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.

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.

 

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).

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.).

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.

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.

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.