Federal Government Issues Procedures for “Corporate Transparency”

by Hunter Taylor

March 6, 2023

In an effort to hedge against ill-dealings and potential foreign security threats in American business entities, Congress enacted the Corporate Transparency Act (“CTA”) in 2021 with the intent of increasing the availability of information regarding corporate ownership. Recently, efforts have been made by the Financial Crimes Enforcement Network (“FinCEN”) to establish enforcement mechanisms which serve to give the CTA “teeth.” To this end, FinCEN recently issued a Final Ruling, as further supplemented, which outlines enforcement procedures and disclosure requirements associated with the CTA. This ruling, in short, requires certain non-exempt entities to timely file reports identifying and providing information about their owners and business affairs above and beyond what has ever been previously required. 

The ownership disclosure requirements set forth in the CTA and the Final Ruling will change the way that business owners plan for the future, especially with regard to non-exempt complex and multi-level corporate structures which are involved in more than one industry. For this reason, each business owner, manager, principal, and officer needs to be aware of the potential implications which are associated with these lingering disclosure requirements and plan accordingly.

Disclosure Rules Will Affect Your Business

The basic consequence to each business owner which does not qualify for an exemption (each, a “Reporting Company”) involves disclosure of its ownership to a government authority, itemized down to what the law defines as a “Beneficial Owner”. This disclosure will require (i) the entities full name, (ii) any trade or DBA name, (iii) the entity’s street address, (iv) State or country (if foreign) of formation, and (v) the entities Taxpayer Identification Number (“TIN”). Additionally, each “Beneficial Owner” of each Reporting Company will be required to disclose their (i) legal name, (ii) date of birth, (iii) current address, (iv) a unique identification number from a passport, state driver’s license, or other government-issued identification document, and (v) an image of that document. 

The Final Rule defines a Beneficial Owner as any individual who, directly or indirectly, either (i) exercises “substantial control” over a Reporting Company, or (ii) owns or controls at least 25% of the ownership interests of a Reporting Company. The Final Rule sets forth that an individual exercises “substantial control” if they serve as a senior officer, have authority over appointment or removal of officers or board members, or have “substantial influence” over important matters of the Reporting Company (among others).

Applicability

Unless an entity qualifies for an exemption, any entity that is a corporation, limited liability partnership, or other entity registered with the Texas Secretary of State will be required to file a Beneficial Ownership Information Report. To the extent that an entity is either (i) publicly traded, or (ii) is a “large operating company” with more than 20 employees and gross receipts in excess of $5 million, an exemption may be available. However, unless an entity is able to qualify for such an exemption, disclosure of its “Beneficial Owners” will be required.

Timelines

All new non-exempt entities formed on or after January 1, 2024, will be required to file a report with FinCEN detailing its ownership and other required business-related information within thirty (30) days of formation. All applicable entities formed before this date will be required to file a report with the same or similar information on or before January 1, 2025.

Access to Information

The CTA authorizes FinCEN to maintain a database of the information disclosed in Beneficial Ownership Information Reports, and to disclose this information to US Government Agencies, certain foreign agencies and authorized persons, and financial institutions using the information for KYC purposes, among others.

Noncompliance

While the penalties actually enforced by FinCEN are unclear pending the CTA’s implementation, the law provides criminal penalties including fines of up to $10,000 or up to two years in prison when a business entity willfully fails to report complete or updated information or willfully provides false or fraudulent information. Accordingly, the timely filing of accurate reports is paramount to continued compliance.

Key Takeaways

Beginning on January 1, 2024, a vast majority of business entities will be required to disclose information regarding their ownership to the government. To discuss how these compliance and disclosure laws could impact your business, please consult with one of our attorneys at (972) 392-8900.

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This update should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Further, this update shall not create a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult an attorney regarding the contents hereof.

Are Your Arbitration Provisions Enforceable?

by Jason Cagle

January 24, 2023

It is common for construction contracts to contain provisions requiring the parties to submit any claims arising out of the contracts to arbitration. Courts tend to enforce such provisions vigorously. However, there are certain situations where courts will decline to enforce arbitration provisions. Three recent cases from the Texas courts illustrate some of these situations.

The first situation involves an unsuccessful attempt to enforce an arbitration provision against the employee of a subcontractor. V3 Constr. Co., LLC v. Butler, 2021 Tex. App. LEXIS 1152 (Tex. App.—Fort Worth Feb. 11, 2021, pet. denied). The general contractor hired a testing company to perform inspections on the jobsite. The parties’ subcontract contained a broad arbitration provision. While working on the jobsite, the testing company’s employee fell off a scaffold and was injured. The employee sued the contractor, claiming its negligence caused his injuries. The general contractor asked the court to compel the employee to submit his claims to arbitration. The court denied the request. Although the testing company signed the arbitration agreement, its employee had not. There are ways in which non-signatories to an arbitration agreement can be compelled to arbitrate, but they did not apply to the employee’s personal-injury claims. For example, the employee’s claims were not based on a right under the subcontract, but rather the contractor’s alleged failure to maintain a safe jobsite under common law. The take-away from this case is that arbitration provisions might not be enforceable against individuals that did not sign the agreement, even if they work for companies that did sign the agreement. It is important to have other measures in place to reduce the risk of liability for such claims, such as obtaining liability insurance.

The second situation involves a company’s failure to bind a customer with an arbitration agreement sent after the transaction had occurred. Nationwide Coin & Bullion Res., Inc. v. Ciarlone, 2022 Tex. App. LEXIS 1721 (Tex. App.—Houston [1st Dist.] Mar. 15, 2022, no pet. h.). A representative of a company which sells coins spoke over the phone with a customer about making a purchase. The representative and the customer agreed to the price of the coins, the customer mailed the company a check, and the company had the coins delivered. The package included an invoice with an arbitration provision on the back. When a dispute arose concerning the coins, the customer filed a lawsuit and the company attempted to enforce the arbitration provision. The court rejected this attempt, finding that the customer had not agreed to arbitrate because the arbitration agreement was sent to him after the transaction had been completed. 

This case provides a situation similar to one often found in the construction industry: transactions with suppliers which send purchase orders or invoices with new terms when they deliver the materials. Whether or not the new terms are binding on the party receiving them often depends on a complex analysis of the parties’ conduct and applicable law. For example, had the coin customer been a “merchant” as defined under the Uniform Commercial Code, the terms of the invoice with the arbitration agreement might have been binding on him unless he communicated an objection to the company. Tex. Bus. & Com. Code § 2.207(b). If the new terms are not binding, however, they will not be enforced even if they contain an arbitration provision.

In the third situation, the documents comprising the parties’ agreement contained not one, but two arbitration provisions. Unfortunately, conflicting language in the provisions made both of them unenforceable. Links Constr. v. United Structures of Am., 2022 Tex. App. LEXIS 2405 (Tex. App.—Houston [14th Dist.] Apr. 14, 2022, no pet. h.). A general contractor hired a roofing subcontractor to perform work on a project. The parties executed a purchase order, which attached and incorporated the subcontractor’s quotation. The purchase order had a provision which required mandatory arbitration. The quotation had an arbitration provision as well, but it gave the subcontractor the sole option to decide whether the claims would be subject to arbitration. The subcontractor later filed a lawsuit against the general contractor, which moved to compel arbitration. The court denied the motion. It explained that the conflicting terms of the arbitration agreements showed that the parties had not had a “meeting of the minds” where they both reached the same understanding of their agreement. As a result, they never formed an arbitration agreement and the lawsuit could proceed. 

Construction contracts sometimes attach or reference quotations or other documents. Inconsistent terms in the attached documents can create problems with interpretation and enforcement of the subcontract’s provisions. This was a worst-case scenario, where a subcontract provision which would otherwise be broadly enforced (arbitration) was rendered unenforceable by inconsistent language in the attachment. Contractors should scrutinize any attachments closely for inconsistent language. They should also include a subcontract provision stating that, in the event there is a conflict with an attachment, the language in the subcontract governs. 

For more information on how these arbitration developments could impact your business, please consult with one of our attorneys at (972) 392-8900.

Three Key Contract Terms in a Volatile Market

by J.P. Neyland

September 14, 2022

Since March 2020, the construction industry has seen unprecedented volatility in its material and labor markets. The costs of key materials have risen substantially over pre-pandemic levels, and supply-chain delays have made it considerably more difficult to estimate lead times. In some cases, costs have more than doubled in just two years. And though these costs have been felt throughout the industry, they have proven costliest to those parties who failed to address them ahead of time—by contract.

Owners and contractors alike have grown increasingly concerned about the construction industry’s volatile material and labor markets and are looking to address these issues upfront. Prices for necessary materials and labor continue to fluctuate, disrupting the bidding process and making it harder to negotiate and execute contracts—particularly those with a stipulated sum or a guaranteed maximum price. And on top of inflation, supply chain issues have created substantial uncertainty: it’s hard for anyone to say whether labor and materials will be available months or years down the line, much less how much they will cost.  

Under these conditions, it’s important for both owners and contractors to pay special attention to the contracting phase of any new project. It is not enough to rely on standard-form contracts, most of which do not sufficiently address the price fluctuations and unavoidable delays that plague today’s construction industry. Fortunately, good legal counsel can provide significant protection from market fluctuations and supply-chain issues. The following three drafting techniques are particularly well suited to addressing these risks in the current environment. 

  1. Express Provisions:

The most conspicuous way to address volatility is to expressly state whether the contractor is entitled to an increase in the contract sum or contract time as a result of price escalations or delays in obtaining labor and materials. Of course, given the risks they pose to all parties, these express provisions are often the subject of intense—and sometimes acrimonious—negotiation. Fortunately, there are a number of ways a carefully drafted contract can regulate these issues to all parties’ satisfaction, including: 

  • limits on the total increase in price and time for performance; 
  • limits on the percentage increase in cost of materials;
  • caps on the total amount of increase in the contract sum or contract time;
  • duties to mitigate;
  • notice obligations; and
  • a threshold of change in cost or time that must be met before an adjustment to the contract sum or contract time is permitted. 

The best way to address these issues in the contract will vary according to the structure of the project. But by discussing their concerns openly and collaborating on a solution, parties can typically agree on a method to limit their exposure. 

  1. Exceptions:

Another way to address volatility is to include specific exceptions related to market fluctuations and supply chain issues. As mentioned above, standard industry forms commonly charge the contractor with responsibility for all costs of materials, labor, and equipment. But contractors can avoid excessive exposure by adding language that “carves out” increases in the cost of materials or delays in contract performance caused by market fluctuations and conditions, governmental actions, supply chain issues, or other causes beyond the parties’ control. These “carve-outs” exclude such costs from the contractor’s responsibility and, when triggered, credit the contractor for the additional costs of price hikes and delays.

  1. Allowances:

Finally, parties can use contractual allowances to mitigate fluctuations in the price and availability of supplies. In general, a construction allowance is an estimated amount included in an initial contract sum as a placeholder until the exact pricing of the material or labor is known. If the actual cost of the material or labor exceeds the allowance, the contract requires the parties to execute a change order to increase the contract sum by the amount of the excess cost. 

As with the express provisions discussed above, the potential exposure from an allowance can easily exceed seven figures when there’s a sudden increase in the price of a material, such as lumber. Parties must also consider the potential for triggering liquidated damages provisions due to delays that are largely outside their control. It is therefore essential for both owners and contractors to consult experienced attorneys who can thoroughly review and negotiate their contracts with an eye toward minimizing the risks of the current market. 

The construction-law specialists at Griffith Davison have extensive experience negotiating contracts in all sectors of the industry and can help you navigate this volatile market. To discuss these issues in more detail or to have a legal professional analyze or draft necessary contractual terms, please consult with one of our attorneys at (972) 392-8900. 

Texas Legislature Relieves Contractors of Liability for Design Defects—With a Few Caveats

by Tatianna Brannen

September 7, 2022

Should contractors be on the hook for defective designs that they didn’t create? For more than a century, the Texas Supreme Court answered that question with a “yes,” placing Texas among the small minority of states that expose contractors to liability for defective plans provided to them by the project owner. But the Legislature has now taken matters into its own hands: its latest addition to the Business & Commerce Code relieves builders of liability for defective plans and brings the Lone Star State into line with the national consensus. As with any law, there are exceptions, but the experienced construction attorneys at Griffith Davison are here to help you navigate them. So, what does the new law say, and what does it mean for you?

Under the newly added Chapter 59 of the Texas Business & Commerce Code, contractors are no longer responsible for the consequences of design defects. Tex. Bus. & Com. Code § 59.051(a). The law also ensures that a contractor need not (indeed, may not) “warranty the accuracy, adequacy, sufficiency, or suitability of plans, specifications, or other design documents provided to the contractor by” anyone other than the contractor’s own agent or associate. Id.

Chapter 59 represents a sea change in Texas’s contractor-liability law. Since 1907, the so-called Lonergan Rule has left contractors responsible for defects in design plans and specifications—even where the plans were made by a separate design professional hired by the owner. See Lonergan v. San Antonio Loan & Trust Co., 104 S.W. 1061 (Tex. 1907). Chapter 59’s new regime frees contractors from the risk of legal liability for plans they had no part in creating. Builders can now rely on plans and specifications given to them by project owners without worrying about being sued for flaws in those designs. The new rule does have some important caveats, though. All actors in the construction industry should be aware of these three qualifications:  

  1. Chapter 59 obliges contractors to disclose any design defect they learn about. Specifically, a contractor must, “within a reasonable time,” inform the other party to the contract about “any known defect in the plans, specifications, or other design documents that is discovered by the contractor, or that reasonably should have been discovered by the contractor using ordinary diligence, before or during construction.” Tex. Bus. & Com. Code § 59.051(b). A noncompliant contractor “may be liable for the consequences of defects that result from the failure to disclose.” Id. § 59.051(c). Texas courts have not yet interpreted the contours of this new disclosure duty, but until they do, contractors should scrupulously document and report any concerns raised by a client’s design plans. 
  2. Chapter 59 does not apply to any project that falls within the statutory definition of a “critical infrastructure facility.” Id. § 59.002(b). That definition includes, among other things, oil refineries, power plants, and a range of oil-and-gas-related sites. Id. § 59.001(3). Contractors should carefully review the full list of critical infrastructure facilities before signing on to any large-scale project. 
  3. Logically enough, Chapter 59 does not shield contractors from design-defect liability if they are the reason for the defect. Thus, the Lonergan Rule remains intact to the extent a contractor is responsible for any design documents that turn out to be defective. To this end, Chapter 59 specifically does not cover (1) design‐build contracts insofar as the designs or plans provided by the contractor are defective; (2) engineering, procurement, and construction contracts (again, to the extent the contractor’s designs are at fault); or (3) any portion of a contract where the contractor agrees to provide signed-and-sealed design input that is ultimately incorporated into the project. Id. §§ 59.002(c)–(d). This last carveout can put contractors in a particularly tough position because it determines liability on a piece-by-piece basis. For example, if a swimming pool subcontractor provides signed, sealed shop drawings that are later used during construction, the contractor is exposed to liability for any defect in the pool’s design. Thus, even if the contract with the owner wasn’t labeled as a “design-build” contract, the contractor may still be exposed to liability for the designs of his subcontractors.  

In short, Chapter 59 is a momentous development for the construction industry. The Texas Legislature has turned more than a century of legal precedent on its head to protect contractors from flaws in other people’s designs. The news isn’t all rosy for builders, though: Chapter 59 carries several important caveats that may limit—or in some cases negate—the statute’s benefits. Careful attention to the letter of the law and its judicial interpretations will be indispensable as the industry adjusts to a new legal landscape. 

To discuss how these design-defect laws could impact your business, please consult with one of our attorneys at (972) 392-8900.

Contracts for Services Vs. for the Sale of Goods

by Kylie Barfield

April 15, 2022

Contracts for Services vs. Contracts for the Sale of Goods: What’s the Difference? 
Different laws govern contracts for services and contracts for the sale of goods. While some statutes apply to particular portions of a contract for services, common law principles (i.e., case law, not statute) govern contracts for services. In contrast, Article 2 of the Uniform Commercial Code (“UCC”) governs contracts for the sale of goods. Article 2 defines “goods” to mean all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale. Tex. Bus. & Com. Code § 2.105. For example, the UCC would govern a contract under which a lumber supplier agrees to provide the lumber used by the framer in framing a building. The contract for the labor to frame the structure, on the other hand, would be a contract for services that is mostly governed by case law and not the UCC. 
 
Mixed Goods-Services Contracts: The Predominant Purpose Test
Construction transactions often involve a hybrid of goods and services. So, when a contract requires a party to furnish goods and services, which set of laws apply? Determining which set of laws apply requires an analysis of whether the predominant purpose of the transaction is for services or for the sale of goods.

Courts implement the “predominant purpose test” (also known as the “dominant factor test”) to determine whether common law or the UCC applies to mixed goods-services contracts. Under the “predominant purpose test,” the applicability of either common law or the UCC hinges on whether the predominant purpose of the transaction requires either (1) the performance of services with goods incidentally involved; or (2) the sale of goods with labor incidentally involved. 

When legal disputes arise as to whether the UCC or common law applies to a contract, Texas Courts have implemented the “predominant purpose test” under two styles of analysis. First, some Texas Courts have looked at the actual nature of the dispute to determine which aspect of the transaction the issue most closely pertains. Montgomery Ward & Co. v. Dalton, 665 S.W.2d 507, 511 (Tex. App.—El Paso 1983). In other words, is the dispute more about the good or more about the labor? Under this style of analysis, the language in the pleadings often dictates the applicable law. In other cases, Texas Courts have relied on the language of the contract itself and have not looked to the nature of the dispute to determine whether the UCC applies. Freeman v. Shannon Constr., Inc., 560 S.W.2d 732, 737 (Tex. Civ. App.—Amarillo 1977). Under this alternant analysis, Texas Courts have looked at the transaction as a whole and the wording of the contract to determine if the essence of the contract is furnishing of services or supplying of goods. 
 
Navigating Mixed Goods-Services Contracts 
While the analysis may be far from black-and-white, it is important to know when to utilize contracts for services and contracts for the sale of goods. These two forms of agreements can be, and should be, vastly different. For example, if a services form agreement is used for a sale of goods transaction, the warranty provision may not comply with the UCC and may be deemed void. Unintended results such as this can be the harsh consequence of not utilizing the correct form of agreement. Construction professionals must consider whether the essence of the transaction is for services or the sale of goods when determining which type of contract to implement. Alternatively, to avoid the harsh results of using the wrong form of contract, construction professionals may consider separating the transaction into different agreements, one covering the services and the other covering the sale of goods. Understanding the differences between contracts for the sale of goods and contracts for the labor is critical whether you are the purchaser or seller in the transaction. 

To discuss how these contract laws could impact your business, please consult with one of our transactional lawyers at (972) 392-8900.

Design Defect Bill Passes Texas House, Goes to Governor Abbott

by Patrick Mulry

May 24, 2021

On May 13, the Texas House passed the legislation commonly referred to as the “design defect bill.” The vote in the House was 113-27, again indicating broad bipartisan support for this fundamental change in Texas law.

The design defect bill now goes to Governor Abbott for further action. He has the option to sign it, veto it, or allow it to become law without signature. Given that the bill passed by wide margins in both chambers, Gov. Abbott is expected to sign the bill.

If the design defect bill becomes law, it will go into effect on September 1, 2021. As with other recent changes in construction law-related legislation, application of the law to contracts and subcontracts is not retroactive, but is based upon the date into which the prime contract was entered.

As noted previously, the design defect bill represents a major change in Texas law that should have substantial positive effects for contractors which, under current law, may have exposure to damages caused by a design defect not caused by the contractor and for which the contractor otherwise has no recourse against the responsible design professional.

In advance of the effective date of the law, contractors should consult with counsel for important revisions to their prime contracts, as well as for revisions to subcontract agreements to ensure that all contract forms afford contractors and subcontractors the protections to which they will now be entitled.

Design Defect Bill Passes Texas Senate

by Patrick Mulry

April 12, 2021

The legislation commonly referred to as the “design defect bill” passed the Texas Senate on Thursday, April 8. The vote on Senate Bill 219 was 29-1, indicating that this fundamental change in Texas law has broad bipartisan support. The bill has been forwarded to the House and is expected to be voted on and passed in the next few weeks and then signed into law by Gov. Abbott later this spring.

The heart of the design defect bill is that a contractor cannot be held responsible for the consequences of defects in, and may not warranty the accuracy, adequacy, sufficiency, or suitability of plans, specifications, or other design or bid documents provided to the contractor by the person with whom the contractor entered into a construction contract (or another person on behalf of the contracting person, typically the owner or owner’s representative). Exempted from the protections afforded by the bill are projects designated as critical infrastructure facilities and projects performed under a design-build contract. Also exempted from the bill are design-build portions of work (for example, swimming pools or fire protection systems) that are part of a larger project which is not itself a design-build project.

This bill represents a major change in Texas law that should have substantial positive effects for contractors which, under current law, may have exposure to damages caused by a design defect not caused by the contractor and for which the contractor otherwise has no recourse against the responsible design professional.

Additionally, the design defect bill contains a mandatory prohibition of waiver which prevents the owner from contracting around this protection for the contractor. In return, the bill requires the contractor, which includes all tiers of contractors and subcontractors, to notify the owner if the contractor learns of a defect in the design documents, or of a design defect that the contractor should reasonably have discovered using ordinary diligence before or during construction. Such notice must be given within a reasonable time of learning of the design defect. The language of the bill is thematically similar to the notice concept already embodied in sections 3.2.2 and 3.2.3 of the AIA A201 general conditions, so it does not impose a requirement that should be unfamiliar to most contractors of size.

If passed, the bill will go into effect on September 1, 2021. As we have seen with other construction-related legislation over the past several decades, this bill will not apply retroactively, but instead will apply only to contracts entered into on or after September 1, 2021. Application of the law to subcontracts is based not on the subcontract date, but upon the date into which the prime contract was entered.

Should the design defect bill become law, contractors will want to consult with counsel for important revisions to their prime contracts, as well as for revisions to subcontract agreements to ensure that all contract forms are in compliance with the new law.

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About Griffith Davison

Griffith Davison, P.C. is a boutique law firm, which focuses on the legal needs of the commercial construction and real estate industry. Founded in 1993, the firm provides services in the areas of construction law, commercial real estate, complex commercial litigation and corporate transactions. Griffith Davison understands the construction and real estate industry and works closely with its clients at every phase to help them navigate the legal landscape, manage risk and achieve success.

For more information visit us online at www.GriffithDavison.com or call us at (972) 392-8900.

Timing of Delivery Does Not Always Negate Prompt Payment Act Obligations

by Tatianna Brannen

March 26, 2021

The Fifth District Court of Appeals in Dallas recently affirmed that a contractor violates the Prompt Payment Act by paying themselves with funds intended to pay its subcontractors.

In this case, the contractor subcontracted with a window supplier to provide windows for a hotel project. The window supplier provided the windows and sent the contractor an invoice. The contractor later sent a payment application to the owner requesting payment for several items, including the windows, for work completed in a previous application period.

The owner paid the contractor but withheld payment for the contractor’s overhead and profit. The contractor then decided to pay itself and “select subs” rather than paying all subcontractors. The window supplier did not receive payment.

The contractor argued it was not a violation of the Prompt Pay Act because there was conflicting evidence on whether the windows were delivered to the project before or after the contractor received payment from the owner.  However, because the evidence conclusively established the contractor received payment for the windows pursuant to the pay application, the contractor was obligated to pay the window supplier regardless of when it actually delivered the windows. Unless there is an express contractual provision to the contrary, a contractor is ultimately responsible for its subcontractors’ payment.

Albertelli Constr. v. Ram Indus. Acquisitions, LLC, No. 05-18-01429-CV, 2020 Tex. App. LEXIS 3965 (Tex. App.—Dallas, May 15, 2020, no pet. h.).

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About Griffith Davison

Griffith Davison, P.C. is a boutique law firm, which focuses on the legal needs of the commercial construction and real estate industry. Founded in 1993, the firm provides services in the areas of construction law, commercial real estate, complex commercial litigation and corporate transactions. Griffith Davison understands the construction and real estate industry and works closely with its clients at every phase to help them navigate the legal landscape, manage risk and achieve success.

For more information visit us online at www.GriffithDavison.com or call us at (972) 392-8900.