Failure to investigate contractor’s performance may prevent an owner from later recovering damages for latent defects

October 17, 2017

A construction project’s owner sued the general contractor for breach of contract after the four-year limitations period expired. The owner claimed that it had discovered issues with the contractor’s work, including improperly installed interior doors at exterior locations and the use of incorrect flooring materials. The owner argued that the “discovery rule” tolled the limitations period and allowed it to bring the claims as “latent defects.”

The court declined to apply the discovery rule, pointing to evidence suggesting that the owner knew or should have known about each issue. It emphasized that contracting parties must exercise reasonable diligence in ensuring the performance of a contractor complies with the contract documents. Reasonable steps include, for example, asking the contractor for information needed to verify its compliance with the plans, specifications, and other contract documents.

While the underlying facts of every claim will be different, it is important to recognize that a construction “defect” will not necessarily be considered a latent defect just because the owner did not have actual knowledge of the defect. If it is determined that the owner could have discovered the defect through the exercise of reasonable diligence, the defect will not be considered latent. Of course, what constitutes “reasonable diligence” (or the lack thereof) will depend upon the factual circumstances of each project and claim.

B. Mahler Interests, L.P. v. DMAC Construction, Inc. , 503 S.W.3d 43 (Tex. App.—Houston [14th Dist.] 2016, no pet.).

Challenges to overall enforceability of a contract can be determined by an arbitrator

October 17, 2017

The parties to a dispute entered into an informal written settlement agreement, which contemplated execution of a more-formal settlement agreement later. The informal settlement agreement stated that “any disagreement result[ing] from negotiation and completion of this documentation” would be submitted to arbitration. One party argued the informal settlement agreement was wholly unenforceable because it was not approved by that party’s Board of Directors.

The court of appeals analyzed whether the arbitrator or the trial court should decide whether the entire informal settlement agreement was enforceable. The parties’ dispute concerned a challenge to the enforceability of the entire contract, rather than a challenge specifically to the arbitration provision. Under these circumstances, the court held that the arbitrator should decide whether the contract is enforceable.

It seems rather ironic that the parties are required to use the arbitration process, as set forth in the agreement, to determine whether the agreement (which contains the arbitration clause) is indeed enforceable. On the other hand, if a party challenged only the enforceability of the arbitration clause (but not the enforceability of the entire contract), most cases have held that a court should decide that dispute.

Human Biostar, Inc. v. Celltex Therapeutics Corp. , 514 S.W.3d 844 (Tex. App.–Houston [14th Dist.] Jan. 19, 2017, pet. denied).


The attached information is general in nature, is presented for discussion purposes only, and may not reflect current legal developments, nor fully explore all potential areas of this topic. The information included should not be relied upon or construed as legal advice and is not a substitute for obtaining legal advice from an attorney. No legal representation is undertaken or implied with the distribution of this information.

Arbitration agreement found unenforceable because employer could modify it without advance notice to the employee

October 17, 2017

An employee had a dispute with his employer arising out of personal injuries on a worksite. The employer’s written Dispute Resolution Policy contained an arbitration provision. The employee asserted the arbitration provision was unenforceable because the employer was permitted to modify or terminate Dispute Resolution Policy at its sole discretion. As a result, the employee argued the arbitration provision was an illusory promise, that is, it was unenforceable due to lack of mutuality because only one side was bound to perform under the agreement.

The court held that the arbitration provision in this instance was unenforceable. Under Texas law, an agreement giving the employer power to modify or terminate the agreement is enforceable (and not illusory) so long as the power: (1) extends only to prospective claims; (2) applies equally to the employer’s and employee’s claims; and (3) requires the employer to give advance notice to the employee before the modification or termination is effective. In this case, the Dispute Resolution Policy complied with the first two criteria, but failed the third because it permitted the employer to modify the policy without providing advance notice to the employee. The arbitration provision was therefore unenforceable.

This case illustrates the importance of careful drafting of arbitration provisions to ensure their enforceability.

Henry & Sons Construction Co., Inc. v. Campos , 510 S.W.3d 689 (Tex. App.–Corpus Christi Oct. 1, 2016, pet. denied).


The attached information is general in nature, is presented for discussion purposes only, and may not reflect current legal developments, nor fully explore all potential areas of this topic. The information included should not be relied upon or construed as legal advice and is not a substitute for obtaining legal advice from an attorney. No legal representation is undertaken or implied with the distribution of this information.