August 13, 2018
Author: Matthew J. Sullivan
Organization: DuBois, Bryant, & Campbell, LLP
In the construction industry, the terms of the contract provide the foundation for loss prevention and litigation avoidance. Indeed, when confronted with a damaging event, each party must analyze its contractual obligations in order to determine whether to absorb certain costs, compromise, or insist on receiving full compensation in time and/or money. Unfortunately, there are few bright lines that can be inserted into a contract in order to avoid disputes. Too often, for every general rule in contract law, there are myriad exceptions which may, or may not, be applicable.
This article is intended to provide some general insight into several troublesome contract clauses that are frequently inserted into contracts involving owners, design professionals, contractors, subcontractors and suppliers. Please note that this article is not a substitute for legal advice and the reader is cautioned to consult with their counsel with any questions or concerns about the duties and obligations of the parties to any contract.
II. PRELIMINARY CONTRACT ISSUES
A. Which Law Applies?
A contract is “a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes a duty.” Restatement (Contracts) Second § 1. The contract can be as simple as one promise between two parties or as complicated as numerous promises between many parties. Needless to say, the enforcement of promises has been an issue since the first breach of a promise thousands of years ago.
When Texas adopted the common law of England, it adopted a body of contract law that was, relatively speaking, in its adolescent years. During the nineteenth and twentieth centuries, courts and the legislature continued to identify the duties and obligations of parties to contracts and determined how certain clauses were to be construed. Of course, we are still tinkering around with finding exceptions to the enforcement of certain promises (indemnity, no damage for delay, and contingent payment clauses are good examples) and the courts of appeals continue to opine on contract law.
- Common Law or Uniform Commercial Code?
The first task in the application of contract terms to a dispute is the determination of which law applies? In contracts solely for services, a combination of common law (court opinions) and statutory law is applied to the interpretation of the duties and obligations contained in a contract. In contracts solely for goods (materials), Articles One and Two of the Uniform Commercial Code will be applicable. The Uniform Commercial Code is a codification of the common law of sales regarding transactions involving goods. Texas adopted the Uniform Commercial Code with certain modifications and it is codified as the Texas Business and Commerce Code. In contracts that include a combination of services and the supply of goods, the court will look to the predominant factor in determining whether to apply common law or the Texas Business and Commerce Code. See G-W-L, Inc. v. Robichaux, 643 S.W. 2d 392, 394 (Tex. 1982)(reversed on other grounds).
The determination of which law applies is very important because the Texas Business and Commerce Code includes, among other things, very specific obligations and remedies in the event of a breach of an agreement. The Code also includes various “gap fillers” in the event the purchase order for goods is silent on subjects such as what to do when the goods are non-conforming.
B. Types of Contracts
Generally speaking, most construction contracts are written. Frankly, the parties to the construction process are well-advised to reduce their agreements to written form. Too many times, memories have faded as to the terms of an oral agreement. Certain contracts must be in writing. In contracts involving services, the “statute of frauds” requires that any contract that cannot be performed within one year must be in writing. If it is possible to perform a contract within a one year period, then there is no absolute requirement that the agreement be in a written form.
Similarly, the Texas Business and Commerce Code requires that any contract for the purchase of goods of $500 or more must be in writing. Of course, the contract does not have to be as formal as a purchase order, and it can be reflected in one or more letters between the parties.
There are occasions where the parties to a contract do not reduce the terms of their agreement to writing. Some still believe that a handshake is all they need in order to perform a contract. Yes, things make work out just fine, but in the event of a dispute the parties will greatly regret their failure to rely on a written contract. Still worse, if the Statute of Frauds is applicable, then the parties may find themselves without any enforceable agreement. Any participant in the construction industry must get in the habit of insisting on a signed contract prior to beginning performance of the work.
Sometimes, in the absence of a written or oral contract, the law implies a contract between the parties. The best example of an implied contract in the construction industry is the claim for quantum meruit. Texas law recognizes a cause of action for “quantum meruit,” which is a claim for unjust enrichment based on an implied agreement to pay for benefits received. Heldenfels Bros. v. City of Corpus Christi, 832 S.W.2d 39 (Tex. 1992). The elements of a quantum meruit claim include:
- valuable services and/or materials were furnished;
- to the party sought to be charged;
- which were accepted by the party sought to be charged; and
- under such circumstances as reasonably notified the recipient that the claimant, in performing, expected to be paid by the recipient.
Id. at 41; City of Corpus Christi v. Acme Mechanical Cont., 736 S.W.2d 894, 898 (Tex. App.–Corpus Christi 1987, writ denied). Most often, a quantum meruit theory is used when a contractor has performed extra work that is outside of the written contract. In litigation, it should always be used as an alternative theory, particularly when there is a dispute as to whether the extra work was authorized by the other party.
C. Battle of Forms
The “battle of the forms” describes the situation where one party makes an offer and another party tries to accept the offer by sending its own form with different or additional terms. Examples of this situation occur daily in the construction industry and typically involve situations where a subcontractor sends a written proposal in a contract form and the general contractor sends its own subcontract form with different terms. Similarly, in the purchase of materials, many times a supplier forwards a purchase order to the contractor only to have the contractor send its own purchase order to the supplier.
This becomes a problem when neither party signs the other party’s agreement and a dispute follows. The problem then becomes determining which terms will control. Section 2.207 of the Texas Business and Commerce Code solves this problem by outlining the process that a court will follow in deciding which terms control. Between merchants–persons who deal in the goods of the kind or otherwise by occupation have knowledge or skill in the industry–if a purchase order includes different or additional terms, those new terms become part of the contract unless:
- the offer expressly limits acceptance to the terms of the offer;
- they materially alter it; or
- notification of objection to them has already been given or is given within a reasonable time after notice of them is received.
If the terms conflict, then the terms cancel each other out and the court will apply “gap fillers” that are included in the code to create the duties and obligations of the parties to the contract. Contractors and suppliers should always make sure that they have reached agreement on all terms of their contract and that each party has signed the agreement. Otherwise, they may find themselves arguing about which changes were material or which “gap fillers” will be included in the contract.
1. Primary Rule - Read Entire Document and Give Effect to All Provisions
All provisions of a contract must be construed together to arrive at the true intent of the parties. El Paso Field Services, L.P. v. MasTec North America, Inc., 389 S.W.3d 802, 805-806 (Tex. 2012) citing Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 333 (Tex. 2011). This canon of construction, which requires courts to look at the entire instrument as a whole, is known as the “four corners” rule. French v. Chevron U.S.A., Inc., 896 S.W.2d 795, 797 (Tex. 1995). The Texas Supreme Court has said that the “orderly way” to do this is “to start at the beginning of the contract and take up the pertinent provisions as they come,” and when they are analyzed, to try to arrive at the proper construction to be placed on the entire contract. Southland Royalty Co. v. Pan American Petroleum Corporation, 378 S.W.2d 50, 53 (Tex. 1964).
2. Secondary Rules
a. Typewritten or Handwritten Provision Controls
If a printed agreement is modified by a written or typewritten provision, the written or typewritten provision controls in the event of an inconsistency. McMahon v. Christmann, 303 S.W.2d 341 (Tex. 1957). Perhaps obviously, this rule is not automatic and absolute and the matter is subject to explanation of the parties’ intent. Roylex, Inc. v. Avco Community Developers, Inc., 559 S.W.2d 833 (Tex. Civ. App.–
Houston [14th Dist.] 1977, no writ). Because typed or handwritten provisions are often added to a printed form of agreement as a result of negotiations, very often in the heat of a last minute attempt to consummate a transaction, each party should take enough time to carefully re-read all provisions of the agreement, including revisions, to prevent an interpretation that differs from the party’s intent.
b. Document Construed Against Drafter
In Texas, written documents are generally construed most strictly against the author, but with the goal of reaching a reasonable result consistent with the parties’ apparent intent. Temple-Eastex v. Addison Bank, 672 S.W.2d 793 (Tex.1984); State Farm Fire & Cas. Co. v. Vaughan, 968 S.W.2d 931, 933 (Tex.1998). It would be useful to state in an agreement that there is not one “author,” and that each of the parties and their counsel have had an opportunity to give input into the document.
c. The Provision First Appearing Wins
In Hughes v. Aycock, 598 S.W.2d 370 (Tex. Civ. App.—Houston [14th Dist.] 1980, writ ref’d n.r.e.), one partner contended that subparagraph B of a section of the partnership agreement was ambiguous because it rendered subparagraph C of that same section meaningless. The court acknowledged the irreconcilable conflict between the two subparagraphs, and resolved the issue by apply the rule that the first provision to appear chronologically controls later conflicting provisions.
Hughes cited Southland Royalty, 378 S.W.2d 50, which sought to resolve an ambiguity created by conflicting royalty clauses in an oil and gas lease. The second and third royalty clauses imposed obligations that clearly conflicted with the obligations under the first royalty clause. The court applied both (i) the rule that gives effect to an “earlier” over a “later” provision in an agreement and (ii) the rule that gives effect to written or typewritten provisions over printed provisions. Of course, neither rule is necessary if the agreement is clearly drafted.
This rule is another illustration of the need to carefully read the entire agreement and identify any conflicting provisions. If a “key” provision conflicts with another provision in the agreement, your client may lose if the other provision is “first.”
d. Specific Language Controls General Terms
If general terms in a contract conflict with specific language in the contract dealing with the same subject, the specific language will control. Reilly v. Rangers Management, Inc., 717 S.W.2d 527 (Tex. 1987); Exxon Corp. v. Emerald Oil & Gas Co., L.C., 348 S.W.3d 194, 215 (Tex. 2011).
In applying the rules of contract construction, the Texas Supreme Court’s pronouncements are instructive: “If we determine that the contract’s language can be given a certain or definite legal meaning or interpretation, then the contract is not ambiguous and we will construe it as a matter of law. . . . But, ‘if the contract is subject to two or more reasonable interpretations after applying the pertinent rules of construction, the contract is ambiguous, creating a fact issue on the parties’ intent.’” El Paso Field Services, L.P., 389 S.W.3d at 806. Perhaps more important is the Court’s admonition that the freedom to contract compels the conclusion that contract enforcement is an “indispensable partner” to this freedom. Id. at 812. The policy in Texas is to avoid a situation where courts are asked by parties to re-distribute risks in a manner that is different from the allocation that the parties agreed upon in their contract. Id. at 811.
E. Incorporation by Reference
Construction contracts are filled with examples of documents that are incorporated by reference. For example, the contract forms between owner and contractor incorporate by reference the A201 General Conditions. In other words, the A201 General Conditions become part of the contract. Likewise, the contract forms include a clause which enumerates the “Contract Documents”–such as the Drawings, Specifications, Supplementary General Conditions, etc. All of these documents become part of the contract.
Texas law recognizes that an extrinsic document will be construed as part of an agreement when it is referred to in a signed contract. Owen v. Hendricks, 433 S.W.2d 164, 166-67 (Tex. 1968); In re Bank One, N.A., 216 S.W.3d 825, 826 (Tex.2007); Clutts v. Southern Methodist University, 626 S.W.2d 334, 336 (Tex. App.–Tyler 19812, writ ref’d n.r.e.); Cullipher v. Weatherby-Godbe Construction Co., Inc., 570 S.W.2d 161, 164 (Tex. Civ. App.–Texarkana 1978, writ ref’d n.r.e.). As a result, caution must be exercised by each party to the contract to make sure that documents that are incorporated into an agreement are consistent with the parties’ agreement.
III. TROUBLESOME CLAUSES
The vast majority of construction projects will involve one or more changes to the contract due to modifications in the scope of work, the occurrence of events beyond the control of the parties, statutory changes, among other reasons. As a result, the parties need to include a contractual mechanism for the orderly processing of changes to the contract.
Article 7 of AIA Document A201, General Conditions of the Contract for Construction (2007 edition), provides for changes in the work. That article explains in detail the use of Change Orders and Construction Change Directives. Like most construction contracts, the AIA general conditions outline a change order process which contemplates that when one of the parties wants to change the terms of the contract, the owner, contractor and architect will evaluate the request for a change and attempt to reach an agreement on how the requested change will affect the Work, the cost of the change, and the time for completion. If the parties reach an agreement, the architect prepares the change order setting forth the adjustments agreed to by the parties, who then sign the order. After the parties execute the change order, it becomes a formal modification to the contract.
The AIA general conditions also provide procedures in the event the owner and contractor are not able to reach agreement on the terms of a change. Specifically, the owner and architect may issue a construction change directive, which enables the owner to change the work required by the contract documents and prescribes the methods by which the owner can adjust the contract price arising from the change. If the contractor disagrees with the pricing of the construction change directive, the architect is authorized to determine interim pricing based on the reasonable costs associated with listed categories of expenses associated with the changed work. In the meantime, under section 7.3.9 of the 2007 AIA General Conditions, the contractor must proceed with the work and the owner must make all payments in accordance with the architect’s interim pricing, and either party may preserve their right to challenge that pricing by asserting a claim under Article 15 of the contract. Although the procedures appear cumbersome on paper, they do provide a formalized methodology for resolving problems associated with changes without disrupting the continued progress of the Work.
Contract modifications need not be in writing unless the Statute of Frauds or the original contract requires it. Construction contracts, however, often contain provisions requiring that “all modifications, changes or extras shall be enforceable only if in writing.” Courts generally enforce these provisions, although courts sometimes consider them waived through certain conduct. See, e.g., Texas Constr. Assocs., Inc. v. Balli, 558 .W.2d 513 (Tex. Civ. App.- Corpus Christi 1977, no writ).
B. Codes and Standards Compliance
1. Sample Contract Provision
The following is an example of a codes and standards clause from a contract between an owner and an architect which addresses the design professional’s obligation to produce documents that are in compliance with codes. The Architect will be responsible for the compliance of the Instruments of Service with all applicable codes, ordinances, regulations, laws and statutes in effect at the time the Instruments of Service are submitted to governmental authorities with jurisdiction for a building permit. The Architect shall review laws, codes, and regulations applicable to the Architect’s services. The Architect shall respond in the design of the Project to requirements imposed by governmental authorities having jurisdiction over the Project
From the owner’s and contractor’s standpoints, it is always a good idea to contractually provide that the Architect and its subconsultants assume the responsibility for providing drawings and specifications that will result in compliance with applicable government codes and standards. Of course, design professionals bristle at this obligation due to the vague definition of “applicable government codes and standards.” More importantly, it is debatable whether any set of drawings will be in compliance with all standards due to: (1) differing interpretations of the codes by local building officials, (2) conflicts within the codes and the standards they incorporate by reference, and (3) conflicts between the building codes and other ordinances or statutes applicable to certain types of construction or building uses. One solution is for a design professional to specifically identify the applicable codes and include an acknowledgment that there may be contradictory interpretations of these codes and other codes or regulations that may be involved in the construction of the project.
C. Concealed Conditions
1. Sample Contract Provision
AIA Document A201-2007, General Conditions of the Contract for Construction, §3.7.4 contains the following clause relating to concealed or changed conditions:
If the Contractor encounters conditions at the site that are (1) subsurface or otherwise concealed physical conditions that differ materially from those indicated in the Contract Documents or (2) unknown physical conditions of an unusual nature, that differ materially from those ordinarily found to exist and generally recognized as inherent in construction activities of the character provided for in the Contract Documents, the Contractor shall promptly provide notice to the Owner and the Architect before conditions are disturbed and in no event later than 21 days after first observance of the conditions. The Architect will promptly investigate such conditions and, if the Architect determines that they differ materially and cause an increase or decrease in the Contractor’s cost of, or time required for, performance of any part of the Work, will recommend an equitable adjustment in the Contract Sum or Contract Time, or both. If the Architect determines that the conditions at the site are not materially different from those indicated in the Contract Documents and that no change in the terms of the Contract is justified, the Architect shall promptly notify the Owner and Contractor in writing, stating the reasons. If either party disputes the Architect’s determination or recommendation, that party may proceed as provided in Article 15.
The changed conditions clause serves to protect the contractor from discovery of unknown conditions that make the work more expensive, more difficult or more costly to perform. The clause provides a mechanism whereby the contractor must promptly notify the owner and architect of concealed or unknown conditions and the architect is then obligated to investigate the claim and, if he/she finds that the complaint about the condition is well taken, recommend an equitable adjustment to the contract sum and/or contract time in light of the newly discovered difficulty. If the parties dispute that recommendation, they may proceed under the contract’s claim provisions located in Article 15.
Most changed conditions clauses, like the one above, include notice provisions which require the party first discovering the changed condition to make a claim for an adjustment of the contract sum and/or time to perform the contract within a certain number of days after the first observance of the condition. This requirement, especially if coupled with a “time is of the essence” provision in the contract, can result in strict enforceability of the notice requirement. Parties wishing to claim under a changed condition clause should therefore be extremely careful to comply with contractual notice provisions.
Changed condition clauses normally cover two types of conditions: (1) subsurface or otherwise concealed or latent physical conditions differing materially from those indicated in the contract (also known as a “Type I” change condition); and (2) unknown physical conditions of an unusual nature differing materially from those ordinarily encountered and generally recognized as inherent in the work called for by the contract (also known as a “Type II” change condition). Both types require the condition to be materially different from that expected.
In regard to “Type I” conditions, the contractor is permitted recovery for conditions that are materially different from those expressly indicated in the Contract Documents. See, e.g., North Harris Co. Junior College Dist. v. Fleetwood Constr. Co., 604 S.W.2d 247, 252-3 (Tex.App.—Houston [14th Dist.] 1980, writ ref’d n.r.e). Where the contract does not expressly indicate the presence or absence of a particular condition, recovery is still possible if there is some indication in the contract for the contractor to reasonably conclude that he will not encounter materially differing conditions. See Foster Constr. C.A. & Williams Bros. v. United States, 193 Ct. Cl. 587, 435 F.2d 873 (1970). Texas courts are more inclined to find such “indications” where the owner has withheld information from the contractor. Compare Fleetwood Constr. Co., 604 S.W.2d at 252-53 (Owner knew of subsurface water condition not indicated in Contract Documents; contractor’s differing site condition claim upheld), with Keith A. Nelson Co. v. R.L. Jones, Inc., 604 S.W.2d 351 (Tex. Civ. App.–San Antonio 1980, writ ref’d n.r.e.) (Owner had no prior knowledge of ground water not shown on plans; contractor’s claim denied).
The “Type II” differing site conditions (unknown, unusual conditions not normally encountered) are more difficult for the contractor to prove because he must show that the condition was unknown and unusual and not reasonably foreseeable after a review of the Contract Documents, inspection of the site, and consideration of the general experience reasonably to be expected of a contractor familiar with work of a similar nature. Normally, to establish that the condition was unusual and not ordinarily encountered, the contractor must provide the court with some point of reference or comparison, such as pertinent climatological, hydrological, or geological evidence and other relevant and privative evidence about the project site. Recovery is rather straight forward where the different site condition is a result of prior construction of which the contractor was unaware. See, e.g., Olshan Demolishing Co. v. Angleton Indep. School Dist., 684 S.W.2d 179 (Tex. App.–Houston [14th Dist.] 1984, writ ref’d n.r.e.); disapproved on other grounds, Qantel Bus. Sys. Inv. v. Custom Controls Co., 761 S.W.2d 302 (Tex. 1988).
Delegation of Design
- Sample Contract Provision
The 2007 Edition of AIA Document A201 includes a delegation of design clause located at paragraph 3.12.10 as follows:
The Contractor shall not be required to provide professional services which constitute the practice of architecture or engineering unless such services are specifically required by the Contract Documents for a portion of the Work or unless the Contractor needs to provide such services in order to carry out the Contractor’s responsibilities for construction means, methods, techniques, sequences and procedures. The Contractor shall not be required to provide professional services in violation of applicable law. If professional design services or certifications by a design professional related to systems, materials or equipment are specifically required of the Contractor by the Contract Documents, the Owner and the Architect will specify all performance and design criteria that such services must satisfy. The Contractor shall cause such services or certifications to be provided by a properly licensed design professional, whose signature and seal shall appear on all drawings, calculations, specifications, certifications, Shop Drawings and other submittals prepared by such professional. Shop Drawings and other submittals related to the Work designed or certified by such professional, if prepared by others, shall bear such professional’s written approval when submitted to the Architect. The Owner and the Architect shall be entitled to rely upon the adequacy, accuracy and completeness of the services, certifications or approvals performed by such design professionals, provided the Owner and Architect have specified to the Contractor all performance and design criteria that such services must satisfy. Pursuant to this Subparagraph 3.12.10, the Architect will review, approve or take other appropriate action on submittals only for the limited purpose of checking for conformance with information given and the design concept expressed in the Contract Documents. The Contractor shall not be responsible for the adequacy of the performance or design criteria required by the Contract Documents.
For the last several years, contractors, subcontractors and suppliers have complained that design professionals, with increasing frequency, attempt to shift design responsibility to the builder through performance specifications and during the shop drawing and submittal process. The 1987 Edition of the A201 General Conditions recognized the possibility that the contractor may need to provide professional certification of certain matters, but there were complaints that the clause (3.12.11) was too vague. The clauses set forth in more recent editions concerning the delegation of design and the contractor’s obligations to review the Contract Documents appear to provide the contractor with more protection and outline the limitations on the contractor’s responsibilities to identify the architect’s errors and omissions. Pursuant to paragraph 3.12.10 of the 2007 Edition A201, it is possible for an architect to delegate design responsibility for certain components or when design responsibility is a matter of construction means, methods, techniques, sequences and procedures. A contractor is not required to violate “applicable law,” which was inserted into the clause in an effort to address contractors’ concerns that several states prohibit the delegation of design responsibility. To the extent the design services are related to systems, materials or equipment, then the owner and architect are to “specify all performance and design criteria.” Moreover, if shop drawings or other submittals relate to the design prepared by the contractor’s architect or engineer, then the contractor’ designer must approve these documents before submitting them to the project architect for his or her review.
Delegation of design raises some other issues of concern. If a contractor is required to provide certain design services, the contractor should check the insurance requirements outlined in the contract and determine whether the design professional must be insured. Even if there are no insurance requirements, the contractor should hire an insured design professional. Perhaps more important, contractors should review their own insurance policies to determine whether the policy(ies) has an architect’s and engineer’s exclusion.
Another issue on certain public projects is whether the procedures outlined in new paragraph 3.12.10 conflict with the Professional Services Procurement Act located at section 2254.001-.004 of the Texas Government Code, which precludes competitive bidding for professional services.
- Flow Down/Flow Up Provisions
- Sample Contract Provision
The AIA’s “Standard Form of Agreement Between Contractor and Subcontractor” (AIA Document A401-2007) contains the following flow down clause:
The Contractor and Subcontractor shall be mutually bound by the terms of this Agreement and, to the extent that provisions of AIA Document A201–2007 apply to this Agreement pursuant to Section 1.2 and provisions of the Prime Contract apply to the Work of the Subcontractor, the Contractor shall assume toward the Subcontractor all obligations and responsibilities that the Owner, under such documents, assumes toward the Contractor, and the Subcontractor shall assume toward the Contractor all obligations and responsibilities which the Contractor, under such documents, assumes toward the Owner and Architect. The Contractor shall have the benefit of all rights, remedies and redress against the Subcontractor that the Owner, under such documents, has against the Contractor, and the Subcontractor shall have the benefit of all rights, remedies and redress against the Contractor that the Contractor, under such documents, has against the Owner, insofar as applicable to this Subcontract. Where a provision of such documents is inconsistent with a provision of this Agreement, this Agreement shall govern. AIA Document A401-2007, Standard Form of Agreement Between Contractor and Subcontractor (“A401”), Article 2.
The purpose of a flow down clause is to make one document part of another so that all of the duties owed to the owner by the contractor are incorporated into the contractor-subcontractor agreement. Through the use of a flow-down clause, the owner’s demands on the contractor are incorporated by reference into the subcontract and are thus considered part of it. International Erectors, Inc. v. Wilhoit Steel Erectors & Rental Service, 400 F.2d 465 (5th Cir. 1968). Likewise, a flow-up provision imposes on the contractor all of the obligations and duties to the subcontractor that the owner owes to the contractor. The specific language of the flow-down clause is highly important, however, as are the documents incorporated by those provisions. Tribble & Stephens Co. v. RGM Constructors, L.P., 154 S.W.3d 639, 664-5 (Tex.App.—Houston [14th Dist.] 2004, review den.).
- Force Majeure
- Sample Contract provision
Except to the extent contractor is required to purchase policies of insurance as set forth in paragraph ____ of this agreement, the Contractor shall not be responsible for damage occasioned by the Owner or Owner’s agent, acts of God, or other causes beyond the Contractor’s control, provided, however, that in the event of any catastrophe or damage by reason of the above causes, the Contractor shall not be relieved of its obligation to continue the construction and to complete the structure although the date of completion of the project and/or the contract price shall be adjusted to reflect the actual delay and/or damage thus caused.
In contract cases in Texas, the general rule is that an act of God does not relieve the parties of their obligations under the contract unless the parties expressly provide otherwise. GT & MC, Inc. v. Texas City Refining, Inc., 822 S.W.2d 252, 259 (Tex. App.–Houston [1st Dist.] 1991, writ denied). However, force majeure clauses operate to protect the Contractor for delays or other damages that occur as a result of acts of God. Force majeure clauses are enforceable under Texas law. See, e.g., Id.; Rowen Co. v. Transco Exploration Co., 679 S.W.2d 660, 664 (Tex. App.–Houston [1st Dist.] 1984, writ ref’d n.r.e.), cert. denied, 474 U.S. 822, 106 (1985).
American Institute of Architects (AIA) Document A201 contains a force majeure clause in Section 8.3.1. Contractors wishing to invoke the clause’s protection should pay special attention to the claim procedures of Article 15 of the General Conditions.
- Hold Harmless/Indemnity
This is the one clause that seems to generate more calls to lawyers than any other clause in construction contracts–and for good reason. This type of clause typically includes two aspects: a “hold harmless” and an “indemnity.” A hold harmless agreement is a release. An indemnity is an agreement to protect another party (in the financial sense) against some future damaging event. Both concepts shift the risk of damages from one party to another. It is one thing to agree to indemnify your customer from damages caused by your negligence. On the other hand, it is very risky to agree to indemnify your customer from damages caused by your customer’s negligence. The latter agreement is an extraordinary shifting of risk and the courts have explained some bright line rules for the drafting of this type of clause.
Sample Contract Provision
An example of a “limited” hold harmless and indemnity clause is:
The Architect agrees, to the fullest extent permitted by law, to indemnify and hold harmless the client, its officers, directors and employees (collectively, “Client”) against all damages, liabilities or costs, including reasonable attorneys’ fees and defense costs, to the extent caused by the Architect’s negligent performance of professional services under this Agreement and that of its subconsultants or anyone for whom the Architect is legally liable.
“Intermediate” form indemnity provisions operate to shift risk of the indemnitee’s negligence—except for the indemnitee’s sole negligence—to the indemnitor. An example of a clause that shifts the risk of one party’s own negligence to another party is:
CONTRACTOR AGREES TO HOLD HARMLESS AND UNCONDITIONALLY INDEMNIFY OWNER AGAINST AND FOR ALL LIABILITY, COSTS, EXPENSES, CLAIMS AND DAMAGES WHICH OWNER MAY AT ANY TIME SUFFER OR SUSTAIN OR BECOME LIABLE FOR BY REASON OF ANY ACCIDENTS, DAMAGES OR INJURIES EITHER TO THE PERSONS OR
PROPERTY OR BOTH, OF CONTRACTOR, OR OF THE WORKMAN OF EITHER PARTY, OR OF ANY OTHER PARTIES, OR TO THE PROPERTY OF OWNER, IN ANY MANNER ARISING
FROM THE WORK PERFORMED HEREUNDER, INCLUDING, BUT NOT LIMITED TO, ANY NEGLIGENT ACT OR OMISSION OF OWNER, ITS OFFICERS, AGENTS, OR EMPLOYEES…
Atlantic Richfield Co. v. Petroleum Personnel, Inc., 768 S.W.2d 724 (Tex. 1989). Please note that the above clauses are not complete. Typically, the terms of a hold harmless/indemnity are included in several clauses that address not only the indemnification obligations, but also state that the indemnifying party agrees to waive the protection provided by workers’ compensation laws. As more fully discussed below, indemnity is a fairly complicated area of law and each party negotiating a hold\ harmless/indemnity agreement should seek the advice of counsel.
Because indemnification agreements and certain types of release agreements are frequently used to exculpate a party from the consequences of its own negligence, and because the Texas Supreme Court deems these types of agreements to effect extraordinary shifting of risk, the Texas Supreme Court has developed fair notice requirements that apply to these types of agreements. The fair notice requirements include the express negligence doctrine and the conspicuousness requirement.
The Express Negligence Doctrine – The Ethyl v.
Daniel Construction Case and Its Progeny
Until 1987, if an indemnity provision evidenced the indemnitor’s “clear and unequivocal” intention to indemnify the indemnitee against the indemnitee’s own negligence, that aspect of the indemnity provision would be enforced. However, in Ethyl Corporation v. Daniel Construction Company, 725 S.W.2d 705 (Tex. 1987), the Texas Supreme Court adopted the “express negligence rule,” holding that parties seeking to indemnify the indemnitee from the consequences of its own negligence must express that intent in specific terms. In stating the rule, the Ethyl court overruled a number of older cases which had held that an indemnitee’s own negligence could be indemnified without the indemnity provision expressly so providing, but the court did not endorse any particular “magic words” that would suffice in all circumstances.
In the period since Ethyl, a number of specific indemnity provisions have been examined for compliance with the express negligence rule. In Adams Resources Exploration Corporation v. Resource Drilling, Inc., 761 S.W.2d 63 (Tex. App.–Houston [14th Dist.] 1988, no writ), the contractor agreed to indemnify the operator against all claims “without regard to the cause or causes thereof or the negligence of any party or parties” arising in connection with the contract, and further agreed that the indemnification obligations assumed by the “parties hereto,” including the obligation previously quoted, would exist without regard to the negligence of any party or parties. The court held that this indemnity provision met the requirements of the express negligence rule. The court noted that the identical indemnity provision was upheld in Dupont v. TXO Production Corp., 663 F.Supp. 56 (E.D. Tex. 1987). The Adams court also made the following comment: Both parties are professionals in their field and employ highly experienced personnel who understand the importance of the wording of a contract. The contracting parties were in similar bargaining positions. They were legally competent to enter into this agreement, and it should
be binding upon them.
Adams, 761 S.W.2d at 65 (emphasis added). It would be better, though, to refer to the indemnitee’s negligence and not just to the negligence of “any party.” On the other hand, in Monsanto Company v. Owens-Corning Fiberglass Corporation, 764 S.W.2d 293 (Tex. App.–Houston [1st Dist.] 1988, no writ), the contractor agreed to indemnify Monsanto against liabilities suffered by Monsanto “as a result of bodily injuries . . . to any person or damage . . . to any property occurring to or caused in whole or in part by, Contractor” or the Contractor’s agents. Id. It should also be noted that the provision did not describe any actions of Monsanto which were to be indemnified. The court held that the intent of the parties as contained in the contract was not sufficient to satisfy the express negligence rule. Id. These cases clearly underscore the critical importance of using the phrase “including its own negligence” if the indemnitee intends to be so covered.
b. The Conspicuousness Requirement – The Dresser
Industries v. Page Petroleum Case
If the Ethyl case shows how to draft enforceable risk-shifting provisions, the case of Dresser Industries, Inc. v. Page Petroleum, Inc., 853 S.W.2d 505 (Tex. 1993) shows how to present enforceable risk-shifting provisions. Before turning to what the Texas Supreme Court did with the conspicuousness prong of the fair notice requirements, it is important to note that the Supreme Court expanded the application of the fair notice requirements to include release agreements (only those types of releases, however, that relieve a party in advance of liability for its own negligence) as well as indemnity agreements (which were the subject of the Ethyl case). Finding that these types of release agreements and indemnity agreements each operated to shift risk between the parties, the court found no reason not to apply the fair notice requirements to these types of release agreements as well. Id. at 509.
With respect to the conspicuousness requirement, the first issue before the Supreme Court was whether the issue of compliance with the conspicuousness requirements was a fact question for the jury or a question of law for the court. In overruling a prior Supreme Court case on this issue (Goodyear Tire & Rubber Co. v. Jefferson Construction Co., 565 S.W.2d 916 (Tex. 1978)), the Supreme Court concluded that this issue was a question of law for the court. Id. The Supreme Court then moved on to adopt a standard for conspicuousness that shows how to present enforceable risk-shifting provisions. Stating that it was a standard familiar to Texas courts that would promote its objectives of commercial certainty and uniformity, the Supreme Court adopted the Uniform Commercial Code standard for conspicuousness provided in Section 1.201 (10) of the Texas Business and Commerce Code quoted below:
A term or clause is conspicuous when it is so written that a reasonable person against whom it is to operate ought to have noticed it. A printed heading in capitals (as: NON-NEGOTIABLE BILL OF LANDING) is conspicuous. Language in the body of a form is “conspicuous” if it is in larger or other contrasting type or color. But in a telegram any stated term is “conspicuous.”
Id. at 511. In applying this standard to the contractual provisions at issue, the Supreme Court concluded that the release provisions were not conspicuous. The provisions were located on back of the work order in a series of numbered paragraphs without headings or contrasting type. Also, the contracts were not so short that every term could be considered conspicuous. Id.
- Limitations on Indemnification
Under Chapter 130 of the Texas Civil Practice & Remedies Code, an architect or engineer may not be indemnified or held harmless by a contractor from damage that:
(1) is caused by or results from:
(A) defects in plans, designs or specifications prepared, approved, or used by the architect or engineer; or
(B) negligence of the architect or engineer in the rendition or conduct of professional duties called for or arising out of the construction contract and the plans, designs or specifications that are a part of the construction contract; and
(2) arises from:
(A) personal injury or death;
(B) property injury; or
(C) any other expense that arises from personal injury, death, or property injury.
Any attempt by an engineer or architect to contract around this statute is void as a matter of law. However, nothing prevents an architect or engineer from receiving a hold harmless or indemnity from a contractor for the contractor’s negligent acts.
In addition, chapter 130 of the Civil Practice & Remedies Code was amended in 2001 (applicable to contracts entered into after September 1, 2001) to prohibit indemnity agreements where an architect or engineer, whose services are the subject of a construction contract, to indemnify or hold harmless an owner or owner’s agent or employee from liability that is caused by or results from the negligence of the owner or the owner’s agent or employee. This exclusion, however, is not applicable to contracts for single family or multifamily residences. In 1999, the Legislature amended the Texas Government Code to prohibit indemnity agreements where a contractor was required to indemnify or hold harmless the state from claims and liabilities resulting from the negligent acts or omissions of the state governmental entity or its employees. TEX. GOV’T CODE ANN. § 2254.0031 (Vernon Supp. 2001).
The Texas Legislature further restricted the ability of parties to enter into indemnity agreements with the enactment of Chapter 151 of the Texas Insurance Code in 2011. Chapter 151 applies to any “construction contract”—a category that is defined broadly enough to include design contracts and performance bonds—for which an indemnitor procures insurance subject to Chapter 151 or Title 10 of the Insurance Code. Such insurance includes typical Commercial General Liability insurance.
Under Section 151.102 of the Texas Insurance Code, a contract provision is void and unenforceable, as a matter of public policy—and regardless of compliance with the express negligence and conspicuousness rules of Ethyl and Dresser—to the extent that it requires the indemnitor to indemnify or defend the indemnitee from the consequences of the indemnitee’s own negligence.
Except as provided by Section 151.103, a provision in a construction contract, or in an agreement collateral to or affecting a construction contract, is void and unenforceable as against public policy to the extent that it requires an indemnitor to indemnify, hold harmless, or defend a party, including a third party, against a claim caused by the negligence or fault, the breach or violation of a statute, ordinance, governmental regulation, standard, or rule, or the breach of contract of the indemnitee, its agent or employee, or any third party under the control or supervision of the indemnitee, other than the indemnitor or its agent, employee, or subcontractor of any tier.
As a result, “broad-form” and even “intermediate-form” indemnity provisions are now void under most circumstances, and indemnitees can only be indemnified from that portion of the damages attributed to the indemnitor. The only exception to this prohibition, and therefore, the only context in which “broad-form” indemnity agreements are still allowed, involves injury to the indemnitor’s employees or those of its agents or subcontractors. Section 151.103 allows parties to engage in the “extraordinary risk shifting” permitted by Ethyl and Dresser—whereby an indemnitor agrees to indemnify an indemnitee from the consequences of the indemnitee’s negligence—but only with respect to claims of bodily injury or death of the indemnitor’s employees or those of its agents or subcontractors (of any tier).
The Texas Legislature also made sure that indemnitees could not achieve through the back door what the statute forbids them from obtaining through the front door of an indemnity clause. Section 151.104 renders void any provision in a construction contract that requires the indemnitor to purchase insurance coverage, either on a stand-alone basis or as an additional insured endorsement, that includes coverage for liabilities arising from the indemnitee’s own negligence.
Limitation of Liability
- Sample Contract Provision
In recognition of the relative risks and benefits of the project to both the client and the architect, the risks have been allocated such that the client agrees, to the fullest extent permitted by law, to limit the liability of the architect to the client for any and all claims, losses, costs, damages of any nature whatsoever, or claims expenses from any cause or causes, including attorneys’ fees and costs, and expert-witness fees and costs, so that the total aggregate liability of the architect to the client shall not exceed $50,000, or the architect’s total fee for services rendered on this project, whichever is greater. It is intended that this limitation apply to any and all liability or cause of action however alleged or arising, unless otherwise prohibited by law.
Agreements to limit damage liability in the future are generally enforceable. Fox Electric Co., Inc. v. Tone Guard Security, Inc., 861 S.W.2d 79, 82 (Tex. App.—Fort Worth 1993, no writ); citing Allright, Inc. v. Elledge, 515 S.W.2d 266, 267 (Tex. 1974); Interstate Fire Ins. v. First Tape, Inc., 817 S.W.2d 142, 145 (Tex. App.—Houston [1st Dist.] 1991, writ denied). Indeed, contract provisions limiting damages have been enforceable in Texas for many years. A.G. Schepps v. American Dist. Tel. Co. of Texas, 286 S.W.2d 684, 690-91 (Tex. Civ. App.—Dallas 1955, no writ) (upholding provision of burglar alarm service contract limiting damages to $50); Allright, Inc., 515 S.W.2d at 267 (upholding provision of parking garage contract that limited automobile damages arising from parking lot’s negligence to $100). In addition, provided that an agreement does not violate public policy—and when there is no disparity in bargaining power between parties there is not violation of public policy— then it will be enforceable. Fox Electric Company, Inc. v. Tone Guard Security, Inc., 861 S.W.2d 79, 82-83 (Tex. App.--Fort Worth 1993, no writ)(enforceability of limitations of liability, in general); Arthur’s Garage, Inc. v. Racal-Chubb Sec. Systems, Inc., 997 S.W.2d 803, 810 (Tex. App.—Dallas 1999, no pet.).
Limitations of liability can take several types of form in terms of the protection and relief. The Houston Court of Appeals for the 1st District upheld the enforceability of an engineering firm’s limitation of liability clause that did not involve a specific sum of money. See CBI NA-CON, Inc. v. UOP, Inc., 961 S.W.2d 336 (Houston [1st. Dist.] 1997, n.w.h.). CBI NA-CON involved the enforceability of a limitation of liability clause that limited an engineering firm’s liability to reperformance, as opposed to monetary damages. Under the facts of that case, Fina entered into a contract with UOP, Inc. to use UOP’s design for a catalytic cracking unit. Fina also contracted with CBI NACON, Inc. to build part of the catalytic cracking unit. After completion of the project, the catalytic cracking unit failed and Fina sued CBI NA-CON and others for $17 million in damages. CBI NA-CON, in turn, filed a claim against UOP in an effort to obtain “contribution” in the event of an adverse jury verdict against CBI NA-CON. UOP convinced the trial court that the limitation of liability clause barred any claim against it. On appeal, the Court determined that CBI NA-CON could not recover against UOP based on several limitation of liability and exculpatory clauses in UOP’s agreement with Fina. Specifically, the court noted that the Fina/UOP contract prohibits the recovery of damages and that even if Fina directly sued UOP, Fina’s recovery would be limited to requiring reperformance of UOP’s negligently performed services under the contract. Moreover, the Court apparently determined that Fina’s claims against CBI NACON sounded in contract alone and a breach of contract claim is not a basis for contribution under Chapter 33 of the Texas Civil Practice and Remedies Code. In terms of drafting requirements, there is authority indicating that limitations of liability clauses do not have to meet the conspicuousness requirements that the Texas Supreme Court requires in cases of “extraordinary risk-shifting.” See Bergholtz v. Southwestern Bell Yellow Pages, Inc., 324 S.W.3d 195, 198 (Tex. App.—El Paso 2010).
No Damage for Delay
- Sample Clause
Notwithstanding anything to the contrary in the Contract Documents, an extension in the Contract Time, to the extent permitted under subparagraph , shall be the sole remedy of the Contractor for any (i) delay in the commencement, prosecution, or completion of the Work, (ii) hindrance or obstruction in the performance of the Work, (iii) loss of productivity, or (iv) other similar claims (collectively referred to in this subparagraph as “delays”) whether or not such Delays are foreseeable, unless a delay is caused by the acts of the Owner constituting active interference with the Contractor’s performance of the Work, and only to the extent such acts continue after the Contractor furnishes the Owner with notice of such interference. In no event shall the Contractor be entitled to any compensation or recovery of any damages, in connection with any delay, including, without limitation, consequential damages, lost opportunity costs, impact damages, or other similar damages. The Owner’s exercise of any of its rights or remedies under the Contract Documents (including, without limitation, ordering changes in the Work, or directing suspension, rescheduling, or correction of the Work), regardless of the extent or frequency of the Owner’s exercise of such rights or remedies, shall not be construed as active interference in the Contractor’s performance of the Work.
The “no damages for delay” clause is typically inserted in the contract to protect the owner in the event that certain unforeseen occurrences cause delay on the project. The clause operates to exclude claims for damages against the owner for delay of the contractor’s performance through no fault of the contractor. Contractors can become inadvertently liable for design problems through the “no damages for delay” clause. This clause reflects the owner’s and contractor’s agreement that the contractor’s remedy for delay is limited to a time extension–as opposed to claims for various categories of damages. Situations such as design professionals’ slow shop drawing turn-around or delays in interpreting the plans and specifications are prime examples of instances of where a contractor may be denied additional compensation due to a “no damages for delay” clause.
The AIA form contracts do not include a “no damages for delay” clause, but several Texas courts have recognized and enforced them. See, e.g., Green Int’l., Inc. v. Solis, 951 S.W.2d 384 (Tex. 1997)(holding that a “no damages for delay” clause does not need to meet fair notice requirements in order to be enforceable). While the Texas Supreme Court has never explicitly adopted exceptions to the enforceability of “no damages for delay” clauses, other jurisdictions and intermediate courts in Texas have refused to enforce such clauses under the following circumstances: 1) dispute involved a delay which was not intended or contemplated by the parties; 2) delay was due to fraud, misrepresentation, or bad faith by the party seeking the protection of the clause; 3) the delay is so extensive that the party delayed would have been entitled to abandon the contract; and 4) the delay is not within the specifically enumerated delays to which the clause applies. City of Houston v. R.F. Ball Const. Co., Inc., 570 S.W.2d 75, 77 (Tex. Civ. App.–Houston [14th Dist.] 1978, writ ref’d n.r.e.); Port of Houston Authority of Harris County v. Zachry Constr. Corp., 377 S.W.3d 841 (Tex.App.—Houston [14th Dist.] 2012, review granted). However, the 2007 A201 does include a waiver of consequential damages clause which may have the effect of negating damages for delay if the court determines that the damages are consequential and not direct damages.
- No Third Party Beneficiaries
- Sample Contract Provision
The 1987 AIA Standard Form of Agreement between Architect and Consultant (C141) and 1987 AIA Standard Form of Agreement between Design/Builder and Architect (B901) include the following clause:
“Nothing contained in this agreement shall create a contractual relationship with or a cause of action in favor of a third-party against either the architect or consultant.”
Virtually all theories of liability between members of the construction team can be traced back to, or are limited by, the original contract documents. These are the contract between the owner and the architect (and, in turn, between the architect and his consulting engineers), the contract between the owner and the general contractor, and a variety of other contracting scenarios, such as between the general contractor who hires the architect. For purposes of a liability discussion, the most significant element of this scheme is that two parties (for example the architect and the contractor) are working for the owner, rather than each other. In other words, the privity of contract is between the owner and the architect and the owner and the contractor. There is, however, no privity of contract between the contractor and the architect. Therefore, if the contractor or architect wishes to seek damages from the other, it is often precluded from raising its breach of contract claims. Instead, it will try to rely on the theory that it is a third-party beneficiary to the contract it is attempting to claim under, but to which it is not a party. Third-party beneficiary claims are not likely to succeed, however, in contracts containing the AIA language cited above. If the party claiming under a contract is not in privity of contract with the person it is claiming against, the AIA language seems to preclude the claim.
Construction contracts and statutes affecting rights under construction contracts are often replete with notice requirements. AIA Document A201 contains dozens of sections requiring various forms of written notice for the section to be effective. The following are examples of but a few. There are usually notice requirements imbedded in changed or concealed conditions clauses. There are notice requirements inherent in the owner’s right to terminate work. The Texas Property Code’s lien statutes contain several notice provisions. Insurance policies contain their own notice requirements. Time is of the essence clauses are often included to heighten the effect of the other notice provisions in the contract.
Obviously, it is not possible to compile an exhaustive list of instances where notice is required. Therefore, it is imperative that each party to the contract reads, understands and complies with the notice requirements in the contract. Otherwise, the party failing to give the required notice may find that it has waived its otherwise legitimate claims.
It should be noted that the Texas Legislature has determined that some notice provisions—specifically notice provisions that require notice of a claim for damages as a condition precedent to the right to sue on the contract—are void if they require notice within less than 90 days or are otherwise not reasonable. TEX. CIV. PRAC & REM. CODE §16.071. The Texas Supreme Court has held, however, that Section 16.071 does not prevent the enforcement of contract stipulations that require notice of something other than a claim for damages, even when such stipulations might ultimately foreclose a party’s rights. American Airlines Employees. Fed. Credit Union v. Martin, 29 S.W.3d 86, 97-8 (Tex.2000); Community Bank & Trust, S.S.B. v. Fleck, 107 S.W.3d 541, 542 (Tex.2002).
- Ownership of Documents
- Sample Contract Provisions
The agreement between Owner and Architect (or engineer) is the first place to look when the issue of ownership of documents arises. Keep in mind that the ownership of the documents is separate and distinct from the ownership of the copyright. Article 3 of the AIA B102-2007 (Owner-Architect) agreement includes several paragraphs which outline the ownership rights, licenses, and rights to use documents when the Architect is in default of its agreement. One of the clauses, Section 3.2, states:
The Architect and the Architect’s consultants shall be deemed the authors and owners of their respective Instruments of Service, including the Drawings and Specifications, and shall retain all common law, statutory and other reserved rights, including copyrights. Submission or distribution of Instruments of Service to meet official regulatory requirements or for similar purposes in connection with the Project is not to be construed as publication in derogation of the reserved rights of the Architect and the Architect’s consultants.
It is important to reiterate that this clause is only a part of the multi-paragraph outline of rights relating to the use of the documents. There are other clauses which concern licenses to use the documents, including the Architect’s obligation to obtain nonexclusive licenses from its consultants.
The 2007 revisions to A201 recognize the need to copy drawings in connection with the building process and set forth the permissible uses to which Instruments of Service may be put by contractors, subcontractors and suppliers, while reiterating that ownership of those documents and their copyrights is retained by the design professionals that authored them.
The Architect and the Architect’s consultants shall be deemed the authors and owners of their respective Instruments of Service, including the Drawings and Specifications, and will retain all common law, statutory and other reserved rights, including copyrights. The Contractor, Subcontractors, Sub-subcontractors, and material or equipment suppliers shall not own or claim a copyright in the Instruments of Service. Submittal or distribution to meet official regulatory requirements or for other purposes in connection with this Project is not to be construed as publication in derogation of the Architect’s or Architect’s consultants’ reserved rights.
The Contractor, Subcontractors, Sub-subcontractors and material or equipment suppliers are authorized to use and reproduce the Instruments of Service provided to them solely and exclusively for execution of the Work. All copies made under this authorization shall bear the copyright notice, if any, shown on the Instruments of Service. The Contractor, Subcontractors, Sub-subcontractors, and material or equipment suppliers may not use the Instruments of Service on other projects or for additions to this Project outside the scope of the Work without the specific written consent of the Owner, Architect and the Architect’s consultants. AIA Document A201-2007, General Conditions of the Contract for Construction (“A201”), §§1.5.1, 1.5.2.
Ownership and control of documents can become a sticky issue if the contract does not provide from the outset who will retain ownership of the documents. The parties should discuss this issue fully in advance and if the Architects intends to maintain ownership of its drawings throughout the project and afterward, it should insist on contractual language specifically explaining the conditions and limitations on the owner’s and contractor’s use. Likewise, if the owner wishes to become the owner of the Architect’s drawings, that should be provided for in the contract to prevent future lawsuits over the rights to the documents. Keep in mind that ownership of the copyright to the documents is separate from the ownership of the document itself and this topic should be addressed in any contract with an architect or contractor, as well.
- Payment Clauses
There are three methods used for pricing a construction project: the lump-sum method, the cost-plus method and the unit-price method. The most common, and the simplest to calculate, is the lump-sum method. Under a lump-sum contract, the parameters of the project are defined and the total contract sum is set, barring approved change orders which affect the contract price.
The contract should specifically provide the manner of calculating payment (i.e., which method is to be used) and then provide for a procedure under which progress payments can be made. In order to come up with a workable progress payment system in a lump sum contract, the owner and contractor should establish a schedule of values at the beginning of the project which allows for progress payments based on the values attached to completion of certain stages of the project. In a cost-plus or unit price arrangement, the contract will invoice based on the amount of work completed during each payment period.
The contract should also spell out the procedure for applying for progress payments, the dates at which payment must be received, and a system for providing proof of payment to subcontractors and suppliers.
Section 53.101 of the Texas Property Code requires the owner to retain ten percent of the contract price to the owner or ten percent of the value of the work, measured by the proportion that the work done bears to the work still to be done, using the contract price or the reasonable value of the completed work if there is no contract price. TEX. PROP. CODE § 53.101 (West 1998). The owner is required to retain the funds for thirty days after final completion of the work. There are also strict notice requirements contained in the Property Code requiring contractors and subcontractors wishing to obtain liens to give proper notices to both the owner and general contractor (if a subcontractor). Most subcontracts provide for the holding of ten percent retainage from each monthly progress payment until the general contractor’s application has been accepted and paid for. The agreement between the general contractor and subcontractor should address the issue of whether the subcontractor is paid retainage when it finishes its portion of the job, or when the general contractor receives the retainage that the owner is holding. Whatever the agreement, it needs to be in writing.
Pay if Paid or Contingent Payment Clause
With increasing frequency, subcontractors and suppliers are faced with the lack of payment for materials and services rendered because the owner has failed to make payment to the general contractor (whether or not the reasons relating to that particular subcontractor/supplier). General contractors often will attempt to protect themselves from a breach of contract action by unpaid subcontractors by relying upon a “pay-if-paid” or “contingent payment” clause. The primary issue in construing such clauses is whether the provisions requiring receipt of payment from the owner represent a “condition precedent” to payment by the general contractor or merely a “covenant” as to the time and manner of payment. Until recently, common law has governed the enforceability of contingent payment clauses and, unless carefully drafted, Texas courts refused to enforce such provisions in order to avoid a forfeiture by subcontractors or suppliers where the owner is unable to pay because of insolvency or other reasons.
Under Texas case law, a contingent payment clause or “pay if paid” clause was required to be absolute and unequivocal in order for contractors to successfully shift the risk of non-payment by the owner to subcontractors. The clause is read in conjunction with the entire contract and is construed with other clauses that address payment of subcontractors. Moreover, like most jurisdictions, Texas courts will construe writings most strictly against its author. In applying these rules, one Texas court determined that the following clause was not a “contingent payment” clause:
When the owner or his representative advances or pays the general contractor, the general contractor shall be liable for and obligated to pay the sub-contractor up to the amount or percentage recognized and
approved for payment by the owner’s representative less the language required under the terms of the prime contract. Under no circumstances shall the general contractor be obligated or required to advance or make payments to the sub-contractor until the funds have been advanced or paid by the owner or his representative to the general contractor. Gulf Const. Company, Inc., v. Self, 676 S.W.2d 624 (Tex App – Corpus Christi, writ ref’d n.r.e.). The court determined that the above clause did not state that the general contractor would not be obligated to pay subcontractors if it did not receive money from the owner. Moreover, the court agreed with the trial court’s conclusions that the clause did not clearly, unequivocally and expressly shift the risk of non-payment by the owner from the contractor to the sub-contractors. In the absence of such absolute and unequivocal expression, contractors were required to pay subcontractors within a “reasonable” time, notwithstanding non-payment by the owner.
In 2007, the Texas Legislature took charge of the issue of contingent pay clauses with the enactment of a provision that it then re-codified in 2009 as Chapter 56 of the Texas Business and Commerce Code. Under Chapter 56, most construction contracts (not including contracts for purely design services, some civil and public works type contracts, and smaller residential projects) containing true pay-if-paid clauses are only enforceable under certain circumstances. Those circumstances are quite detailed.
For instance, a contractor’s contingent payment clause is not enforceable against a subcontractor if the reason for the owner’s non-payment is a breach on the part of the contractor, unless that breach is, in turn, the result of a breach by the subcontractor. TEX. BUS. & COM. CODE §56.051. Likewise, subcontractors (and other contingent payees) may object to a true pay-if-paid clause, and if they do so in a timely manner, the clause will be unenforceable going forward unless the contractor (or another contingent payor) quickly notifies the subcontractor, in writing, that the notice was ineffective due to the subcontractor’s breach. TEX. BUS. & COM. CODE §56.052. Contingent payors are also prohibited from enforcing such clauses if they are in a “sham” relationship with the owner (or other obligor). TEX. BUS. & COM. CODE §56.053. Finally, such clauses are not enforceable if doing so would be “unconscionable”. TEX. BUS. & COM. CODE §56.054.
- Statutes of Limitation/Statutes of Repose
- The Statutes of Limitations
Section 16.004 of the Civil Practice and Remedies Code requires a person to bring suit for debt, fraud, or breach of fiduciary duty within four years after the date the cause of action accrues. Breach of contract to repay a debt is therefore covered by section 16.004 and subject to a four year limitations period. Section 16.051 of the Civil Practice and Remedies Code provides a residual limitations period of four years for every action for which there is no express limitations period, except for an action to recover real property. However, the parties can agree to shorten the limitations period to a period of not less than two years by expressly providing for a shorter period in the contract. TEX. CIV. PRAC. & REM. CODE § 16.070 (West 1999). A contract that establishes a limitations period of less than two years is void. The following language, therefore, complies with the statute:
As between the OWNER and the ARCHITECT, any contract claim must be brought within two years from the day following the act or omission giving rise to the breach of contract claim. The four year statute of limitations period in Section 16.051 applies to breach of contract actions. Section 16.003 of the Civil Practice and Remedies Code provides a two year limitations period for negligence claims. The cause of action generally accrues in a negligence case when the duty of ordinary care is breached.
The Statutes of Repose
Section 16.008 of the Texas Civil Practice and Remedies Code provides a 10-year Statute of Repose in suits against architects, engineers, interior designer or landscape architect furnishing services for designs, plans, or inspection of construction of an improvement to real property or equipment attached to real property. Specifically, the statute bars suits for damages to real or personal property, personal injury, wrongful death, contribution and indemnity that are brought more than ten years after substantial completion of the project. TEX. CIV. PRAC. & REM. CODE § 16.008 (Vernon 1998). The date of Substantial Completion serves as the trigger date for the start of the statute of repose. If the suit involves design of equipment, then the 10-year period begins at the time the equipment begins operation. If the design professional receives a written claim for damages, contribution or indemnity within the 10-year period, then the period is extended for two years from the day the claim is presented.
For construction or repair of improvements to real property, contractors have their own statute of repose located at section 16.009 of the Civil Practice and Remedies Code. The contractor’s statute of repose is similar to the design professional’s statute of repose, but it includes an automatic two-year extension of time in which to bring a lawsuit in the event “damage, injury, or death occurs during the 10th year of the limitations period.” The contractor’s statute of repose also contains several exclusions in the event the contractor warranted, guaranteed or otherwise agreed to stand behind the work for a longer period of time. Another exclusion does not protect a contractor who is in actual possession or control of the real property at the time the damage or injury occurs. Nor does the statute operate to bar a claim when the contractor fraudulently conceals the defective work or commits willful misconduct.
Repose Distinguished from Limitations
A statute of reposed is often confused as a statute of limitations. A statute of repose operates to bar an action if it does not accrue within the statutory period of time, whereas a statute of limitations bars an action if it is not brought within the statutory period of time after it accrues. See Sowders v. M.W. Kellogg Co., 663 S.W.2d 644, 647 (Tex. App.–Houston [14th Dist.] 1983, writ ref’d n.r.e.). Due to the ability of a statute of repose to bar any and all claims against a design professional or contractor prior to the occurrence giving rise to a claim, all parties to the construction process are welladvised to indefinitely retain the Certificate of Substantial Completion in a very safe place. In the absence of a signed Certificate of Completion, a claimant filing a lawsuit shortly after the expiration of the repose period may be able to raise a fact question as to the definitive date of substantial completion.
- Sample Contract Provision
The AIA definition of “substantial completion” is: Substantial Completion is the stage in the progress of the Work when the Work or designated portion thereof is sufficiently complete in accordance with the Contract Documents so that the Owner can occupy or utilize the Work for its intended use. AIA Document A201-2007, General Conditions of the Contract for Construction (“A201”), §9.8.1.
In most cases, the parties are allowed to, and do, define “substantial completion” in the construction contract. The fact that parties are allowed to define substantial completion as they choose can lead to difficulties. However, the AIA definition has been so widely adopted throughout the construction industry that it can fairly be considered the standard definition of the term.
The AIA definition is in harmony with the majority of the court opinions that define substantial completion. The contractor is the party who first proposes that the project is substantially complete. Although the provision assumes that the date of substantial completion will relate to the entire project, it also contemplates the possibility that portions of the project may be substantially complete in phases. In that event, the owner and contractor should have a separate agreement to accept a portion of the work in advance of substantial completion of the entire project.
The AIA’s substantial completion clause also fixes the start of the contractor’s warranty period. As a result, the owner should be aware of this impact on the warranty in the event the owner agrees to a phased substantial completion. Indeed, at least one Texas court automatically applied a phased substantial completion in its application of the statute of repose to bar a contractor’s contribution claim against a subcontractor. Therefore, a general contractor should consider modifying its subcontract so that the date of substantial completion of the subcontracted portion of the work is defined as the date that the entire project is substantially complete. As between the owner and the general contractor, for a phased substantial completion, the parties should carefully identify which portions or systems are included in each certificate. The general contractor can, in turn, modify the subcontracts accordingly. Hopefully, this will avoid statute of repose problems and warranty disputes at a later date.
It is also important to note that the date of substantial completion is the trigger date for beginning the running of the 10-year statute of repose found in Texas Civil Practice and Remedies Code § 16.008, which is addressed above.
- Suitability of Design
- Sample Contract Provision
Neither the AIA Owner/Contractor Agreement nor the General Conditions for the Contract of Construction address the issue of the Architect’s or Owner’s warranty to the Contractor regarding the suitability of the design plans. The AIA Contracts do, however, require the Contractor to perform significant due diligence of the site, the Contract Documents, and the information provided by the Owner and notify the Architect of any errors or omissions that it discovers or of which it otherwise is made aware. Section 3.2.4 of AIA Document A201-2007 goes on to provide that:
If the Contractor fails to perform the [aforementioned due diligence], the Contractor shall pay such costs and damages to the Owner as would have been avoided if the Contractor had performed such obligations. If the Contractor performs those obligations, the Contractor shall not be liable to the Owner or Architect for damages resulting from errors, inconsistencies or omissions in the Contract Documents. . .
A particularly complex problem for contractors on construction projects is the impact of design errors on the contractor’s project cost and schedule. Depending on the severity of the problem, the contractor is faced with the possibility of absorbing the cost of schedule delays and of remedying the consequences of design errors. Obviously, the construction team should undertake measures to identify any design problems so that they can be resolved prior to construction. Needless to say, this is not always the case and the contractor, for any number of reasons, may be left with a situation where the design problem is identified at a critical point in the construction process and the progress of the work may be adversely impacted by the problem.
When the problem is identified, the contractor should submit a request for information to the architect, who should then provide a design solution. Depending upon the circumstances (and the terms of the contract), the contractor will also submit a request for change order to the owner for the contractor’s extra cost and an extension of time if the project is delayed by the design problem. Nevertheless, the contractor can find itself inadvertently liable for the design defect if the owner refuses to compensate the contractor for the cost associated with the design problem and the contractor is unable to assert either a contractual or common law basis for recovering its costs.
Texas courts are split on the question of whether the owner warrants the suitability of plans to the contractor. The landmark Texas Supreme Court case on the issue is Lonergan v. San Antonio Loan & Trust Co.. The Lonergan court stated that:
If there be any obligation resting upon the [owner], as guarantor of the sufficiency of the specifications, it must be found expressed in the language of the contract, or there must be found in the contract such language as will justify the cost in concluding that the parties intended that the owner should guarantee the sufficiency of the specifications to [the contractor].
Lonergan, 104 S.W. 1061, 1066 (1907). Since Lonergan, however, several courts have implied a warranty on the part of the owner to furnish the contractor with plans and specifications accurate and sufficient for the construction. See, e.g., City of San Antonio v. Forgy, 769 S.W.2d 293, 296 (Tex. App.–San Antonio 1989, writ denied); Shintech, Inc. v. Group Constructors, Inc., 688 S.W.2d 144, 151 (Tex. App.-Houston [14th Dist.] 1985, no writ). These cases may be explained on grounds other than implied warranty, however, for in each of them the contractor was forced, during construction, to alter the plans or specifications because they were manifestly unsuitable. These results could probably have been obtained under each of the contracts pursuant to which work was done, without relying upon implied warranty language.
In any case, when confronted with defects or conflicts in the plans and specifications, the contractor typically must initiate the necessary procedures to resolve the problem. The general conditions of the contract are the starting point for determining these procedures. In addition, the contractor should also review the general conditions of the specifications which often include additional procedures related to the resolution of the problem with the plans and specifications.
While the contractor is almost always in privity of contract with the owner, he is generally not in privity of contract with the architect. Therefore, it is generally difficult for the contractor to impose liability directly on the architect. See, e.g., Bernard Johnson v. Continental Constructors, Inc., 630 S.W.2d 365 (Tex. Civ. App.- Austin 1982, writ ref’d n.r.e.) (stating the general rule that “a suit for breach of contract may not be maintained against a person who not a party to the contract, particularly by a non-party who is assigned duties by the terms of the contract). Further frustrating the contractor’s attempts to hold the architect responsible is AIA Form A201, the General Conditions of the Contract of Construction, which seeks to absolve the architect of any responsibility to the contractor, and which places upon the contractor the responsibility for completing the work in accordance with the plans and specifications.
One means of attempting to circumvent the lack of privity is for the contractor to maintain that it is an implied beneficiary of the architect’s contract with the owner, and that the contract implicitly required the architect to furnish adequate plans and specifications. This generally presents a question of fact as to whether the contractor was an intended beneficiary of the owner/architect contract, but the AIA form contract specifically states that “nothing contained in this agreement shall create a contractual relationship with or a cause of action in favor of a third party against either the owner or the architect.” In addition, the general conditions for the contract of construction (A201) state that the “contract documents shall not be construed to create a contractual relationship of any kind between the architect and the contractor” (although the architect shall, however, be entitled to performance and enforcement of obligations . . intended to facilitate performance of his duties.).
For the contractor’s right to suspend work, AIA Document A201-2007, General Conditions of the Contract for Construction limits that right to a singular “for cause” ground: the owner’s failure to pay. Specifically, section 9.7 provides that the contractor may suspend work when it has not been paid in accordance with the payment provisions in the contract. However, the contractor is required to provide seven days’ written notice before he/she stops the Work.
The owner’s right to suspend the contract is outlined under sections 14.3.1 and 14.3.2 of A201, which provide: 14.3.1. The Owner may, without cause, order the Contractor in writing to suspend, delay or interrupt the Work in whole or in part for such period of time as the Owner may determine.
14.3.2. The Contract Sum and Contract Time shall be adjusted for increases in the cost and time caused by suspension, delay or interruption as described in Section 14.3.1. Adjustment of the Contract Sum shall include profit. No adjustment shall be made to the extent:
- the performance is, was or would have been so suspended, delayed or interrupted by another cause for which the Contractor is responsible; or
- that an equitable adjustment is made or denied under another provision of the Contract.
On any project, the owner may determine that it needs to keep the contractor in a standstill position due to finance issues, site problems (found a mastodon bone), or other reasons. The right to suspend work and the conditions under which a project can be suspended should be spelled out clearly in the contract. An owner’s unreasonable suspension of work can sometimes be considered a breach of the contract.
Obviously, the owner’s decision to temporarily suspend work can be costly to the contractor. Therefore, the contractor should immediately submit change orders to the owner reflecting the additional costs–which include such items as storage, demobilization of workers, extended rental costs and possibly changed working conditions. A contractor wishing to submit change orders increasing the contract sum must always be careful to meet any written notice requirements included in the contract. See, e.g., AIA Document A201-2007, General Conditions of the Contract for Construction, §§3.7.5, 15.1.2.
AIA Document A201-2007, General Conditions of the Contract for Construction, §14.1 provides for termination by the Contractor. Section 14.2 of A201 provides for termination by the Owner for cause.
When conditions occur that make performance of the construction contract impossible, the party not at fault may, in good faith and for just cause, terminate the contract. However, wrongful termination is tantamount to a breach of contract and the injured party is entitled to damages.
The conditions under which termination is allowed should be defined in the contract. The AIA standard contract includes some of these. Examples of when a Contractor is authorized to terminate the contract are: court orders requiring all Work to be stopped; an act of government, such as a national emergency requiring all Work to be stopped; because of repeated suspensions or delays equaling a specified amount of time; because the architect has not notified the contractor of the reason for withholding certification for payment; or because the owner has failed to make payment on a certificate of payment within the number of days specified in the contract. See AIA Document A201-2007, General Conditions of the Contract for Construction, §14.1. Owners are also authorized to terminate the contract under certain conditions. Examples, which are included in the AIA form documents, are: the contractor repeatedly fails to have enough skilled workers on the job; the contractor fails to pay the subcontractors as per their agreements with the contractor; the contractor repeatedly disregards applicable laws; or the contractor is guilty of substantial breach of a provision of the contract documents. See Id. at §14.2. The 2007 edition General Conditions lowered the threshold by which such breaches would justify termination from “persistent” failures to “repeated” ones. In the absence of a specific contractual provision identifying events that justify termination,