Recent Amendments and Caselaw Affecting the Construction Industry in Texas

1) Recent Legislative Amendments Concerning the Construction Industry:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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