Price Escalation Impacts

This Bulletin provides guidance to contractors, subcontractors, suppliers, and others to ensure compliance with contractual change order requirements in the event work on a construction project is impacted by price escalation.

Construction projects are being impacted by increased costs for most construction materials. The Producer Price Index shows a 69% increase in the cost of construction materials from March 2020 to March 2022. Many construction contracts do not address escalation or specifically exclude change orders for material escalation, leaving the risk of escalation of construction materials with the contractor, subcontractor, or suppliers.

Bid Protection Tips:

  • Keep bids open for less than 30 days with a designated sunset date:
    • Keeping your bids open for less than 30 days can help protect you from sudden changes in pricing and help maintain your bids’ competitive status.
    • If asked to extend time a bid is open, reconfirm prices before agreeing.
  • Lock in material prices and confirm agreement:
    • Getting a signed, written agreement with your supplier – that notes the specific price agreed to – will be extremely valuable.
  • Consider Specific Proposal Terms:
    • Make sure to include in your bids/proposals language such as:
      “Upon release by customer to proceed to purchase raw materials, this proposal becomes a binding agreement.”
    • If you include this language in a proposal, make sure that the proposal is specifically incorporated by reference into the contract.

Contract Protection Tips:

We also recommend that you check all contracts for an Escalation Clause, which will compensate you in the event there are increases in raw material or equipment costs. Look for a clause like this:

Material prices, including construction materials, are based on current prices at the time of the Proposal. Any significant price increases (meaning a price increase exceeding (10%) in materials necessary to perform the work, that occur during the period of time between the date of this Proposal and Substantial Completion of the Project, shall cause the contract price to be equitably adjusted by an amount reasonably necessary to cover any increase. Further, if material or equipment required by the contract are not available due to shortage or unavailability or if the price to procure such material or equipment increases as set forth in this provision, then an acceptable substitute shall be found and an adjustment in the contract price shall be made accordingly. Contractor shall be entitled to an extension of time for any delay in obtaining delivery of the item necessary for completion of the Work.

Additionally, define unavailability to obtain materials as an excusable delay or force majeure event in the contract.

If the contract does not include an escalation provisions, you should revise to include a provision. Check the Prime Contract to see if escalation has been addressed. If so, the owner and the contractor should not object to including an escalation provision in downstream contracts.

Supply Protection Tips:

  • Negotiate for release of funds to make early purchases when needed.
    • Negotiate contracts that allow you to purchase materials in advance to avoid a price increase or product unavailability.
  • Confirm product lead times in advance of project needs;
    • Put a hold on material verified to be in stock.
    • Make purchases early when feasible.
    • Obtain guarantees from your suppliers.

Price Escalation Action Items:

If you experience a price escalation impact, it is imperative that you comply with the notice provisions of your contract and track your actual time and damages:

  1. Keep meticulous records of all increased expenses and provide supporting documentation as required to obtain payment.
  2. Track your material costs to establish the increased cost versus the amount at bid.
  3. Follow the recommendations set forth in GRSM Construction Bulletin – Protect Your Right To Payment.

For questions, contract Denise M. Motta.

Force Majeure Recommendations

This Bulletin provides guidance to contractors, subcontractors, suppliers, and others to ensure compliance with contractual change order requirements in the event work on a construction project is impacted by a force majeure event.

Contract Protection Tips:

A force majeure event is defined as an unforeseeable circumstance that prevents someone from fulfilling a contract. Because many events arising on a construction project could be arguably unforeseen, it is imperative that the contract contain a Force Majeure provision. Examine all contracts for the applicable Force Majeure provision. Look for a clause like this:

§ 8.3.3     Any failure or omission by Owner or Contractor in performance of its obligation shall not be deemed a breach or create any liability for damages or other relief (other than additional time) if it arises from any cause beyond the reasonable control of such party, including, without limitation, acts of God, floods, fire, explosions, storms, earthquakes, acts of public enemy, war, terrorism, rebellion, insurrection, riot, sabotage, invasion, epidemic, quarantine, strikes, lockouts, labor disputes or other industrial disturbances, or any order or action by any governmental agency, or causes of similar nature.

In the aftermath of the COVID-19 pandemic, a variety of Force Majeure clauses have been added to construction contracts. Given supply chain issues, it is advisable to include a clause addressing specific supply chain impacts provided by the contractor or supplier providing: “lack of or failure of or other inability to obtain necessary transportation, fuel, power, materials, machinery, equipment or facilities, delays caused by other contractors, subcontractors or their subcontractors of any tier, or any materialmen or suppliers” Also, it is recommended that the clause specifically provide: “Any such delay shall extend the time for completion of the contract by not less than the duration of the delay.”

Force Majeure Event Action Items:

If you experience a force majeure event, it is imperative that you comply with the notice provisions of your contract and track your actual time and damages.

  1. Provide notice and request for a time extension, as well as associated costs. Notice should be provided in accordance with the contract provisions. Remember to check the timing of notice (e.g., within 5 days of occurrence of the event) and the method of notice (e.g., in writing delivered by certified mail return receipt requested). If your contract does not contain specific requirements of what must be included in the notice, the following Example Notice Language may be used:

    At this time, [Contractor/Subcontractor/Supplier] is being delayed by a Force Majeure Event, which is outside of its control. [Describe Event]. [Contractor/Subcontractor/Supplier] has been impacted by the Force Majeure Event. Among other impacts, we continue to face impacts to our labor force and disruptions to the delivery of material and detailing services.

    It is impossible to notify you of the full impact the Force Majeure Event will have on costs and schedule; however, we hereby request a day-for-day extension. [Contractor/Subcontractor/Supplier] will submit its costs associated with this impact along with documentation of the schedule impacts. [Contractor/Subcontractor/Supplier] reserves all rights that it has under the contract and applicable law to an extension of time for any delay and costs that result from this force majeure event.

  2. Check all contracts for clauses relating to compensation in the event of a shutdown or delay. Is there a No Damages for Delay Clause? Look for a clause like this:

    No claim for damages . . . other than for an extension of time shall be made or asserted against the owner for any reason whatsoever. The contractor shall not be entitled to an increase in the contract sum or payment or compensation of any kind from the owner for direct, indirect, consequential, impact or other costs, expenses or damages, including but not limited to costs of acceleration or inefficiency, arising because of delay, disruption, interference from any cause whatsoever.

If there is an enforceable No Damages for Delay Clause, begin considering mitigation options that will reduce your job site overhead and general conditions, such as the ability to return rented equipment during any project suspension.

  1. Check contract for Supply Chain Delay provision.
  2. Check contract for Price Escalation provision.
  3. Keep meticulous records of all damages arising from any delay and increased expenses and provide supporting documentation as required to obtain payment.
  4. Follow the recommendations set forth in GRSM Construction Bulletin – Protect Your Right To Payment.

For questions, contact Denise M. Motta.

Supply Chain Delay Recommendations

This Bulletin provides guidance to contractors, subcontractors, suppliers, and others to ensure compliance with contractual change order requirements in the event work on a construction project is impacted by supply chain delays.

Contract Protection Tips:

The construction industry is being impacted substantially by inability to obtain necessary construction products due to supply chain issues. Most construction contracts do not accommodate time extensions due to supply chain impacts. To address this gap in contract terms, we recommend including language such as: “lack of or failure of or other inability to obtain necessary transportation, fuel, power, materials, machinery, equipment or facilities, delays caused by other contractors, subcontractors or their subcontractors of any tier, or any materialmen or suppliers” as part of the defined force majeure event under the contract.

This provision can be included in the Change Order section of the contract as well by including a provision such as: “If the Work is delayed by the failure of or other inability to obtain necessary transportation, fuel, power, materials, machinery, equipment or facilities, delays caused by other contractors, subcontractors or their subcontractors of any tier, or any materialmen or suppliers, contractor shall be entitled to a change order for its costs and time associated with the delay.”

If the contract does not include a supply chain provision, you should revise to include a provision. Check the Prime Contract to see if supply chain delays have been addressed. If so, the owner and the contractor should not object to including supply chain provision in downstream contracts.

Supply Chain Delay Action Items:

If you experience supply chain delay, it is imperative that you comply with the notice provisions of your contract and track your actual time and damages.

  1. Provide notice and request for a time extension, as well as associated costs.
    Notice should be provided in accordance with the subcontract provisions. Remember to check the timing of notice (e.g., within 5 days of occurrence of the event) and the method of notice (e.g., in writing delivered by certified mail return receipt requested).
  2. Check all contracts for clauses relating to compensation in the event of a shutdown or delay. Is there a No Damages for Delay Clause? Look for a clause like this:

No claim for damages . . . other than for an extension of time shall be made or asserted against the owner for any reason whatsoever. The contractor shall not be entitled to an increase in the contract sum or payment or compensation of any kind from the owner for direct, indirect, consequential, impact or other costs, expenses or damages, including but not limited to costs of acceleration or inefficiency, arising because of delay, disruption, interference from any cause whatsoever.

If there is an enforceable No Damages for Delay Clause, begin considering mitigation options that will reduce your job site overhead and general conditions, such as the ability to return rented equipment during any project suspension.

  1. Keep meticulous records of all damages arising from any delay and increased expenses and provide supporting documentation as required to obtain payment.
  2. Follow the recommendations set forth in GRSM Construction Bulletin – Protect Your Right To Payment.

For questions, contact Denise M. Motta

Protect Your Right To Payment By Following Nedd

In order to preserve your right to payment, you must satisfy the contractual requirements supporting a change order for the increased costs or time due to the delay. The key to the successful presentation of change order claims is educating your team on the following:

1.    NOTICE

  • Review the change order and notice provisions of your contracts. Make your contract searchable and insert the term “Noti” and look for the items listed below.
  • Who:  Check the designated representative for notice.

  • It may not be the project manager.

  • Confirm who can authorize the change order.

  • Is owner approval required?

  • Ensure that the party approving the change order has authority to do so.

  • What:  Check for specific information required by the contract.

  • Provide ALL information available.

  • If certain information is not yet available, state that the information will be provided when available.

  • Reserve all rights to amend and submit additional information.

  • Request both an increase to the Contract Sum and Contract Time.

  • Make the request even if you do not believe the delay or time necessary will cause a significant impact.

  • When:  Check the time deadline for notice.

  • Does the contract provide for waiver if notice is not provided?

  • How:  Check the method for providing notice.

  • Does it require certified mail?

  • Is email sufficient?

  • If email is not proper notice, be sure to issue via the required method in addition to email.

  • IF YOUR CUSTOMER DOES NOT ALLOW A TIME EXTENSION OR REJECTS YOUR NOTICE, respond and provide further notice that you consider the rejection a “Constructive Acceleration” and will be forced to incur overtime and other potential labor, material, and equipment costs.

2.    ENTITLEMENT

  • Prepare and submit an entitlement packet that demonstrates your legal and factual entitlement to a change.

  • Legal Entitlement: Review your contract for clauses that would allow for the recovery of delay and/or acceleration costs, or look for common law options that may invalidate no-damages-for delay clauses such as the delay was “beyond the contemplation of the parties” or if you were “constructively accelerated”.

  • Search your contract for the following terms:

  • “Excusable Delay”

  • Delay

  • God (Acts of God)

  • Epidemic

  • Quarantine

  • No Damages for Delay

  • “Time Extension”

  • “Sole Remedy”

  • “Accelerat” – Acceleration damages are different from delay damages. If you request a time extension and are not granted the extension, you may have a claim for directed, or constructive acceleration.1

  • Factual Entitlement: Prepare a comparison demonstrating the impact on your baseline schedule from your planned schedule.

  • Supplement entitlement packet to substantiate the basis for the change order.

  • Track and document each day of delay through schedules, time sheets, daily reports, payroll documentation, or other project records.

  • Provide updated entitlement packet to support change order request as information is updated.

  • Save the entitlement packet and all supporting information where it can be easily located, updated, and shared.

3.    DAMAGES

  • Track and document amount of actual costs incurred (to the extent possible).

  • Monetary Damages may include:

  • Increased cost of materials

  • Increased cost of labor

  • Increased cost of equipment rental charges

  • Storage of materials

  • Additional supervision or field costs for the extended duration

  • Costs associated with de-mobilization and re-mobilization

  • Lost overhead and profit

  • Costs for extended general conditions, equipment costs, or rental costs

  • Additional bond or insurance premiums

  • Tax implications

  • Document and provide proof of ALL Expenses:

  • Labor – Compare original estimated hours with actual hours delayed or spent in overtime.

  • Use daily time cards, certified payroll, daily reports, or a separate phase code in your job cost accounting to track actual labor delays and impacts.

  • Materials – Gather notices from suppliers relating to increased costs and delays. Gather the invoices and checks showing payment for any increased costs.

  • Equipment – Gather proof of down-time hours through daily time cards, certified payroll, daily reports, or a separate phase code in your job cost accounting to track labor.

  • Be prepared to produce your rental agreement of proof of cost and payment for rental.

  • Overhead and Profit – Cite to contract section setting forth allowable OH&P on changes.

  • Storage, Subcontractor and Vendor Costs – Produce invoices and proof of payment for increased costs resulting from delays and acceleration.

4.    DON’T WAIVE YOUR CLAIMS

  • Check language in ALL lien waivers and ALL payment applications and ALL change orders to make sure (1) pending claims, (2) unpaid contract balances, and (3) unpaid retainage are not waived.

  • Be aware of potential releases included in online payment applications (Textura).

  • Confirm that contract does not provide that acceptance of payment is a waiver of all claims.

  • If it does, consider whether to accept payment.

  • Be aware claim deadlines.

  • Follow dispute resolution procedures in the contract (including time provisions).

  • Be aware of statute of limitations to file lawsuits.

  • Bond and lien claim deadlines.

 

For questions, contact Denise M. Motta.


1 A claim for constructive acceleration arises where (1) there is an excusable delay; (2) you properly request a time extension; (3) the request for extension was denied; (4) you were ordered to complete the project by the original completion date despite the excusable delay; and (5) you accelerated performance and incurred additional costs. A claim for directed acceleration arises where (1) you are ordered to accelerate (perform in a shorter period than originally allowed by the contract schedule); (2) the delays prompting the acceleration were excusable; and (3) you accelerated performance and incurred additional costs.

Gordon & Rees Ranked #4 of Top 50 Construction Law Firms in the Nation by Construction Executive Magazine

Gordon Rees Scully Mansukhani has been ranked as the No. 4 construction law firm in the nation by Construction Executive in the magazine’s 2022 ranking of The Top 50 Construction Law Firms™.  As the only law firm with offices and attorneys in all 50 states, Gordon & Rees’ construction group (with over 150 construction lawyers) delivers maximum value to our clients by understanding their business and combining the resources of a full-service national firm with the local knowledge of a regional firm.

Led by Allen Estes and Angela Richie, the construction lawyers at Gordon & Rees are uniquely situated to serve our construction clients.  We have attorneys with professional training and practical experience in related fields such as engineering and construction management, as well as lawyers with leadership experience in various construction industry related trade associations, legal advisory committees and government agencies.  “If a client is looking for a legal partner in multiple states who understands their business, Gordon & Rees is that partner,” said Angela Richie.

To develop The Top 50 Construction Law Firms™ rankings, the Construction Executive editorial team reached out to more than 600 U.S. construction law firms to complete their survey. The data collected included 2021 revenues from the firm’s construction practice; the number of attorneys in the firm’s construction practice; percentage of firm’s total revenues derived from its construction practice; number of states in which the firm is licensed to practice; year in which the construction practice was established; and the number of construction industry clients served during fiscal year 2021. The ranking was then determined by an algorithm that weighted these factors in descending order of importance. 

Gordon & Rees is regularly recognized for its top tier construction practice throughout the United States. The group consists of lawyers nationwide who focus their practice on the comprehensive range of legal services required by all participants in the construction industry — architects, engineers, design professionals, design joint ventures, owners, developers, property managers, general contractors, subcontractors, material suppliers, product manufacturers, lenders, investors, state agencies, municipalities, and other affiliated consultants and service providers.

To view Construction Executive’s annual law firm rankings, please click here

Contractors’ Right to Sue in Washington Requires Registration

Summary:

In Washington, contractors must be properly registered in order to pursue a legal action against a customer for breach of contract. Dobson v. Archibald, a February 2022 decision by the Washington Court of Appeals, reinforced how the governing statute – RCW 18.27.080 – does not simply create an affirmative defense but establishes a mandatory pleading prerequisite.1

Discussion:

In 2018, Archibald hired Dobson to refinish his hardwood floors for $3,200. Dobson was not a registered contractor. She had been referred to Archibald by acquaintances who were familiar with her construction and home repair work, including improvements Dobson had made to her own home. Archibald paid Dobson a $700 deposit before Dobson began her work. At the completion of the floor repair project, Archibald was unhappy with the appearance of the floors and informed Dobson that he would not pay the remaining $2,500.

Dobson recorded a lien against Archibald’s property and filed suit in 2019. Archibald moved for summary judgment, asserting that Dobson could not bring suit because she was not a registered contractor. After a cross-motion for summary judgment by Dobson and Archibald’s motion for leave to amend his answer, the trial court granted Archibald’s summary judgment motion and dismissed Dobson’s suit with prejudice.

The Appellate Court’s analysis started with the statute RCW 18.27.080, which provides, in pertinent part:

No person engaged in the business or acting in the capacity of a contractor may bring or maintain any action in any court of this state for the collection of compensation for the performance of any work or for breach of any contract for which registration is required under this chapter without alleging and proving that he or she was a duly registered contractor …

Dobson contended that nonregistration is an affirmative defense which must be timely pleaded and proved by the defendant. The Court rejected that contention, stating that the plain language of the statute does not support that view. The Court pointed also to Coronado v. Orona, 137 Wn. App. 308, 311 (“Washington contractors cannot sue clients to recover for compensation or for breach of contract if the contractors are not properly registered”). Therefore, registration must be alleged and proved by the plaintiff.

Dobson also contended that she was not a “contractor” under RCW 18.27.010(1)(a) and therefore did not need to be licensed. She argued that the registration requirement did not apply because she was primarily employed as a longshoreman and the flooring work she did for Archibald was “an isolated act in her spare time as a favor.” The Court looked to the statutory definition of a “contractor” and found that “[e]ven a single and isolated business venture is not exempt from the registration requirements of the registration act.”

The Court further clarified that the facts distinguished this case from Rose v. Tarman, 17 Wn. App. 160 (1977), on which Dobson relied. In Rose, the registration requirement did not apply where the parties were two friends with a longstanding social relationship. Here, Dobson and Archibald knew each other exclusively through this specific business transaction. Despite some superficial similarities, “[t]he narrow factual scenario that allowed Rose to avoid the registration bar is simply not applicable to Dobson.” Thus, the Appellate Court affirmed the trial court’s summary judgment dismissal of Dobson’s action.

Takeaways:

For contractors, this court decision reinforces the meaning and effect of Washington’s contractor registration act, RCW 18.27: contractor registration is a prerequisite to filing suit.

For legal practitioners, this Dobson case makes abundantly clear that plaintiffs must plead and prove contractor registration, and actions in the State of Washington that do not meet this pleading requirement will be subject to summary judgment dismissal.

________________________________________________________________________________________________________

1 Dobson v. Archibald, 2022 WL 521496, 505 P.3d 115 (Feb. 22, 2022)

The Importance of Engaging Design Professional Experts Early, with a Focus on Massachusetts Law

In any Massachusetts case alleging negligence against a design professional, an expert witness on the topic of liability is a critical, early consideration. Given the expense of expert witnesses, counsel representing design professionals are wise to evaluate (1) the need for an expert, (2) the timing of the engagement of an expert, and (3) the scope of the expert’s services.

To begin, not every allegation of negligence against a design professional necessitates an expert opinion. “The test for determining whether a particular a particular matter is a proper one for expert testimony is whether the testimony will assist the jury in understanding issues of fact beyond their common experience.” Herbert A. Sullivan, Inc. v. Utica Mutual Insurance Co., 439 Mass. 387, 402 (2003) (addressing duties of an insurer). For instance, in its ruling in Parent v. Stone & Webster Engineering Corp., the Massachusetts Supreme Court noted no expert would be necessary to prove professional negligence where an electrician was injured by a mislabeled distribution box carrying 2,300 volts. 408 Mass. 108 (1990). It is reasonable to expect lay jurors to comprehend the duty of an electrician to properly label a distribution box carrying potentially fatal quantities of voltage. To the extent liability is readily recognizable to the average juror (i.e. “within the ken of the average juror”), significant cost savings are achievable by forgoing the use of an expert witness. That, however, is the exception.

Far more often the duty of care is more nuanced, and an expert is required to prove liability. For instance, “[a]rchitects, like other professionals, do not have a duty to be perfect in their work, but rather are expected to exercise ‘that skill and judgment which can be reasonably expected from similarly situated professionals’ . . . Expert testimony is generally needed to establish this professional standard of care.” LeBlanc v. Logan Hilton Joint Venture, 463 Mass. 316, 329 (2012). While contracts for architects, engineers, surveyors and other design professionals often expressly set forth their duties, those contractual terms are not typically sufficient to establish liability against the design professional. More explanation is required to educate the average juror on duties (written and/or implied) of design professionals.

Furthermore, design professional deviations from the common practices of the profession do not always constitute negligence. Design creativity can be “stifled” and progress in the fields of engineering and architecture could be halted if “untried configurations” subjected the practitioners to liability. Klein v. Catalano, 386 Mass. 701, 717 (1982).

Once there is a determination that an expert is necessary legal counsel ought to engage such services early. The early involvement of an expert can assist the attorney in analysis of discovery, preparation for depositions, evaluating exposure, and mediating. Tempting as it may be to delay the procurement of an expert until the point of necessity, hoping that the matter will resolve before incurring expert-related costs, it is more typically a false saving; it invites the classic conundrum of not knowing what you do not know.

That is not to say the initial engagement of an expert need be expensive. An expert can be engaged early at minimal cost. Formal written reports are not needed early in the case. Indeed, it is unadvisable to do so unless the outcome of said report is certain. An attorney experienced in defending Massachusetts design professionals can often identify liability assessments early. Even in that instance, the preparation of a formal, written opinion is typically an expensive endeavor. An informal, verbal opinion is usually sufficient for purposes of identifying available defenses (including the affirmative defenses accompanying the Answer), preparing discovery demands to other parties, responding to discovery demands and participating in mediation.

Therefore, the scope of the expert’s services is best to be left flexible. A tiered approach is often advisable. The potential of a full disclosure, suitable for purposes of Massachusetts Rule 26, must be considered. However, before that requirement is realized, an expert can be engaged on an hourly basis to review the available documents, provide insights thereon, and present a preliminary verbal opinion. Depending on counsel’s assessment of the efficiency, credibility and value of that preliminary verbal opinion, more expert services can be arranged.

Of course, an expert’s opinion (be it verbal or written) can never eclipse the role of the juror. Attorneys must be keenly observant of this foundational truth of the practice of law – an expert is merely a component of the case; it cannot be the end-all-be-all. “The role of an expert witness is to help the jury understand issues of fact beyond their common experience. Under modern standards, expert testimony on matters within the witness’s field of expertise is admissible whenever it will aid the jury in reaching a decision, even if the expert’s opinion touches on the ultimate issues that the jury must decide. [citation omitted] An expert may not, however, offer his opinion on issues that the jury are equally competent to assess.” Simon v. Solomon, 385 Mass. 91, 105 (1982). Moreover, the ability of an opposing party to produce a contradicting expert opinion must never be discounted.

The expert is a critical component to most cases alleging negligence against design professionals in Massachusetts. That being said, the expert need not break the bank for such a case.

Connecticut Appellate Court Confirms That Paid If Paid Clauses Remain Enforceable

In Electrical Contractors, Inc. v. 50 Morgan Hospitality Group, 212 Conn. App. 724 (2022), the Appellate Court affirmed the trial court’s finding that payment from the property owner to the general contractor was a condition precedent to the general contractor’s obligation to pay the subcontractor. Here, the plaintiff, an electrical subcontractor on a commercial construction project, sued the defendant, the general contractor, for nonpayment of over $350,000. The subcontract between the plaintiff and defendant provided that “[the plaintiff] expressly agrees that payment by [the owner] to [the general contractor] is a condition precedent to [the general contractor’s] obligation to make partial or final payments to [the plaintiff] as provided in this paragraph . . . .” The Court held that this provision clearly and unambiguously means that the general contractor was not obligated to pay the subcontractor unless the general contractor received payment from the owner. The court further made a point to distinguish “pay-if-paid” and “pay-when-paid” clauses, noting that the latter “merely postpones a general contractor’s obligation to pay its subcontractors for a reasonable period of time,” whereas the former creates a “condition precedent” to payment.

Recent Amendments and Caselaw Affecting the Construction Industry in Texas

Here are some recent Texas legislative amendments and Texas Supreme Court cases from the past year concerning the construction industry in Texas.

1) Recent Legislative Amendments Concerning the Construction Industry:

a) The Texas Legislature throws a “Spear” in the Lonergan Doctrine to reduce general/subcontractor liability for owner-provided plans and specs:

Forty-nine out of the fifty states follow the Spearin Doctrine under which owners warrant the accuracy and sufficiency of owner-provided plans and specs in construction contracts. On the other hand, for over a century, Texas has followed the Lonergan Doctrine under which, absent contractual language to the contrary, a general contractor/subcontractor, instead of the owner, bears the risk of deficiencies in owner-provided design documents, once they started construction. Texas Senate Bill 219, which went into effect on September 1, 2021, finally changed that and brought Texas in line with the rest of the country, with a few exceptions.

SB 219 amends Chapter 59 of the Texas Business & Commerce Code to establish that a contractor (as defined under the bill) is not 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 for the construction (as defined under the bill), or repair of any improvement to real property provided to the contractor by the person with whom the contractor entered into the contract or another on that person’s behalf. However, SB 219 is not a full liability shield for general/subcontractors because the bill also imposes a new requirement, under Chapter 59.051(b), to disclose any “defect, in accuracy, inadequacy, or insufficiency in the plans, specifications, or other design documents” to the owner that the general/subcontractor actually discovers or that it should discover by “ordinary diligence” (as defined under the bill).

Importantly, SB 219 has four notable exceptions, under Chapter 59.002, because while it applies to most contracts for real property construction or repair, it does not apply to:

(1) contracts for the construction or repair of a “critical infrastructure facility” (as defined under the bill);

(2) designs provided by a general/subcontractor under a design-build contract;

(3) designs provided by a general/subcontractor under an “engineering, procurement, and construction” (“EPC”) contract; and

(4) portions of a construction contract where the general/subcontractor has agreed to provide “input and guidance” on design documents which are provided in the form of “signed and sealed work product” of a licensed architect, engineer, registered land surveyor and that work product is actually incorporated into the design documents used in construction.

Effective date: September 1, 2021. The changes in the law addressed in SB 219 apply only to a contract entered into on or after the effective date.

Key Takeaway: SB 219 ends the Lonergan Doctrine and brings Texas in line with the rest of the country which follows the Spearin Doctrine. For post-September 1, 2021 contracts, general/subcontractors will avoid liability if the defects in the project were caused by design defects in the owner-provided plans and specs and not the workmanship, provided that they disclose any defects in these plans that they discover by ordinary diligence.

b) The Texas Legislature expands the list of types of organizations that prevailing parties may seek attorney’s fee awards from:

Texas Civil Practice and Remedies Code section 38.001 previously allowed the award of attorney fees to a prevailing claimant against only individuals and corporations, not limited liability companies, partnerships, or other types of non-corporate private business entities. The Texas Legislature passed House Bill 1578 in May 2021 which finally amends section 38.001 to include several other business entities besides a corporation as the target for attorney’s fee award requests.

More specifically, HB 1578 adds a new subsection (a) to section 38.001 defining an “organization” to mean the same as defined in section 1.002(62) of the Texas Business Organizations Code, which includes: “a corporation, limited or general partnership, limited liability company, business trust, real estate investment trust, joint venture, joint stock company, cooperative, association, bank, insurance company, credit union, savings and loan association, or other organization, regardless of whether the organization is for-profit, nonprofit, domestic, or foreign.”

Effective date: September 1, 2021. The changes in the law addressed in SB 219 apply only to a contract entered into on or after the effective date.

Key Takeaway: Now prevailing plaintiffs or claimants will be able to seek attorney’s fees from a much broader range of non-corporate business entities for contracts entered into starting on September 1, 2021. Prevailing defendants generally are still not entitled to attorney’s fees under Section 38.001 unless they file a counterclaim or request for fees in its answer based on the contract.

c) The Texas Legislature adds another interlocutory appeal category for TXDOT contractors:

The Texas Legislature passed HB 2086 to amend Section 51.014(a) of the Texas Civil Practice and Remedies Code to add a subsection (15) for Texas Department of Transportation (“TXDOT”) contractors. Now HB 2086 has authorized the interlocutory appeal of an order either granting or denying a motion for summary judgment filed by certain contractors based on Section 97.002. More specifically, these contractors are permitted to appeal the grant or denial of summary judgment cases arising out of the conduct of a contractor who, under Section 97.002 of the Texas Civil Practice and Remedies Code, constructs or repairs a highway, road, or street for the TXDOT if, at the time of the personal injury, property damage, or death, the contractor was in compliance with contract documents material to the condition or defect that was the proximate cause of the personal injury, property damage, or death.

Effective date: June 16, 2021. The changes in the law addressed in HB 2086 apply only to a contract entered into on or after the effective date.

Key Takeaway: The Texas interlocutory appeal statute, which previously had fourteen categories of motions which were permitted for interlocutory appeals, has been expanded on a consistent basis in recent legislative sessions to add new categories. HB 2086 continues the trend to add a new interlocutory appeal category for summary judgments filed by TXDOT contractors.

d) The Texas Legislature simplifies the mechanic’s lien statute:

The Texas Legislature passed HB 2237 to amend Chapter 53 of the Texas Property Code to clarify the mechanic’s lien process. HB 2237 impacts subcontractors in numerous ways, including the following:

1) Establishes uniformity in the notice requirements by imposing the same notice obligation on all subcontractors regardless of with whom they have contracted. Rather than sending one notice to the owner and one to the general contractor, the single notice now required must be sent to both simultaneously. Additionally, HB 2237 prescribes the form of the notice to be given under both Section 53.056 (notice of derivative claimant) and 53.057 (notice of contractual retainage);

2) Adds alternative methods for delivery of the notices required to be sent under Sections 53.056 and 53.057 (as detailed below);

3) Eliminates the requirement that an architect, engineer or surveyor have a direct contractual relationship with the owner to be entitled to file a lien;

4) Eliminates an owner’s ability to cut off the time period in which lien claims can be perfected through the filing of an affidavit of completion or notice of termination or abandonment;

5) Shortens the deadline to bring suit to foreclose a lien to the first anniversary of the last day on which a claimant may file a lien affidavit under Section. 53.052; and

6) Removes the requirement that the statutory lien waivers under Section 53.284 be notarized.

Effective date: January 1, 2022. The changes in law made by HB 2237 apply only to an original contract entered into on or after the effective date. An original contract entered into before the effective date is governed by the law as it existed immediately before the effective date, and that law is continued in effect for that purpose.

Key Takeaway: HB 2237 will help streamline the process to file a mechanic’s/contractor’s/materialmen’s lien and make lien perfection much easier in Texas.

e) The Texas Legislature allocates money for new tuition revenue bonds for public higher education construction projects:

During the Third Special Session in late 2021, the Texas Senate passed SB 52, which will issue about $3.3 billion in tuition revenue bonds, now renamed Capital Construction Assistance Projects (“CCAP”). The governor had added this Third Special Session to determine how to spend the $16 billion in federal COVID-19 relief money allocated to Texas. SB 52 was signed by the governor on October 25, 2021, and it took effect on January 18, 2022. These CCAPs will fund public college and graduate school/higher education program construction and renovations and improvement projects at nearly every public college and university in Texas. SB 52 also establishes a new Capital Project Oversight Commission that will develop guidelines for project approval. The new CCAP funds will now be overseen by the Texas Comptroller’s contract advisory team and will be reported to the Legislative Budget Board’s contract database.

Effective date: January 18, 2022. The changes in the law addressed in SB 52 apply only to a contract entered into on or after the effective date.

Key Takeaway: While the former tuition revenue bonds will now be called CCAPs, the bigger change will be greater oversight from the Legislature and more procedural hoops to go through for contractors to request and obtain the funds for higher education construction and renovation projects in Texas.

2) Recent Texas Supreme Court cases involving the construction industry:

a) Signature Indus. Servs., LLC v. Int’l Paper Co., — S.W.3d —, 2022 WL — (Tex. Jan. 14, 2022):

The principal issue in this recent case was whether the plaintiff was entitled to recover consequential damages for breach of a construction contract. Signature Industrial Services (Signature) had a contract with International Paper (IP) to upgrade equipment at an IP paper plant. While the jury awarded $2.4 million in direct damages for breach of contract as requested by Signature, it also awarded about $56 million in consequential damages based on expert testimony that a $42 million sale of Signature as a company to a suitor named Primoris had fallen through as a result of IP’s breach, and that Signature had also suffered a loss of about $12 million in “book value” as a result of the breach and about $2 million in penalties for non-payment of payroll taxes.

On appeal, the Texas Supreme Court held that none of the consequential damages could be awarded. Under Texas law, consequential damages are not available unless the parties contemplated at the time they made the contract that such damages would be a probable result of the breach. Consequential damages must also be proved with reasonable certainty. The Court held that the $42 million in damages that reflected the loss of the sale of the company could not be awarded because IP was unaware of the pending sale of Signature to Primoris. Signature argued that the $42 million could be viewed as part of the decline in Signature’s “market value,” but assessing the award in these terms did not overcome the bar that such damages were not foreseeable at the time the agreement was made. The $12 million figure allegedly reflecting the loss in Signature’s “book value” was also not recoverable because this figure was not established with reasonable certainty. Signature’s expert had arrived at this figure by simply looking at balance sheets before and after the breach, and attributing all of the difference in book value to the breach, a method that did not provide the requisite proof with reasonable certainty of damages attributable to the breach.

Key Takeaway: None of the $42 million in consequential damages awarded by the jury for breach of the construction contract were upheld by the Texas Supreme Court. These consequential damages, reflecting the loss of the sale of the company, were rejected as not proven with reasonable certainty because the defendant IP was not made aware of the pending sale of Signature to Primoris during the contract negotiation process.

b) In re Texan Millwork, 631 S.W.3d 706 (Tex. Oct. 1, 2021):

This discovery dispute arises from a fatal industrial accident in which a granite store employee died when two 400-pound granite slabs fell off a construction worker’s truck. After obtaining a default judgment against that construction worker, Lazaro Cabrera, the survivors added claims against Texan Millwork, a cabinet-maker that had hired Cabrera to fabricate the granite slabs into countertops for a residential construction project. Shortly after being sued, Texan Millwork obtained a sworn statement from Cabrera, which it later offered as evidence to support a summary judgment motion asserting that he was an independent contractor not subject to the cabinet-maker’s control at the time of the accident. Cabrera subsequently evaded the survivors’ multiple attempts to serve him with a subpoena for an oral deposition.

The trial court ordered Texan Millwork to make the worker available for a deposition within twenty-one days. The court of appeals denied mandamus relief, citing disputed evidence that Texan Millwork employed or controlled the worker Cabrera on the day of the accident, some three years before the survivors served the deposition notice.

After a successor trial judge declined to reconsider the ruling, the Texas Supreme Court conditionally granted mandamus relief because Texas Rule of Civil Procedure 199.3’s plain language precludes a trial court from compelling a party to produce a witness when employment and control are lacking at the time production is requested or required. The Texas Supreme Court found no evidence bearing on employment or control of Cabrera by Texan Millwork that either existed contemporaneous with service of the deposition notice or thereafter and the record instead bore uncontradicted evidence to the contrary. Focusing on the relevant time period, the Court held that (1) the trial court’s order exceeded the permissible bounds of discovery; and (2) the error was irremediable on appeal.

Key Takeaways: Under TRCP 199.3, only a witness that is employed or controlled by a party at the time of the deposition may be compelled for a deposition. Because there was a lack of evidence showing employment or control of the independent contractor Cabrera by the cabinet subcontractor Texan Millwork, mandamus was granted to quash the deposition notice.

c) JLB Builders, LLC v. Hernandez, 622 S.W.3d 860 (Tex. May 7, 2021):

JLB Builders, LLC, was the general contractor for a high-rise construction project in Dallas, Texas, and subcontracted the concrete work to Capform, Inc., which employed Hernandez. Hernandez was injured on the job and sued JLB for negligence and gross negligence, claiming that JLB retained contractual and actual control over Capform and, thus, owed him a duty of care. The trial court granted summary judgment for JLB, but the en banc court of appeals vacated the trial court’s judgment as to the negligence claim. On appeal, the Texas Supreme Court reinstated the summary judgment win for the general contractor because the general contractor JLB did not exercise actual control over the work of the subcontractor Capform’s employee, Hernandez, as required to demonstrate a duty of care. In addition, the contract between JLB and Capform did not provide a basis for imposing a duty of care on the general contractor to ensure the subcontractor employee’s safety.

Key Takeaways: The Texas Supreme Court reversed because there was no genuine issue of material fact regarding the existence of a duty of care on the general contractor for the subcontractor’s employee. Standard provisions in subcontracts generally do not impose a duty of care toward subcontractor employees unless you can show actual control by the general contractor over the work of that employee.

d) Aerotek, Inc. v. Boyd, et al., 624 S.W.3d 199 (Tex. May 28, 2021):

Aerotek hires hundreds of thousands of employees around the globe to work as contractors through online-only hiring applications called an “onboarding” process. This onboarding process allows the applicant to fill out the hiring application online, which also contain a mutual arbitration provision, and provide a digital signature. Aerotek hired the four employees here to work on a construction project, but were terminated soon after starting work, and they sued Aerotek for racial discrimination and retaliation claims. On appeal, the Texas Supreme Court upheld Aerotek’s motion to compel arbitration despite simple denials by the new construction company employees that they had not signed separate arbitration agreements or read the electronic contract agreements containing mutual arbitration provisions they had signed during the onboarding process.

Key Takeaways: Similar to software license agreements that many people scroll past and click on agree to be able to use the program, the onboarding process at many companies has moved online and arbitration agreements are often placed in employment contracts or hiring applications, especially in the construction industry. The motion to compel arbitration was upheld here by the Texas Supreme Court despite the simple denials by the new construction company employees that they had not read the electronic contract agreements containing mutual arbitration provisions they had signed during onboarding. Simple denials that the employees signed the contracts containing the arbitration provision are insufficient to prevent attribution of electronic signatures on the hiring applications to the employees.

e) Los Compadres Pescadores, LLC v. Valdez, et al., 622 S.W.3d 771 (Tex. Mar. 26, 2021):

A subcontractor’s employees were electrocuted by a power line while digging foundation piers for condominiums on South Padre Island, Texas. The employees, Valdez and Teran, sued the property owner, Los Compadres Pescadores, LLC, who had hired the subcontractor, Torres, to manage and supervise the project, who, in turn, hired Valdez and Teran. The jury found the property owner liable under both ordinary-negligence and premises-liability theories, and the court of appeals affirmed. On appeal, while the property owner contended that Chapter 95 of the Texas Civil Practice and Remedies, which limits liability of property owners for injuries of independent contractors on their property, applies and that the employees failed to submit legally sufficient evidence as that statute requires, the employees contended that Chapter 95 does not apply.

The Texas Supreme Court affirmed, first holding that Chapter 95 does apply because evidence showed that the energized power line created a dangerous condition of the piling itself. Nevertheless, the Court held that the employees had still established their claims under Chapter 95 because: (1) evidence established that the subcontractor Torres was the property owner’s agent; (2) the property owner had actual knowledge of the dangerous condition; (3) although the power line was open and obvious, the fact that it was energized and dangerous was not open and obvious; and (4) the owner’s negligent failure to warn or make safe was a substantial factor in causing the employees’ injuries.

Key Takeaway: The Texas Supreme Court’s ruling here narrows the scope of cases that fall within Chapter 95 to those when an employee is injured by a dangerous condition of the same improvement on which the employee was working, not simply a general workplace injury.

The Connecticut Appellate Court Decides That Construction Contractor Was Not Obligated To Continue Accelerated Schedule to Mitigate Its Damages Following Late Delivery of Materials by Supplier

In United Concrete Prods. v. NJR Constr., LLC, 207 Conn. App. 551, 263 A.3d 823 (2021), the Connecticut Appellate Court has issued a decision that should be of interest to the Connecticut construction industry and the construction bar. The lawsuit arose out of the late delivery of materials on a construction project, which is a frequent problem on construction projects. In United Concrete Products, the defendant general contractor, NJR Construction, LLC (“NJR”) was retained by the State of Connecticut Department of Transportation (“DOT”) to replace a bridge over the Hockanum River (“Project”). Id. at 555-58 (2021). The Prime Contract provided that NJR with an eight-week time-frame to perform the work, at which time the road would be closed to traffic. Id. The Prime Contract also provided for a bonus of $3,000 for each day the road was opened to traffic prior to the eight week deadline of August 8, 2016, and for liquidated damages of $3,000 for each day the road remained closed beyond the deadline. Id.

NJR subsequently entered into a purchase order (“Subcontract”) with the plaintiff, United Concrete Products, Inc. (“United”), whereby United agreed to provide certain concrete components for the Project, including ten pre-stressed concrete beams. Id. The Subcontract required that United deliver the concrete beams by June 7, 2016, but, NJR did not actually schedule the delivery until June 29, 2016. Id. Nevertheless, even with that schedule NJR could have reopened the road by July 19, 2016, which would have allowed it to receive the full $60,000 incentive bonus. However, United did not deliver the concrete beams until July 26, 2016, which caused NJR to lose the incentive bonus, be assessed liquidated damages by the DOT, and to incur additional delay damages. Id. After deducting the amount of $179,500 in damages that it incurred due to United’s late delivery of the beams, NJR paid United the balance of $66,074.75. Id.

United then filed a lawsuit in the Connecticut Superior Court seeking, among other things, payment of the full amount due under the Subcontract, without the offset, a claim for violation of Connecticut’s Prompt Payment Act, as well as a claim against NJR’s payment bond surety under the Connecticut’s Little Miller Act.1 Id. NJR asserted affirmative defenses and a counterclaim alleging, among other things, that United breached the Subcontract by failing to meet the delivery deadline for the beams, and violated the Connecticut Unfair Trade Practices Act (“CUTPA”) by repeatedly misrepresenting when it would deliver the materials. Id.

One of United’s defenses to NJR’s breach of contract counterclaim was that NJR had failed to mitigate its damages by failing to maintain its accelerated work schedule on the Project after United’s late delivery of the beams, which would have substantially reduced NJR’s damages. The defense was based upon the fact that prior to the delivery of the beams on July 26, 2016, NJR had been taking a “fast-track” approach to the Project; i.e., working on an accelerated schedule, in order to maximize its ability to receive the incentive bonus. Id. at 567. However, after United’s untimely delivery of the beams, and the realization that it would not receive any incentive bonus from the DOT, NJR abandoned its fast-track approach to the schedule, and proceeded at a regular pace. Id.

The trial court ultimately rendered judgment in favor of United on its breach of contract claim, finding that because the contract was for the sale of goods, and was therefore governed by the Article 2 of Uniform Commercial Code (“UCC”), the fact that NJR accepted the beams despite the late delivery, NJR was liable to pay for the full amount due under the Subcontract without a setoff. Id. at 560. The trial court also awarded NJR the full amount of its claimed damages against United on the counterclaim for late delivery of the beams, and also for United’s violation of CUTPA. Id. at 559. The trial court rejected United’s mitigation of damages defense. On appeal, the Connecticut Appellate Court affirmed the relevant portions of the judgment below, including with respect to the mitigation of damages issue.

The Appellate Court reiterated the general proposition that in the context of contracts and torts, the party receiving the damage award has a duty to make reasonable efforts to mitigate damages. Id. at 567. The Court further explained as follows: “To claim successfully that the plaintiff [or counterclaim plaintiff] failed to mitigate damages, the defendant [or counterclaim defendant] must show that the injured party failed to take reasonable action to lessen the damages; that the damages were in fact enhanced by such failure; and that the damages which could have been avoided can be measured with reasonable certainty. … Furthermore, [t]he duty to mitigate damages does not require a party to sacrifice a substantial right of his own in order to minimize a loss.” Id. (quoting Sun Val, LLC v. Commissioner of Transportation, 330 Conn. 316, 334, 193 A.3d 1192 (2018)).

Although United argued that the trial court erred by failing to offset or reduce NJR’s damages based on failure to mitigate because NJR abandoned its fast-track work schedule following the late delivery of the beams, the Appellate Court disagreed. The Court agreed with NJR’s position that once NJR realized that it was not going obtain the incentive bonus due to United’s late delivery of the beams, the was no reason for NJR to continue with the accelerated schedule. Id. at 567-68. Because NJR was only obligated to make reasonable efforts to mitigate its damages, such reasonable effort only entailed working at a normal, rather than an accelerated pace. Id. at 568.

What is interesting about this decision is that NJR had already established the fast-track schedule for the Project, but only reduced it to a normal schedule after United’s late delivery of the beams, rather than maintaining the status quo. Nevertheless, the Appellate Court found once United breached the Subcontract by delivering the beams late, thus eliminating the very reason that NJR was operating on the accelerated schedule, it was no longer reasonable to expect NJR to maintain that accelerated schedule. Accordingly, under the proper circumstances, a party can defeat a failure to mitigate defense, even if its post-breach conduct arguably increased its damages.
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1 The payment bond claim and other issues discussed in the lengthy appellate decision are outside the scope of this article, which is focused on the mitigation of damages issue.