Senate Bill 219
Contractors Not Liable for Design Defects
Senate Bill 219 (Hughes / Leach) (“SB 219”) passed Senate 29-1, passed House 113-27, Senate concurred 29-2. It was signed by the Governor, effective September 1, 2021.
SB 219 erodes the long-standing Texas legal doctrine that makes the contractor warrant the adequacy of the design of plans and specifications furnished by the owner, unless the contractor shifts that burden to the owner. The rule of law dates back to a 1907 case, Lonergan v. San Antonio Loan & Trust.
The majority of the states follow the Spearin doctrine, in which the owner is held liable for the adequacy of the design of owner-furnished plans and specifications. However, up until the passage of SB 219 Texas followed the Lonergan doctrine, which placed on the contractor the risk of inadequacy in the design of owner-furnished plans and specifications. Lonergan required that contractors shift this risk to the owner by contract. Contractors have fought the Lonergan doctrine for years. Absent contract language to the contrary, the doctrine placed a burden on the construction team and made them liable for construction defects caused by flawed design documents furnished by the owner.
Subsection (b) of SB 219 provides as follows: “[a] contractor must, within a reasonable time of learning of a defect, inaccuracy, inadequacy, or insufficiency in the plans, specifications, or other design documents, disclose in writing to the person with whom the contractor enters into a contract the existence of any known defect in the plans, specifications, or other design documents that is discovered by the contractor, or that reasonably should have been discovered by the contractor using ordinary diligence, before or during construction.” The Bill further states, “[a] contractor who fails to disclose a defect as required by Subsection (b) may be liable for the consequences of defects that result from the failure to disclose. Thus, the Bill is not a full shield from liability and still requires the contractor to disclose any design defects within a reasonable time. The Bill further defines “ordinary diligence” as diligence that a contractor would make in the reasonable preparation of a bid or fulfillment of its scope of work under normal circumstances. The Bill does not require a contractor to engage any person with specialized skills, such as an architect or engineer, to determine whether or not a design defect exists. Thus, if a contractor discloses design defects within a reasonable time, the contractor will avail itself of the protection the Bill offers and avoid any liability for design defects in owner-furnished plans and specifications.
There are exceptions to this legislation. This Bill does not apply to the following:(1) a contract for the construction or repair of a critical infrastructure facility; (2) Design-Build contracts; (3) Engineering Procurement and Construction (“EPC”) contracts; and (4) contracts where the contractor agreed to provide input on the design. The change in law represents a major win for contractors who, previously, had greater exposure to liability arising out of design defects in project plans and specifications. Even with the change, it is always important to ensure counsel reviews your prime and subcontract agreements to ensure that you benefit from the change in law.
House Bill 2237
Modernizing and Simplifying Texas Lien Laws
House Bill 2237 (“HB 2237”) (Burrows / Johnson) impacts entities in the construction industry by amending longstanding Texas lien laws. HB 2237 passed the House 136-1, was amended and passed by the Senate 30-0, and then the House concurred 141-1. It was signed by the Governor, effective January 1, 2022.
A significant number of practitioners in Texas consider Texas’ lien laws to be some of the most complex in the country. Thus, there has been considerable confusion regarding securing lien rights in Texas, as notice requirements and deadlines vary under the law. Generally, HB 2237 simplifies notice requirements, relaxes certain unforgiving deadlines, amends statutory definitions, addresses procedural issues, and more. HB 2237 is over 35 pages long, so this article focuses on key changes.
First, Chapter 53 of the Texas Property Code received its first major update in years by establishing uniformity in the notice requirements. It does so by changing the number of notices required to be sent by sub-subcontractors. Generally, a single notice must now be sent by the sub- subcontractor simultaneously to both the owner and the general contractor (previously a second notice was required by sub-subcontractors). Additionally, HB 2237 amends delivery of notices. Specifically, in addition to sending lien notices via certified mail, HB 2237 enables notice via “traceable, private delivery or mailing service that can confirm proof of receipt,” (e.g., FedEx, UPS, or private in-person delivery companies). Delivery via registered mail, however, is no longer permitted. Though delivery via certified mail is still permitted. Moreover, HB 2237 amends deadlines by doing away with a trap many lien claimants fall victim to. Namely, an extension will be provided if a lien deadline falls on a Saturday, Sunday, or legal holiday (previously the deadline was absolute).
With respect to definitions, HB 2237 amends Chapter 53 to include new definitions for the terms “improvement,” “labor,” “material,” “residence,” “retainage,” “subcontractor,” and “work.” Notably, HB 2237 expands and clarifies the people / companies entitled to make lien claims; it now clearly includes subcontractors of any tier. Relatedly, Chapter 53 will also extend to allow a lien for (licensed) architects, engineers, surveyors, and landscapers and demolition contractors, regardless of whether they furnish their labor or material under a written contract (previously a written contractual relationship was required).
The deadline to file a lawsuit to foreclose on a lien has been shortened by one year such that a foreclosure suit must be filed within a year of last day on which a claimant has a right file a lien affidavit. Furthermore, HB 2237 removes the requirement that statutory lien waivers be notarized (despite this it may nonetheless be prudent to get some claimants’ waivers notarized to be safe).
In conclusion, HB 2237 amends several important aspects of Texas lien laws. Importantly, unlike several of the bills that went into effect a few days ago, HB 2237 will only apply to projects where a prime contract was entered into on or after January 1, 2022. Until then, the current, more complex version of the lien statute still applies. Additionally, it is worth noting that HB 2237 does not apply to public projects. Despite the changes, Texas lien laws are still complicated. Therefore, consulting with a construction attorney is usually well worth the time and money to navigate the lien statute and to make sure you have a strong, valid lien claim.
House Bill 3069
Shorten Statute of Repose for Public Work
House Bill 3069 (Holland / Hughes) (“HB 3069”) passed legislation regarding the Statute of Repose in Texas for public/governmental projects. HB 3069 passed the House 141-3, passed Senate 29-2. It was signed by the Governor, effective June 14, 2021.
Statutes of repose are not statutes of limitations. Statutes of repose begin to run on an ascertainable date, and unlike statutes of limitations, they are not subject to tolling or deferral. Unlike traditional limitations provisions, which begin to run upon accrual of a cause of action, a statute of repose runs from a specified date without regard to accrual of any cause of action. The purpose of the statute of repose is to limit uncertainties and create a final deadline that is not subject to exceptions. Without a statute of repose, professionals and contractors would face a never-ending uncertainty as to liability.
Prior to the passing of HB 3069, the statute of repose in Texas was 10 years from the date of substantial completion. This 10-year period could be extended an additional 2 years if the claimant presents a written claim for damages to the contractor furnishing the work during the applicable 10-year period. HB 3069 applies to public projects and shortens the period for a governmental entity to bring suit down to 8 years from the date of substantial completion. It also only extends this period by 1 year if a claim is presented during the 8-year period.
The change is important and benefits contractors and design professionals who furnish labor and / or materials to a public project because it shortens the statute of repose period, limiting the extended exposure to liability. The Bill carves out three exceptions to the 8-year statute of repose: (1) TXDot contracts; (2) a project that receives money from the state highway fund or a federal fund designated for highway and mass transit spending; and (3) civil works projects as defined in Section 2269.351 of the Texas Government Code (roads, streets, bridges, utilities, water supply projects, water plants, airport runways and taxiways, etc.). For these exceptions, the 10-year statute of repose still applies.
Senate Bill 968
Protection from Pandemic Related Project Shutdown
Senate Bill 968 (Kolkhorst / Klick) (“SB 968”) addresses how Texas will handle certain implications related to COVID-19 in various settings, including the construction industry. SB 968 passed the Senate 31-0, and passed the House (with amendments) 146-2, the Senate concurred 27-4. It was signed by the Governor and went into effect immediately on June 16, 2021.
As it relates to the construction industry, SB 968 amends Chapter 418 of the Texas Government Code by adding Sec. 418.1085 relating to “Limitations on Construction and Related Services.” First and foremost, SB 968 provides that “the presiding officer of the governing body of a political subdivision [(e.g., the mayor of a city)] may not issue an order during a . . . pandemic disaster that would limit or prohibit:
- housing and commercial construction activities, including related activities involving the sale, transportation, and installation of manufactured homes;
- the provision of governmental services for title searches, notary services, and recording services in support of mortgages and real estate services and transactions;
- residential and commercial real estate services, including settlement services; or
- essential maintenance, manufacturing, design, operation, inspection, security, and construction services for essential products, services, and supply chain relief efforts.
In essence, SB 968 provides a number of protections to residential and commercial contractors by ensuring that a presiding officer of a political subdivision does not have the power to limit or prohibit progress on projects. Additionally, those engaged in activities that necessarily support the residential and commercial construction industry (as mentioned in (1)-(4) above) are also afforded the same protections. SB 968 memorializes these protections as Texas Law and provide stability in the construction industry moving forward.
Senate Bill 6
Omnibus Pandemic Bill, Business Liability/Insurance Protections for Contractors
Senate Bill 6 (Hancock / Leach) (“SB 6”) offers protection to businesses who continued to operate during the pandemic. SB 6 passed the Senate 29-1, passed House 133-10, the Senate concurred 30-1 It was signed by the Governor and went into effect immediately on June 14, 2021.
During the pandemic, as much of the country shut down and many stayed indoors, Texas declared certain businesses “essential” and allowed those businesses to continue to operate through the COVID-19 Pandemic. Included in the list of “essential” businesses were construction industry providers, including contractors. SB 6, under certain circumstances, excepts from liability for personal injury, death, or property damage those who design, manufacture, sell or donate certain products during the pandemic emergency. Contractors fall into this category and enjoy the benefit of this exception. SB 6 also requires that the claimant prove actual knowledge of a defect or actual malice in the design and manufacturing of the product. SB 6 recognizes that these businesses acted in good faith and followed official guidelines to continue to operate and help strengthen the state economy.
Senate Bill 338
Uniform General Conditions for K-12 Building Construction
Senate Bill 338 (Powell / Lucio) (“SB 338”) effectively allows school districts to adopt uniform general conditions, after reviewing the uniform general conditions adopted by the Texas Facilities Commission, to be incorporated in all district building construction contracts. SB 338 passed the Senate 30-0, passed House with amendments 138-8, the Senate concurred 30-1. It was signed by the Governor and went into effect immediately on June 7, 2021.
Government Code section 2166.302 states that the Texas Facilities Commission shall adopt uniform general conditions to be incorporated into all building construction contracts made by the state. Section 2166.305 requires that the commission review the uniform general conditions of state building contracts “whenever the commission considers review worthwhile, but not less frequently than once every five years.” SB 338 now provides for one individual representing the Texas Association of School Boards and one individual representing the Texas Association of School Administrators to form part of the committee. The Bill allows these two members to form part of the Texas Facilities Commission Committee and perform reviews of the general conditions. SB 338 allows school districts to be included in the list of facilities that can benefit from the adoption of the uniform general conditions into building construction contracts. Contractors should note that the uniform general conditions will significantly increase the terms and conditions added to any contract that incorporates them. The conditions may significantly impact a contractor’s duties and obligations under a contract, thus highlighting the importance of retaining legal counsel to ensure your rights are protected.
House Bill 1195
Deductibility of PPP Loans for State Franchise Tax
House Bill 1195 (Geren / Hancock) (“HB 1195”) amends current laws relating to the franchise tax treatment of certain loans and grants made under the federal Coronavirus Aid, Relief, and Economic Security Act. HB 1195 passed the House 143-1, and passed Senate 31-0. It was signed by the Governor and went into effect immediately on May 8, 2021.
In response to the COVID-19 pandemic, the U.S. Congress enacted legislation that provided economic relief to businesses through the paycheck protection program (“PPP”), which allowed businesses to secure forgivable loans and grants in order to continue paying its employees while business operations were disrupted due to the pandemic. PPP aid can be forgiven; however, a business receiving a PPP loan or grant is still taxed on the loan amount as part of its total revenue subject to the franchise tax.
Under this new law, the Tax Code has been amended so that businesses that received federal aid through PPP loans and grants will not be subject to any tax penalties, and PPP loans and grants will be excluded from a business’s total revenue for franchise tax purposes. Additionally, taxable entities are allowed to include expenses paid using PPP loans and grants in its determination of cost of goods sold or determination of compensation, if that expense would have been includable.
HB 1195 substantially impacts small-business owners, especially those in the construction industry, like family-owned contractors, who were heavily impacted by pandemic related shutdowns. Now, instead of being concerned with possible tax increases because they received federal aid to stay afloat, these small-business owners can focus on more impactful issues affecting the construction industry (e.g., material shortages), as they continue to operate their businesses.
House Bill 2416
Close Commercial General Liability Gap for Attorney’s Fees due to In re Nalle
House Bill 2416 (“HB 2416”) (Gervin-Hawkins / Powell) it amends laws relating to the recovery of attorney’s fees as compensatory damages for certain claims. HB 2416 passed the House 144-0, and passed Senate 30-0. It was filed despite missing Governor Abbott’s signature, HB 2416 will still go into effect on September 1, 2021.
The Texas Supreme Court has previously held that attorney’s fees that are awarded to a prevailing party are considered costs and not damages under a commercial general liability insurance policy. It is widely believed that this ruling leaves contractors exposed to paying potentially large awards for attorney’s fees, even if the claim is covered under insurance, as the contractor will be responsible for paying the attorney’s fees of other prevailing parties, not their insurance carrier.
HB 2416, amends Chapter 38 of the Texas Civil Practice and Remedies Code by adding Section 38.0015, which authorizes the recovery of reasonable attorney’s fees as compensatory damages for breach of a construction contract. Under this change, insurance carriers are now responsible for paying the attorney’s fees of the prevailing party, instead of the general contractor being saddled with that expense. Thus, HB 2416 now allows contractors to avoid costly exposure and provides them with protection from potentially paying out large attorney’s fees that are awarded to prevailing parties in connection with covered claims.
Moving forward, contractors who do not prevail in a lawsuit stemming from covered claims should pay close attention to the final ruling to ensure that their insurance carriers bear the responsibility of paying attorney’s fees awarded other parties.
House Bill 19
Reformation of Litigation Abuse regarding Commercial Vehicle Accidents
House Bill 19 (Leach / Taylor) (“HB 19”) provides a framework for trial procedures, the use of evidence, and the determination of liability in certain civil actions—as defined by HB 19—involving commercial motor vehicles. HB 19 passed the House 81-49, passed the Senate (with amendments) 30-1, the House concurred 106-38. HB 19 was signed by the Governor, effective September 1, 2021.
HB 19 was passed to amend Chapter 72 of the Texas Civil Practice and Remedies Code (“Chapter 72”), which deals with the “Liability of Motor Vehicle Owner or Operator to Guest.” Generally, HB 19 is an effort by the Texas Legislature to curb the litigation tactics used by plaintiffs’ attorneys in commercial vehicle accidents against the vehicle owners and their insurers. In particular, the amendments to Chapter 72 disincentivize frivolous lawsuits that were plaguing transportation industries (e.g., material transportation for construction projects). Of note, the amount and nature of the frivolous lawsuits being filed were increasing insurance premiums for commercial transporters and putting insurers at odds with their insured. For example, some insured would seek to go to trial, but their insurers would opt for settlement to avoid judgements for (and over) policy limits.
Notable changes resulting from HB 19 include a bifurcated trial system, wherein (upon request) the trial will be split into two phases. In the first phase, the jury will determine who caused the accident (i.e., ordinary negligence) and the amount of compensatory damages. In the second phase, the jury will determine whether the entity that caused the accident was grossly negligent, and the amount of exemplary (e.g., punitive) damages. Generally, evidence for each phase is limited to the evidence relevant to type of damages pursued. Additionally, HB 19 provides that if a defendant stipulates that a person operating the vehicle was: (1) the defendant’s employee; and (2) acting within the scope of employment, then the defendant’s liability for all compensatory damages for an employee’s negligence shall be based on respondeat superior (a legal doctrine that holds an employer legally responsible for the wrongful acts of an employee, if such acts occur within the scope of the employment), as opposed to some other basis for negligence.
Largely, according its author, State Rep. Jeff Leach, R-Plano, HB 19 is intended to protect commercial vehicle operators from “unjust and excessive lawsuits.” Paraphrasing, R. Leach stated that it also provides a legal and procedural framework intended to protect businesses of all sizes from abuses in from abuses in the justice system. In essence, HB 19 gives defense attorneys and insurers a new set of tools in their fight against frivolous lawsuits. For the construction industry, HB 19 should provide stability to commercial vehicle operators and help cut insurance costs by reducing the risk associated with plaintiffs’ claims for certain civil actions.