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Several key changes in the laws governing construction contracts and the procedure for perfecting and releasing statutory mechanic’s liens on private construction projects were passed during the 82nd Legislative Session and signed into law by Governor Rick Perry earlier this year.  Among the most significant to members of the AGC is the addition of Chapter 151 of the Texas Insurance Code precluding the use of broad form indemnity agreements in commercial construction contracts.  As most general contractors include some type of broad or intermediate form indemnity clause in their standard subcontract agreements, it is imperative that contractors possess a clear understanding of the impact that HB 2093 will have on those contract documents when the new law takes effect on January 1, 2012.

Specifically, the new Section 151.102 of the Texas Insurance Code makes void and unenforceable as a matter of public policy any indemnity provision contained within a construction contract – including any agreement collateral to or affecting a construction contract – that seeks to require an indemnitor to indemnify, hold harmless or defend one or more parties against a claim caused by that party’s own negligence or fault.  The prohibition against such broad form indemnity obligations extends to the indemnified party’s (the “indemnitee”) own breach of a contractual obligation or violation of a statute, ordinance, governmental regulation, standard, or rule.  An indemnitee is deemed to include both the party requesting the indemnification and all agents, employees or third parties under the control or supervision of the indemnitee.  Also made void are contractual provisions requiring a party to secure additional insurance that would otherwise cover these same liabilities of third parties.

Carved out of this relatively straightforward prohibition are several key exceptions found within Sections 151.103 and 105.  Most notably, Section 151.103 permits an indemnitor to agree to indemnify, hold harmless or defend another against a claim for bodily injury or death of an employee of the indemnitor, its agent or its subcontractor of any tier without regard to which party is at fault.  And Section 151.105(10) expressly excludes residential (defined to include “a single family house, townhouse, duplex, or land development directly related thereto”) and public works projects from its reach, thereby limiting the new prohibitions to commercial construction projects only.  Sophisticated general contractors will likely interpret these exceptions as a mandate to insist on the inclusion of broad form indemnity clauses in subcontracts for residential and public construction, and where the liability arises from the injury or death of a subcontractor’s employee or that of its own subcontractors, suppliers or agents.

Boiled down to its essence, the new law provides that a subcontractor can still be made to indemnify a general contractor, the project’s owner, the architect and other third parties for its own negligence, fault or breach, as well as that of its own employees, agents and sub-tier subcontractors – provided that an appropriate indemnity provision is included in the subcontract agreement – but that same subcontractor cannot be made to indemnify the general contractor or anyone else for that party’s own acts or omissions unless the claim is for the bodily injury or death of an employee of the subcontractor (or its agents or its own subcontractors of any tier), or unless the work is for residential or public work construction.

Arguably, the purpose of HB 2093 was to relieve primarily subcontractors and those down stream from some of the burdens imposed by onerous indemnity clauses in construction contracts.  That relief was achieved, however, by significantly restraining the ability of contractors and subcontractors to freely negotiate contract terms and apportion liability.  HB 2093 clearly represents a compromise in what has been an ongoing and often heated debate between the major lobbying groups in the construction industry. Groups representing the subcontractor and supplier industries have sought to reduce the  use of broad and intermediate form indemnity agreements to prevent unfair and unreasonable results.  Conversely, owners and contractors have sought to protect the freedom to assign risks as the parties deem most appropriate.  By limiting the application of the new Chapter 151 to commercial construction projects, and excluding agreements providing for indemnification for claims for  the bodily injury or death of an employee of the indemnitor, its agent, or its subcontractor of any tier, the legislators sought to maintain the current freedom of contracting on residential and public projects while offering protection to subcontractors and suppliers on commercial construction projects.

NOTICE:   The information in this article is intended for general information purposes only, and is in no way intended to provide legal advice or in any way create an attorney-client relationship between the author, the law firm of McNelis + Associates, PLLC and the reader.  Such information should be carefully scrutinized to ensure that it continues to comply with any changes in legislation or case law holdings.  You are urged to seek the services of a qualified lawyer with particular expertise in construction law should you have any specific questions or concerns regarding your rights and/or obligations under the laws of the State of Texas.

In this tight economy, where project payments are flowing much less freely than they once did, necessity has likely compelled you to develop a working knowledge of Texas lien laws in order to perfect your own lien claims or defend against a claim asserted by a subcontractor.  But how familiar are you with the truly dark side of Texas lien law?

In part to address the flood of patently false “legal records” and “judgment liens” being asserted against public officials throughout the State in the late 1990’s by fringe members of the Republic of Texas movement, the Texas Legislature adopted Chapter 12 of the Texas Civil Practice and Remedies Code to make it illegal to create or utilize fraudulent court records or liens.  What has become known as the “Fraudulent Lien Statute” provides that a person may not make, present, or use a document or other record with: (1) knowledge that the document is fraudulent; (2) intent that the document be given the same legal effect as a valid document; and (3) intent to cause financial injury, physical injury or emotional distress.  The Fraudulent Lien Statute has since been refined by subsequent legislation and expanded by Texas courts to apply to the filing of an improper mechanic’s lien against a construction project under Chapter 53 of the Texas Property Code.

So how scary can the statute possibly be if a lien claimant makes a simple procedural mistake and doesn’t even know that its lien is untimely or improperly perfected?  Turns out, plenty.  At least one Texas court interpreting the statute has found that an individual filing a lien in Texas is presumed to have knowledge of the requirements of Texas lien law.  This means that the mere act of filing of a lien that violates the requirements of Chapter 53 of the Property Code due to it being untimely or insufficient in its content may be sufficient to find a knowing violation of the statute even where there is no actual knowledge of the defect.  The clear message here is that contractors are responsible for knowing the legal requirements of the liens they file, and ensuring that their liens comply with those requirements.

Ok, so a mistake has been made and a bad lien has been filed.  How bad can that be?  Under Chapter 12 of the Civil Practice and Remedies Code, fraudulent lien holders are subject to both civil and criminal liability.  A person who makes, presents or uses a fraudulent lien, is liable to each injured person for: (1) the greater of $10,000 or the actual damages caused by the violation; (2) court costs; (3) reasonable attorney’s fees; and (4) exemplary damages in the amount determined by the court.  With the potential for both actual and exemplary (or punitive) damages, it is easy to imagine how the cost of filing a bad lien can add up in both large and small projects alike.

Yet the “cost” of filing an invalid lien is not necessarily limited to a financial penalty.  Section 32.49 of the Texas Penal Code also provides criminal sanctions for the failure to release a fraudulent lien claim.  Under this provision, a person commits an actionable offense if the person: (1) owns, holds, or is the beneficiary of a fraudulent lien; and (2) refuses to release the fraudulent lien within 21 days of receipt of actual or written notice requesting release of the fraudulent lien.  The punishment?  While the violation is considered a Class A misdemeanor, the consequence of maintaining a fraudulent lien is a fine of up to $4,000.00, incarceration for a period of up to one full year, or both.  Serving a year in jail for filing a bad lien against a project would be an extremely ugly outcome.

Yet the news isn’t all bad.  A general contractor confronting a subcontractor’s or supplier’s invalid lien against its project should be aware of the considerable leverage it has under the Fraudulent Lien Statute to compel the voluntary release of the lien.  Where the lien is patently invalid for either factual or procedural reasons, the threat of imposing the monetary penalties under Chapter 12 of the Civil Practice and Remedies Code can be a powerful tool for securing the lien’s voluntary release.

NOTICE:   The information in this article is intended for general information purposes only, and is in no way intended to provide legal advice or in any way create an attorney-client relationship between the author, the law firm of McNelis + Associates, PLLC and the reader.  Such information should be carefully scrutinized to ensure that it continues to comply with any changes in legislation or case law holdings.  You are urged to seek the services of a qualified lawyer with particular expertise in construction law should you have any specific questions or concerns regarding your rights and/or obligations under the laws of the State of Texas.

An increasingly common provision finding its way into construction contracts is one that seeks to limit the time in which a party is given to assert a claim for additional compensation or a time extension. These provisions typically require the contractor or subcontractor to give written notice of any claim for additional compensation or time within a very short time period or the claim is deemed to be waived. Because Texas law strongly favors the parties’ right to contract freely, such provisions are generally enforced unless otherwise prohibited by law as being against public policy.

Section 16.071 of the Texas Civil Practice and Remedies Code is one such law, having first been promulgated in 1891to afford Texas citizens and their businesses relief from the most onerous of limitations provisions.  The statute provides that any limitations period on a “claim for damages” of less than ninety (90) days is void and, therefore, unenforceable.  Until recently, however, no contractor had sought to challenge a shorter limitations period in a reported decision before a Texas Court of Appeals.

In a case of first impression, the El Paso Court of Appeals recently analyzed a limitations provision contained in a public contract to determine whether the provision was in violation of Section 16.071.  The case involved a terminated contractor who had sued the public entity alleging the work had been delayed by the public entity and not the contractor. The public entity argued that the contractor’s claims for additional compensation and time were barred because the contractor had failed to give notice of those claims by the deadline set out in the parties’ contract.

Reiterating the strong preference in Texas for the parties’ right to freely contract, the El Paso Court of Appeals ruled that the limitation provision in the contract did not violate the statute because the language of the contract limited the time within which the contractor could give notice of a claim for “additional compensation and/or time” and did not limit the time in which the contractor had to give notice of a “claim for damages.”  The Court noted in its ruling that the Texas Supreme Court had previously interpreted the phrase “notice of a claim for damages” to mean a notice of a cause of action.  In holding that the language of the contract was not in violation of the statute, the El Paso Court of Appeals distinguished a claim for additional compensation or time as an “antecedent event” that may or may not lead to a claim for damages.

The solution for contractors and subcontractors seeking to preclude the potentially devastating impact of a short notice period is ensure the provision pertains only to notices of “a claim for damages” and not to a claim for additional compensation or time.  Alternatively, a party could revise a contract’s limitation provision to specify that the contractor must give notice of a claim for additional compensation or time within the same period as provided for by Section 16.071 of the Texas Civil Practice and Remedies Code for the making of claims for damages.

As a prudent contractor, you are urged to consult with your attorney before entering into any contract containing language whose impact you do not fully understand.