Tag: Litigation and Arbitration

Legal and Economic Updates Impacting CRE and Construction in Central Texas

by James Hicks

November 16, 2023

Griffith Davison, P.C. recently attended the 2023 Land Development Seminar organized by the Austin Bar Association’s Real Estate Section for critical legal and economic updates affecting real-estate developers and construction professionals in Central Texas.

  • Technical Advisory Review Panel (TARP): The Austin City Council directed the City Manager’s Office to establish a TARP, composed of City staff and industry professionals, to improve the City’s technical criteria manuals and the process for adopting and amending rules. The TARP is expected to reduce the excessive number of new rules coming up to the City Council for adoption.  
  • Site Plan Lite: The City Council exempted up to four unit developments from the time-consuming site plan review process and has directed the City Manager to create a streamlined review process for 5-16 unit developments. Relatedly, McKinsey Consulting recommended 44 initiatives to speed up the City’s regular site plan review process (which currently takes more than a year for 78% of applications).
  • Home Options for Middle-income Empowerment (HOME): In December, the Austin City Council is expected to vote on the pro-housing HOME revisions to the Land Development Code to increase flexibility with respect to minimum lot size, setbacks, height restrictions, floor-to-area ratios, impervious cover limits, and occupancy limits.
  • Texas Regulatory Consistency Act a/k/a Death Star Bill: A new state law, HB 2127, broadly prohibits local governments from regulating agriculture, occupations, labor, finance, natural resources, property, business, or insurance.  The Austin Court of Appeals will soon decide whether the law is constitutional.
  • Right-to-Farm Act Amendment: HB 1750 prohibits cities from regulating agricultural operations unless the regulation (1) uses the least restrictive means, and (2) is necessary to protect persons from imminent danger.
  • Dis-annexation Bills: HB 3053 requires cities to conduct a dis-annexation election in any area unilaterally annexed in 2015-2017.  The City of Grand Prairie has challenged SB 2038, which allows landowners to petition for release from a city’s extraterritorial jurisdiction (“ETJ”).
  • Platting Shot Clock Amendments: HB 3699 amends the Local Government Code to allow cities to delegate plat approval to city staff, with appeal right to city council, require cities to publish a complete list of all requirements for a plat application, and prohibit cities from requiring a dedication of a future street unless it is included, funded, and approved in a city or county capital improvement plan. HB 14 allows third-party review/inspection if a city does not complete review/inspection within 15 days of a statutory deadline.
  • Nonconforming Use Compensation: if a city shutters a nonconforming use, such as a short-term rental, SB 929 requires the city to notify the landowner of its remedies and (1) pay the costs of stopping the use and the loss of property value, or (2) allow the use long enough for the owner to recoup that amount.
  • Parkland Dedication Limits: HB 1526 caps required parkland dedication at 10% of property area and caps fees in lieu of dedication based on the type of property (urban, suburban, central business district), and further requires cities to respond to requests for dedication determinations within 30 days. 
  • Texas Water Fund: SJR 75/Proposition 6 amends the Texas Constitution to create a water fund to assist in financing water infrastructure projects in the state through grants or low-interest loans.
  • Developers Pinched: Market factors—including rising interest rates and construction costs, water supply issues, flagging lot supply hampered by pandemic-era investors who bought land at $3 per square foot and refuse to sell at $2 per square foot, and too many multifamily units in the pipeline—have made it hard for real-estate investors and lenders to find attractive deals. 
  • CRE Capital Markets Recovery? Transactions volume is down precipitously amid higher borrowing costs and an uptick in capitalization rates, but CRE loan maturities may catalyze activity. Institutional investors’ target allocations to CRE continue to increase; and a surge in private wealth globally means there is capital for future investment. A recovery will likely require Fed to signal we have reached peak interest rates, stability in ten-year US treasury bonds, recession risk premium not worsening, increased appetite for larger-scale activity, and more returns to office.
  • Revitalizing 6th Street: Our firm’s landlord in Downtown Austin, Stream Realty, has acquired 60% of the properties on 6th Street between Brazos and I-35, the area called “Dirty 6th” in recent years due to lack of investment. The City Council has passed certain safety measures and has increased building height limits from 45 to 140 feet for Stream’s proposed multi-use and hotel projects. Stream agreed to preserve historic facades. Stream would like the City to widen sidewalks and reduce the street to three lanes, to help attract upscale restaurants, hotels, and other businesses and restore the area as a nightlife hub. 

To discuss how these legal and economic updates could impact your commercial real estate or construction projects in Central Texas, contact Griffith Davison’s Austin office at (512) 686-8648, or email James directly at jhicks@griffithdavison.com.

.

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.

NLRB Adopts New Standard for Evaluating Workplace Rules

by Caleb Johnston

November 1, 2023

The National Labor Relations Board (“NLRB”) has prescribed a new legal standard for evaluating whether an employer’s workplace rules tend to interfere with the rights of employees which are protected by Section 7 of the National Labor Relations Act (“NLRA”). Specifically, the NLRB’s decision in Stericycle, Inc., 372 NLRB No. 113 (N.L.R.B. Aug. 2, 2023) sets forth the new standard and overturns the old test established in Boeing Co., 365 NLRB No. 154 (N.L.R.B. Dec. 14, 2017), which had governed employer’s workplace rules for the past six years. Employers should be aware of the changes the NLRB has implemented as it may require an employer to revise its workplace rules to comply with the new Stericycle standard. 

Legal Background. 

Under Section 7 of the NLRA, employees have the right to form, join, or assist labor unions and the right to join together as employees to advance their interests as employees. If an employer implements a workplace rule which interferes with, restrains, or coerces an employee in exercising their Section 7 rights, then the employer will have committed “unfair labor practice” in violation of the NLRA. 

A workplace rule which threatens to terminate an employee for joining a labor union is clearly a violation of an employee’s Section 7 rights. However, the analysis is not as clear when an employer implements facially neutral workplace rule. For example, a workplace rule which prohibits employees from discussing or disclosing “confidential information” is facially neutral. If the term “confidential information” can be interpreted to include information such as individual salaries or work schedules, then the rule may violate Section 7 because employees have the right under Section 7 to discuss and disclose their salaries and work schedules. In these more challenging cases, the standard prescribed by the NLRB will be used to determine whether or not the facially neutral workplace rule in question violates an employee’s Section 7 rights. 

The NLRB recently changed its standard for evaluating facially neutral workplace rules. The old standard, established in Boeing, sought to provide greater clarity and certainty for employers by placing workplace rules into one of three categories: (i) rules that were considered lawful; (ii) rules that were deemed unlawful; and (iii) rules that warranted “individualized scrutiny” to determine whether they violated an employee’s Section 7 rights. The three-category system established in Boeing is no longer in effect, however, as the NLRB recently decided to move to a more rigorous standard for analyzing workplace rules in Stericycle.

The New Stericycle Standard. 

The new standard in Stericycle replaces Boeing’s categorical approach with a case-by-case analysis of workplace rules. The Stericycle standard also implements a burden shifting framework. First, the NLRB must prove that the challenged workplace rule “has a reasonable tendency to chill employees from exercising their Section 7 rights.” At this stage, the workplace rule is interpreted from the perspective of a “reasonable employee.”  In other words, if an employee could reasonably interpret the workplace rule to interfere with, restrain, or coerce the employee in exercising their Section 7 rights, then the workplace rule is presumptively unlawful. 

The burden then shifts to the employer to rebut the presumption. This will require the employer to prove “that the rule advances a legitimate and substantial business interest, and that the employer is unable to advance that interest with a more narrowly tailored rule.” If the employer can satisfy its burden, then the challenged workplace rule is upheld as lawful.

Practical Considerations. 

The new Stericycle standard went into effect on August 2, 2023, and applies retroactively, meaning that all workplace rules which are challenged as violating Section 7 of the NLRA will be reviewed by the NLRB under the Stericycle standard moving forward. As a result, workplace rules that were previously lawful for an employer to maintain under the Boeing standard may now be held unlawful under Stericycle. For example, a “no recording” rule which prohibits an employee from recording workplace conversations was categorically approved as lawful under Boeing. Today, however, the same rule may be held unlawful under Stericycle if the rule is not narrowly tailored to serve the employer’s legitimate and substantial business interest.

Employers should consider reviewing their employee handbooks, manuals and other documents containing work rules or policies to ensure compliance with the NLRB’s newly announced standard in Stericycle. In addition, employers should consider adopting a policy which specifically sets out an employee’s Section 7 rights under the NLRA and explains that the employer’s workplace rules should not be interpreted as restricting those rights. While there is no guarantee that such policy would save an employer’s workplace rule from violating the NLRA, the General Counsel for the NLRB has taken the position that such policy should create a presumption that an employer’s rules are lawful.

To discuss how Stericycle may impact your workplace rules, please feel free to contact one of our attorneys at (972) 392-8900. 

.

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.

Contractors and Adjacent Property: Spreading the Neighborly Love

by Tatianna Brannen

June 26, 2023

Contractors and developers often get into disputes with neighboring landowners. Due to the complicated relationship between these parties, unique procedural issues often arise that require special consideration. 

One reoccurring scenario in which disputes between neighbors may arise is where one landowner begins construction on a project that sits next to already developed land. Once construction begins, the neighboring landowner may have complaints concerning the construction. Such disputes may arise relating to nuisance, trespass, negligence, breach of contract, fraud, breach of warranty, and/or property damage. If the neighboring landowner decides to file suit, they may decide to join the contractor performing the construction along with their neighbor. One common basis for a claim against a contractor in this scenario is that a neighboring landowner is owed duties under the construction contract as a third-party beneficiary. 

However, procedural issues may arise with the presence of an arbitration provision in the construction contract at issue. Such a provision raises the question: Can neighboring landowners be compelled to arbitrate their claims even though they are non-signatories to the construction contract at issue? Several recent opinions from the Supreme Court of Texas suggest this result is a possibility.

One way a neighboring landowner may be compelled to arbitrate its claims is through the theory of direct-benefits estoppel. This doctrine is used in many types of disputes, including those involving the construction and real estate industries. The doctrine of direct-benefits estoppel applies to breach of contract claims in which a party seeks to assert a claim as a third-party beneficiary to a contract it did not sign. It prohibits a party from asserting that the lack of its signature on a written contract precludes enforcement of the contract’s arbitration clause when the party itself maintains that other provisions of the same contract should be exploited to benefit it. In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 739 (Tex. 2005). The Supreme Court of Texas recently clarified the scope of direct-benefits estoppel and the doctrine’s application in construction defect cases involving non-signatories to a construction contract. 

In two separate cases, the Supreme Court of Texas recently considered whether non-signatory parties asserting a breach-of-contract claim must arbitrate along with the signatory parties. The first case involved homeowners who sued their homebuilder for construction defects and fraud based on a construction contract containing a mandatory arbitration provision. The homeowners also asserted claims on behalf of their children. The children did not sign the construction contract at issue. The Supreme Court of Texas held that litigants who sue based on a contract subject themselves to its terms, including any arbitration clause within that contract. Taylor Morrison of Tex., Inc. v. Skufca, 660 S.W.3d 525 (Tex. 2023). The court further explained that if any of a plaintiff’s claims are based on a contract, then the plaintiff must arbitrate all claims that fall under the scope of the contract’s arbitration clause. Id.

The court expanded upon the foundation regarding direct-benefits estoppel, holding that suing for factually intertwined construction-defect claims may be compelled to arbitrate through direct-benefits estoppel. Id. at 529. Additionally, it clarified that in making its analysis, the court looks at the causes of action asserted in the petition and whether they implicate the contract at issue. The court further held that because the claims had to be determined by reference to the contract at issue, they satisfied direct-benefits estoppel and were therefore subject to the contract’s terms, including the arbitration clause. Id. 

Lastly, the court made it clear that the non-signatories may not avoid arbitration by amending their petition to allege only tort or other noncontractual claims. The court explained that direct-benefits estoppel also applies when a nonsignatory seeks direct benefits from the contract outside of litigation. Id. Because the non-signatories lived in the home at issue and sued for factually intertwined construction-defect claims, they were required to arbitrate all of their claims.

In a similar case, the Supreme Court of Texas applied direct-benefits estoppel to hold that nonsignatory family members living in the home that was the subject of the construction defect suit were also required to arbitrate their claims. Taylor Morrison of Tex., Inc. v. Ha, 660 S.W.3d 529 (Tex. 2023). 

These two recent cases have expanded the scope of direct-benefits estoppel and have implications that reach wider than construction defect cases. Any party involved in a suit involving third-party beneficiaries should carefully analyze the claims and procedural issues before them to avoid being subject to a forum against their choosing.  

Tatianna Brannen is an attorney at Griffith Davison, P.C. and can be reached at tbrannen@griffithdavison.com. 

This article first appeared in the June 2023 Issue of Dallas Bar Association Headnotes.

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.

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.