount the obligor claims is due.
• If the dispute does not relate to construction of or improvements to
a detached single-family residence, duplex, triplex, or quadruplex,
then no more than 100 percent of the difference may be withheld.

and Subcontractors
Good Faith Withholding Exception
• If payment is withheld in good faith, does the amount withheld accrue
interest?
• Two courts have held that no matter whether the withholding party had a
good faith basis for withholding the payment, the withheld amount will
still accrue interest if the withholding party is ultimately found to be at
fault for the breach.
Patel v. Creation Const., Inc., 05-11-00759-CV, 2013 WL 1277874, at *3 (Tex. App.--
Dallas Feb. 27, 2013, no pet.) (mem. op.).
Landmark Org., LP. v. Dephini Constr. Co., No. 13–04–00371–CV, 2005 WL
2560022, at *5 (Tex. App.--Corpus Christi Oct. 13, 2005, pet. denied) (mem. op.).

Prompt Payment by Governmental
Entities and their Contractors
• The Payment for Goods and Services Act (the
“Act”) requires governmental entities, and those
who contract with them, to make timely
payments for goods and services purchased by
contract. See generally TEX. GOV'T CODE §§
2251.001–.055.
• A person may not waive any of the rights or
remedies granted by the Act, and all purported
waivers of any of the rights or remedies granted
by the Act are void. Id. at § 2251.004.

Payment by a governmental entity is overdue on the 31st day
after the later of:
(1) the date the governmental entity receives the goods
under the contract;
(2) the date the performance of the service under the
contract is completed; or
(3) the date the governmental entity receives an invoice for
the goods or service.
However, if the governing body of the political subdivision
meets only once a month or less, then payment is overdue on
the 46th day after the last of the events described above.

If a government contractor receives a payment from a
governmental entity, then the government contractor
must pay a subcontractor its share of the payment not
later than the 10th day after the date of payment, and
the payment is overdue on the 11th day.
If a subcontractor receives a payment from a government
contractor, then the subcontractor is likewise required to
pay its subcontractors their share of the payment not
later than the 10th day after the date of payment, and
the payment is overdue on the 11th day.

Remedies –
• Overdue payments accrue interest at the rate of 1% plus
the prime rate as published in the Wall Street Journal on
the first day of July of the preceding fiscal year that does
not fall on a Saturday or Sunday.
• Government contractors and subcontractors also have a
right to suspend work after notice.
• Award of attorney’s fees mandatory in action to enforce.

Limits on Indemnification and
Additional Insureds
Texas Anti-Indemnity Act did away with the two-part fair notice test
that formerly determined whether broad and intermediate form
indemnity agreements in construction contracts were enforceable.
• Broad Form Indemnity - requires a party to indemnify another party
for that other party's negligence.
– Example - a clause that requires a subcontractor to indemnify a
contractor for the contractor’s negligence.
• Intermediate Form Indemnity - requires a party to indemnify
another party for that other party's negligence, unless the injury or
damages were caused by the other party’s sole negligence.
– Example - a clause that requires a subcontractor to indemnify a
contractor for the contractor’s negligence, unless the injury or
damages were caused by the contractor’s sole negligence.

Additional Insureds
Except as provided by Section 151.103, a provision in a construction
contract, or in an agreement collateral to or affecting a construction
contract, is void and unenforceable as against public policy to the
extent that it requires an indemnitor to indemnify, hold harmless, or
defend a party, including a third party, against a claim caused by the
negligence or fault, the breach or violation of a statute, ordinance,
governmental regulation, standard, or rule, or the breach of contract
of the indemnitee, its agent or employee, or any third party under the
control or supervision of the indemnitee, other than the indemnitor or
its agent, employee, or subcontractor of any tier.
TEX. INS. CODE § 151.102.
Chapter 151 “may not be waived by contract or otherwise.”

Additional Insureds
Employee Claim Exception - exempts provisions
in a construction contract that require a party to
indemnify another party or third party against a
claim for the bodily injury or death of an
employee of the indemnitor, its agent, or its
subcontractor of any tier.

Additional Insureds
• Chapter 151 applies when the indemnitor is provided or
procures insurance.
• Various indemnity provisions listed in TEX. INS. CODE §
151.105 are not subject to Chapter 151, including an
indemnity provision in a construction contract, or in an
agreement collateral to or affecting a construction
contract, pertaining to:
– a single family house, townhouse, duplex, or land
development directly related thereto; or
– a public works project of a municipality.

Additional Insureds
• Chapter 151 voids provisions in construction contracts
that require the purchase of additional insured coverage,
or any coverage endorsement, or provision within an
insurance policy providing additional insured coverage, if
it requires or provides coverage the scope of which is
prohibited under Chapter 151.
• However, this prohibition does not apply to a provision in
an insurance policy, or an endorsement to an insurance
policy, issued under a consolidated insurance program if
the provision or endorsement lists, adds, or deletes
named insureds to the policy.

Indemnity – Architects and
Engineers
TEX. CIV. PRAC. & REM. CODE §§ 130.001-.005
• Contractor cannot be required to indemnify an
architect or engineer from personal injuries,
deaths, or property injuries caused by the
architect’s or engineer’s defective plans, designs,
or specifications.
• Architect or engineer cannot be required to
indemnify an owner for liability that results from
the owner’s negligence

Engineers
An architect or engineer can only be required to indemnify a
governmental agency for damage caused by or resulting from the
following committed by the engineer or architect or its agent,
consultant under contract, or another entity over which the engineer
or architect exercises control:
• an act of negligence,
• intentional tort,
• intellectual property infringement, or
• failure to pay a subcontractor or supplier.
Note - Section 271.904 applies to public works projects of a
municipality that are not subject to the Anti-Indemnity Act.

Engineers
An architect or engineer cannot be required to indemnify a party, including a third
party, against a claim based wholly or partly on the negligence of, fault of, or breach of
contract by the governmental agency, the agency's agent, the agency's employee, or
other entity over which the governmental agency exercises control.
Two caveats:
1. A contract may require the engineer or architect to reimburse the governmental
agency for the agency's attorney fees in proportion to the engineer's or
architect's liability.
2. The governmental agency may require the engineer or architect to name the
agency as an additional insured under the engineer's or architect's general
liability insurance policy and provide any defense provided by the policy.

Questions or Comments?
Sean M. McChristian
Porter Hedges LLP
1000 Main Street, 36th Fl.
Houston, Texas 77002
(713) 226-6632
smcchristian@porterhedges.com

Construction Meets Texas Law: Selected Statutory Overrides

Recommended

Recommended

More Related Content

What's hot

What's hot (14)

Similar to Construction Meets Texas Law: Selected Statutory Overrides

Similar to Construction Meets Texas Law: Selected Statutory Overrides (20)

Recently uploaded

Recently uploaded (20)

Construction Meets Texas Law: Selected Statutory Overrides