Author: chris

Pitfalls of Contractor’s Consents

by Michael Lilly

October 23, 2020

You’ve negotiated your Agreement with the Owner and you’ve started to mobilize.  The Owner is still trying to close on its construction financing – but they are “close.”  You receive a call from the Owner’s representative, the representative says “closing is scheduled for tomorrow, the lender just needs you to sign a document before they will fund, it’s no big deal, I’ll send it over to you right now – just sign it and get it to me as soon as possible.”  Finally!  The project is about to start!  You receive the document, a Contractor’s Consent, and you are inclined to just sign it and get to work. Should you?

What Is It Really?

In virtually every construction loan transaction with a commercial lender, the lender will require the borrower (owner) to assign the borrower’s interest in its construction contract with the general contractor, to the lender as additional collateral. This document is generally referred to simply as an Assignment of Construction Contract or Collateral Assignment of Construction Contract.  In connection with the borrower’s delivery of the Assignment of the Construction Contract, the lender will generally require that the borrower’s general contractor consent in writing to such assignment.  Thus, a Contractor’s Consent is first and foremost the general contractor’s written consent to the borrower’s collateral assignment of the construction contract.  However, lenders will ordinarily include multiple additional terms and concepts that the contractor should consider.

THE MAJOR ISSUES

If the Lender elects to assume the Construction Contract, when will it happen?

In the event of a borrower default under the loan documents, nearly every Contractor’s Consent sets forth a procedure allowing for the lender to either (i) terminate the project, or (ii) to assume the construction contract and take-over the project. Often, however, the consent will not require that the lender makes its choice, to either terminate or assume the construction contract, within a specific period of time.  Thus, should the lender declare the borrower in default, what is the general contractor to do?  The short answer is – the general contractor must stop work and wait on the lender to make a decision.  This will, in the very least, result in additional de-mobilization costs and potentially significant re-mobilization costs (should the lender elect to proceed with the contract).

What can the general contractor do?  Negotiate a specific time frame for the lender to make its election to terminate or assume the construction contract.

Lender consent to Change Orders.

Often Contractor’s Consents will include a specific obligation that the borrower and contractor obtain the Lender’s prior consent to any Change Orders.  The result – an already time consuming and often difficult change order process become infinitely more time consuming and difficult, as lenders are typically reluctant to agree to changes in cost and scope for a project.

Tracking and logging COVID-19 expenses

April 10, 2020

Time is crucial in every construction project. Delay costs, liquidated damages, back charges, and additional labor hours for slow and untimely completion can ruin profit margins and lead to serious problems down the road. COVID-19, if it hasn’t already, will inevitably create costs and delays, none of which could have been negotiated or realized when an original construction contract was formed. Examples of these costs and delays include:

  • Government mandated shutdown of jobsites
  • Worker unavailability
  • Costs for extra personal protection equipment
  • Health inspection fees
  • Material expense increases for supply chain disruption and delays in production
  • Increased equipment requirements to keep workers busy but apart from each other
  • Technology costs to provide remote meeting capabilities for management, owners, architects, and contractors
  • Labor expenses after jobsite shutdowns
  • Delays and increased inspection costs

Understanding the rights and responsibilities in a construction contract is vitally important for successfully recovering these costs and delays. For example, many construction contracts contain force majeure clauses that provide time extensions to contractors for “acts of god” or for “other causes beyond the contractor’s control” but often require timely notices and ongoing reporting and due diligence. Further, change orders can provide a means of recovering losses but regularly the contract requires the costs and delays be contemporaneously identified and quantifiable. Regardless of the tool used to mitigate losses, consistent and contemporaneous tracking and detailing is key.

Here are three techniques contractors can use to track their COVID-19 related costs and delays: (1) create a new general ledger account or job; (2) create new costs codes for tracking COVID-19 related costs on a per job basis; and (3) encourage superintendents and those familiar with the jobsite to keep notes regarding additional, new restrictions implemented to slow the pandemic’s spread.

When creating cost codes for COVID-19, it is also important to break the code out to specifically identify the labor and material attached to the code. By removing ambiguities, the contractor preserves its claim, eases its later burden when proving its delays, and takes away an easy and available argument for would-be challengers.

By implementing a system(s) for tracking the inevitable delays now, contractors put themselves in the best position to recover later. If you need help understanding the forms of recovery, the implications in a contract, or have any other questions related to COVID-19’s effect on the construction industry, contact us so we can help you continue business.

 

COVID-19 and the Construction Industry

April 1, 2020

Good news for the construction industry in Texas.

On March 31, 2020, Governor Abbott signed Executive Order GA 14 which clarifies what services are considered essential services during the COVID-19 pandemic. A copy of the Executive Order can be found here:

https://gov.texas.gov/uploads/files/press/EO-GA-14_Statewide_Essential_Service_and_Activity_COVID-19_IMAGE_03-31-2020.pdf

Fortunately, various construction activities are now included in the definition of essential services and companies may continue, as long as they adhere to the requirements for operating an essential service. This Executive Order supersedes any conflicting local orders, which means that we now have a standard definition which governs construction projects throughout the state.

Under the Governor’s Executive Order, Texas will follow the list of “essential services” as defined by the US Department of Homeland Security in its most recent Guidance on Essential Critical Infrastructure Workforce dated March 28, 2020. This updated Guidance adds Commercial Facilities and Residential Facilities to the list of essential services:

Commercial Facilities includes workers who support the supply chain of building materials from production through application/installation, including cabinetry, fixtures, doors, cement, hardware, plumbing, electrical, heating/cooling, refrigeration, appliances, paint/coatings, and employees who provide services that enable repair materials and equipment for essential functions.

Residential Facilities includes workers performing housing construction related activities and workers supporting the construction of housing.

To review the complete March 28, 2020 list of Essential Critical Infrastructure Workforce, follow this link:

https://www.cisa.gov/publication/guidance-essential-critical-infrastructure-workforce#download

Please note that as the country responds to the virus, local and federal regulations continue to change. Contact us if you need guidance on how the latest rules apply to your construction and real estate projects, and how to comply with the rules regarding operating an essential service.

Liquidated damages are unenforceable if they significantly exceed actual damages

March 27, 2020

The Texas Supreme Court recently clarified the law governing enforcement of liquidated-damage provisions in contracts. Even if the liquidated-damage provision was enforceable at the time the parties formed the contract, a court still may compare the actual damages suffered to the liquidated damages to determine whether the provision should still be enforced.

A liquidated-damage provision in a contract sets a fixed amount or formula to be used to calculate damages from a breach. If it is enforced, then the party enforcing the contract will not be required to prove its actual damages from the other party’s breach.

To enforce a liquidated-damage provision, the party enforcing the contract must prove that, at the time the contract was formed: (1) the harm anticipated from a breach was difficult to predict; and (2) the liquidated damage amount was a reasonable estimate of the harm.

The Court explained that a liquidated-damage provision might still be unenforceable even if these two elements are proven. The party breaching the contract may show that the liquidated damages were significantly higher than the actual damages caused by the breach. If so, the liquidated-damage provision constitutes a punishment or penalty, and therefore is unenforceable. In that instance, the party enforcing the contract may recover only its actual damages.

In construction contracts between owners and contractors, liquidated-damage provisions are often used to address damages caused by delays to completion of the project. Applying the Court’s reasoning to these contracts, the owner must show that at the time the contract was signed, it was difficult to estimate the damage that would be caused by a delay. The owner also must provide evidence to show that the amount or formula used for the liquidated damages was a reasonable estimate of the damages. If the owner makes these showings, the contractor would bear the burden to show that the owner’s actual damages resulting from the delays were significantly less than the liquidated damages in order to avoid enforcement of the provision.

Atrium Med. Center, LP v. Houston Red C LLC d/b/a ImageFIRST Healthcare Laundry Specialists, — S.W.3d —, No. 18-0228 (Tex. Feb. 7, 2020).

Contractor Sentenced to Three Years in Prison Following Employee Death

December 17, 2019

On November 3, 2017, Gerardo Juarez began his first day of work for James Coon Construction. The next day Juarez fell from a roof he was repairing, suffering injuries which later proved fatal. Following the accident, James Coon, owner of Coon Construction, pled guilty to involuntary manslaughter and workers’ compensation fraud and was sentenced to three years in prison.

Coon Construction was hired to repair a roof at a three-story apartment complex in Akron, Ohio. New-hire Juarez was placed on the crew tasked with making the repairs. After two years of criminal litigation following the accident, it was discovered Coon did not provide Juarez with safety equipment adequate for work performed at such height, which is a felony. Evidence suggested that his fall could have been prevented had he been wearing adequate fall protection. Coon also failed to provide workers’ compensation coverage, another felony.

Criminal prosecution for failure to provide a safe environment for employees is an increasing trend. Federal law requires employers to instruct each employee in the recognition and avoidance of unsafe conditions and the systems applicable to his or her work environment to control any hazards or other exposure to illness or injury.  Failure to follow applicable safety laws and provide workers’ compensation insurance as required by law can expose employers to possible criminal action.

Reporting Fraudulent Information to the Workers’ Compensation Board Results in Criminal Charges

December 12, 2019

Lying to the workers’ compensation authorities in order to reduce premiums can result in criminal charges. On September 5, 2019, Manhattan D.A. and other New York state investigators announced the indictment of unlicensed labor broker Salvador Almonte and insurance broker Steven Asvasadourian on multiple fraud charges after they were caught in a scheme which included lying to the New York State Insurance Fund about the status and work of construction employees. Almonte and his accomplice underreported the size of Almonte’s companies and lied to insurance carriers about the type of work being performed to evade more than $1 million dollars in insurance premiums. In doing so, the pair left more than one hundred construction workers underinsured. In one instance, Almonte claimed that workers he sent to perform dangerous tasks on high-rise construction projects were cleaners, thereby drastically lowering the premium rates he paid.  Investigators found that more than 12 of Almonte’s workers have been injured in the past four years, one fatally, and Almonte refused to acknowledge to the New York Workers’ Compensation Board that he was their employer.

While this case illustrates extreme examples of fraud in the workers’ compensation system, the exposure to potential criminal liability for fraudulently reporting information to the workers’ compensation board is a legitimate, serious consequence of such actions.

Property Owners Afforded Extra Protection from Claims of Independent Contractors

December 10, 2019

The Supreme Court of Texas has extended protections for property owners to claims for negligent hiring.

The case involved an oil field worker who died from injuries he sustained while working on a drill site. His estate sued Endeavor Energy Resources, property owner, claiming Endeavor negligently hired the injured person’s employer. Endeavor argued Chapter 95 of the Texas Civil Practice and Remedies Code barred the claims. Chapter 95 protects property owners from liability for injuries to independent contractors who modify improvements to real property assuming the property owner does not actually know about the dangerous condition which caused the injury.

The Texas Supreme Court ruled in favor of Endeavor by extending it Chapter 95 protections. In doing so, the Court recognized negligent hiring involves two instances of negligence: the hiring itself and the negligent act. The Court concluded the negligent act alleged in this instance “arose from the use” of an improvement to real property and therefore Endeavor should be protected by the statute. Consequently, the Court reversed the court of appeals and broadened Chapter 95’s purview to exclude claims for negligent hiring against property owners.

This case is important for property owners as it limits the causes of action that can be asserted against them by parties injured on their property. Further, it shows the Court’s commitment to preserving the broad protection afforded by this statute.

http://www.txcourts.gov/media/1444025/170925.pdf

Texas Court Says AS-IS Clause Possibly Unenforceable

October 7, 2019

The Third District Court of Appeals in Austin recently held that an as-is clause in a purchase contract may be unenforceable. The Court found that there was a question of fact as to whether or not the seller fraudulently induced the purchaser to agree to the as-is clause by failing to disclose certain information about the property.

The case involved the sale of a residential property where the seller had owned the property for over 30 years and was well-aware of the condition and history of the property.  Seller provided a Seller’s Disclosure Notice that indicated there were no previous fires and no known encroachments on the property. In fact, there had been a fire in 2007 and the neighbor’s fence was encroaching on the property. The purchaser had an inspection performed, which identified several defects in the property, but the inspection did not reveal the previous fire or the encroachment of the neighbor’s fence. After the inspection, the purchaser proceeded to closing.

Two years later, the purchaser filed suit against the seller regarding the condition of the property. The purchaser argued that had the defects been disclosed, she would not have entered into the as-is purchase contract. The Court held that the purchaser had sufficient evidence to support her claim that she was fraudulently induced to enter into the as-is contract due to the seller’s failure to disclose the fire and the encroachment.

Therefore, while an as-is clause will generally negate a claim against the seller regarding the condition of the property, this Court seems to require a seller to disclose known defects about the property in order to take advantage of the protection of the as-is clause.  It is unknown if this rationale would translate to a commercial contract situation where the buyer is deemed to be more sophisticated.

Ivy v. Garcia, 2019 Tex. App. LEXIS 6962 (3rd Dist. 2019)

Insurance claims can be denied completely unless the owner or contractor can show how much damage resulted from causes covered under the policy

October 17, 2018

An appeals court recently agreed with an insurance company that coverage was properly denied because its policyholder did not present enough evidence showing how much damage occurred during the period covered by its insurance policy. This opinion could have broader implications for project owners and contractors, who may need to make insurance claims for damage resulting from both covered and excluded causes.

In the case, a hotel owner made a claim under its 2012-2013 insurance policy for property damage to its roof caused by hailstorms. There had been multiple hailstorms before and during the 2012-2013 insurance policy period. The insurance carrier obtained a judgment declaring that no coverage existed, which was affirmed on appeal.

In Texas, an insurance carrier is only required to pay for losses covered by the policy. The policyholder bears the burden to prove that its claims are covered by the policy. If property damage was caused by both covered and excluded perils, then the policyholder must present evidence sufficient to allow the court to reasonably allocate the damage.

Here, the hotel owner claimed that some of the hail damage was caused by storms which occurred during the 2012-2013 insurance policy period, but the evidence showed that some or all of the damage could have been caused by storms before the policy period started. The owner’s expert admitted that there was no way to tell which storms caused or contributed to the damage, or how much damage was caused by storms during the policy period. Under these circumstances, the court sided with the insurance company and allowed it to deny the claim completely.

The issues raised in this case can arise on construction projects. Project owners or contractors may make insurance claims for property damage which occurred over an extended period of time or which may have resulted from multiple causes. This situation can be further complicated when multiple insurance policies are involved.

For these reasons, when preparing insurance claims, owners and contractors should take care to gather evidence which would permit a reasonable determination of what damage was (or was not) caused or worsened by the perils covered under the applicable insurance policy.

Certain Underwriters at Lloyd’s of London v. Lowen Valley View, LLC, 892 F.3d 167  (5th Cir. 2018).

Liquidated-damage provision enforced by Houston Court of Appeals

April 18, 2018

The First District Court of Appeals in Houston recently enforced a liquidated-damage provision. The opinion analyzes whether the liquidated damages constituted an unenforceable “penalty” under Texas law.

A liquidated-damage provision permits a party enforcing a contract to recover damages based on an amount or formula agreed upon in advance. However, the breaching party may invalidate the liquidated-damage provision if it demonstrates that it is a penalty for noncompliance rather than “just compensation” for the actual loss caused. A liquidated-damage provision is enforceable (and is not a penalty) if (1) the harm caused by the breach is incapable or difficult of estimation; and (2) the amount of liquidated damages is a reasonable forecast of just compensation. These elements are evaluated from the parties’ perspective at the time the contract was formed. The amount of actual damages incurred is also relevant; if the actual damages are far less than the liquidated damages, then the liquidated damages might not be a reasonable forecast.

In this case, the court found that the harm caused by the breach was difficult to estimate due to the inherent fluctuations of the luxury-condominium real-estate market, and that the parties reasonably estimated the damages.

Belfiore Developers, LLP v. Sampieri, No. 01-17-00847-CV (Tex. App.—Houston [1st Dist.] Mar. 6, 2018, no pet. h.).

Texas Supreme Court refuses to look beyond the contract language to determine a party’s obligations

April 3, 2018

The Texas Supreme Court recently declined to look beyond an agreement’s clear language to trigger one party’s obligations. This was despite the other party’s insistence that pre-contract negotiations proved that the obligations had to be triggered. As a result, the other party did not get the performance that it thought was included in its bargain.

In URI, Inc. v. Kleberg County, the parties entered into an agreement in which URI could resume its uranium-mining operations, provided URI restored water quality in certain wells. At the time the agreement was formed, data suggested that multiple wells would meet the criteria to qualify for restoration. However, later data showed that no wells met the criteria. Kleberg County argued that URI should be required to restore wells based on the earlier data and not the later data.

The Texas Supreme Court disagreed, finding that the agreement was unambiguous as to URI’s obligations. Under the parol-evidence rule, facts and circumstances surrounding a unambiguous contract’s execution can be used to determine the context and meaning of the contract language, but cannot be used to augment, alter, or contradict the contract’s terms. Here, the parties’ expectation that the data would show that some wells’ water was suitable for specified uses before mining was extrinsic evidence that contradicted the agreement’s language requiring actual data showing that the water met the criteria to trigger URI’s restoration obligation. The Court therefore determined the parties’ intent based on the unambiguous language in the agreement, even though that language excused URI from performing any well restorations prior to resuming its mining activities and despite Kleberg County’s expectations.

This case illustrates the importance of carefully drafting contract provisions, particularly when one party’s obligations are conditioned on facts that will not be fully known until a later date.

URI, Inc. v. Kleberg Cty., No. 16-0336, 2018 Tex. LEXIS 253 (Tex. Mar. 23, 2018).

This blog entry was written by Eric Etheridge and Jason Cagle.

2017 Legislative Updates

January 23, 2018

In Texas, the 85th Legislature enacted several important pieces of legislation relevant to construction. Overall, only 18.3% or 1,211 total bills, passed the Texas Legislature and 50 bills were vetoed by Gov. Greg Abbott. Among other budgetary items, funding for schools was reduced by approximately $1.1 billion and about $2 billion was taken from highway projects.

While high-profile reforms such as lien-law modernization and right-to-repair failed to pass, several important pieces of construction legislation did pass:

SB 807 – Modified Tex. Bus. & Comm. Code § 272.0001, 272.001. Effective Sept. 1, 2017.

The Texas Business & Commerce Code allows a construction contractor working on a project in Texas to void provisions in a construction contract selecting another state’s law or requiring litigation in an out-of-state venue.

SB 807 expanded the ability to void out-of-state choice-of-law and venue provisions to include architect and engineers. It also expanded the statute to include contracts “collateral to or affecting the construction contract.”

HB 3021 – Modified Tex. Govt. Code § 2254.0031. Effective Sept. 1, 2017.

Engineers and architects can no longer be required to indemnify or defend a state governmental entity for claims or liabilities resulting from the negligent acts or omissions of the entity or its employees.

HB 3270 – Modified Tex. Education Code § 22.08341. Effective Sept. 1, 2017.

The Texas Education Code requires background checks for the employees of contractors and subcontractors working on public schools. However, HB 3270 amends the Education Code to exempt employees not working around children. Stated another way, if children are not present, background checks will not be required.

SB 1289 – Modified Tex. Govt. Code § 2252.202. Effective Sept. 1, 2017.

Iron and steel used on state projects must be from the United States. However, there are several exceptions:

  1. If there are insufficient quantities of US iron or steel;
  2. If US iron or steel isn’t reasonably available;
  3. If the quality of U.S. steel is insufficient;
  4. If there is a more than 20% price increase;
  5. If buying US iron or steel is inconsistent with the public interest; and,
  6. Electrical components are not considered to be iron or steel products.

In addition, political subdivisions such as cities and counties are exempt.

Partial performance can overcome the absence of a written contract

November 15, 2017

In Thomas v. Miller, the lack of a written contract became the focal point of the dispute. Leorris Thomas verbally agreed to sell two acres of land to the Millers in exchange for payment of the amount remaining on Thomas’s mortgage. The Millers paid Thomas’s mortgage from 2004 to 2010 and made improvements to the property during that time. However, continual threats from Thomas caused the Millers to abandon the property in 2009. Thomas subsequently sold it to a third party.

The Millers sued and won their lawsuit against Thomas for breach of contract. Thomas appealed claiming the oral contract was unenforceable under the statute of frauds, which considers certain agreements unenforceable for a variety of reasons, including when they are not in writing.

The appellate court found the partial performance by the Millers was sufficient to trigger an exception to a statutory requirement for the contract to be in writing. It also found that refusing to enforce the contract would amount to a virtual fraud. The Millers relied on the contract to their substantial detriment, had no adequate remedy, and Thomas would reap an unearned benefit. The appellate court therefore affirmed the trial court’s ruling and enforced the oral contract.

Thomas v. Miller , 500 S.W.3d 601 (Tex. App.—Texarkana 2016, no pet.).

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.

Construction contracts can incorporate documents executed by the parties without describing them with specificity

November 15, 2017

Construction contracts often “incorporate by reference” other documents that provide additional terms or further define a party’s obligations. However, the specificity required when describing the document differs depending on whether the document has been executed by the parties. As discussed in a recent case, if the parties execute the document to be incorporated, courts apply less-stringent standards on how the document must be identified in the contract.

A contractor, Dyonyx, entered into an agreement with a consultant, Castillo, to provide consulting services related to a project for the City of Houston. Under the agreement, the contractor would issue separate purchase orders specifying the consultant services during a five-year contract term. The contractor could terminate the agreement early if the City terminated the primary contract. The contractor and the consultant signed an initial purchase order for services to be provided during the first year of the contract term. Four months later, the City terminated its agreement with the contractor. The contractor then terminated its agreement and its purchase order with the consultant.

The consultant sued the contractor for breach of contract. It argued that the purchase order was not subject to the termination provisions in the agreement because the purchase order did not specifically incorporate the agreement. The court of appeals rejected this argument. Both parties executed the agreement and the purchase order, they referenced each other, and they related to the same transaction. Thus, the agreement and the purchase order had to be read together to determine the parties’ intent and to give effect to the terms governing their respective obligations and rights. These rights included the contractor’s right to terminate the contract early. Since the contractor properly terminated the consultant agreement, any purchase orders issued pursuant to that agreement also terminated without constituting a breach of the contract.

Of course, if you intend to incorporate documents into another agreement, you should make the intent clear in the agreement. However, if you have two or more documents, executed by the parties, which relate to the same project or subject matter, Texas courts will likely read them together to determine the parties’ intent.

Castillo Information Technology Srvcs. v. Dyonyx, LP , 2017 Tex. App. LEXIS 7182, Case No. 01-16-00649-CV (Tex. App.—Houston [1st Dist.] Aug. 1, 2017, no pet. h.).

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.

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.

Pay attention to the signature block and guaranty provisions when signing a contract

May 31, 2017

The president of a builder signed a contract, but (1) neglected to put the full legal name of his business in the signature block and (2) a provision of the contract stated that “the obligations under this agreement are also a personal obligation of the builder representative signing below.” After the builder defaulted, the owner sued the president of the builder as an individual.

The Court ruled that the president was not individually liable because (1) the contract recited the parties as the legal entities, not as the president, individually, (2) the word, “president” appeared after the signature of the builder’s president, and (3) the personal guarantee section referred to the “builder’s representative” and not a specific individual.

The lesson here is to be very clear in the signature block to avoid disputes such as this. While eventually the builder’s president was found not personally liable, this was after a lengthy and expensive court proceeding.

Mission Grove, L.P. v. Hall, 503 S.W. 3d 546 (Tex. App.—Houston [14th. Dist.] 2016, no pet.).

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.

Court narrowly construes law limiting contract-notice requirements

May 31, 2017

Under the Texas Civil Practice & Remedies Code, “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.

In a recent case, an owner sought to enforce a provision in a construction contract which stipulated that the contractor had to initiate a “claim” against the owner within seven days of the event. The Court ruled in favor of the owner, holding that the parties’ freedom to contract should be respected. The Court drew a distinction between giving notice of a “claim” and giving notice of a “claim for damages,” reasoning that a claim under the provision at issue was just giving notice of facts giving rise to a claim for damage. A claim for damages, in contrast was a cause of action (such as a claim for breach of contract).

As such, depending on the contractual language at issue, this statute might not provide protection from short-notice periods in construction contracts. The statute is more likely to apply if the language requires suit to be filed within a certain time period, or otherwise equates a claim with a cause of action.

El Paso Cty. v. Sunlight Enters. Co., 504 S.W. 3d 922 (Tex. App.—El Paso 2016, no pet.).

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.

Contractor’s officer successfully defends against claims for misapplication of trust funds

May 17, 2017

The U.S. Court of Appeals for the Fifth Circuit recently analyzed a defense against a subcontractor’s claims asserted under the Texas Construction Trust Fund Act. Under the Act, contractors can be held liable as trustees for misapplication of payments received for the benefit of downstream contractors. Tex. Prop. Code § 162.031 (a). Owners, officers, and agents of contractors who have control or direction of trust funds can also be held individually liable as trustees. Id. § 162.002. However, the trustees can defend against the claims by showing that the trust funds were used to pay the contractor’s actual expenses directly related to the construction of the improvement. Id. § 16.031(b).

In this case, a contractor applied for and received funds for a construction project that included funds requested by a subcontractor. The subcontractor never received the funds and asserted claims against the contractor’s officer individually for misapplication of funds under the Act. The contractor’s officer showed that the funds at issue were spent on the contractor’s salaries, overhead, and supervision for the project. The Fifth Circuit found this showing was sufficient to support his defense and to defeat the subcontractor’s claims under the Act.

Monaco v. TAG Invs., Ltd. (In re Monaco), 839 F. 3d 413 (5th Cir. 2016).

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