Don’t Mess with Texas: 5th Circuit takes Litigators Back to Law School

 In the recent decision of Sayers Construction, L.L.C.v. Timberline Construction, Inc. and High Voltage, Inc., the Fifth Circuit affirmed a federal district court’s determination that it did not have jurisdiction to vacate an arbitration award in Florida. 976 F.3d 570 (5^th Cir. 2020). The court reminded us that jurisdiction really is power, just like lawyers everywhere learned in their very first civil procedure class in law school. After walking us through the trodden legal framework of Pennoyer, International Shoe, World-Wide Volkswagen, and Burger King, and hinting at the liberal policy of promoting arbitration, the court concluded, “this is Florida’s problem. Not Texas’s.” Sayers Construction, 976 F.3d at 574.

The case serves a friendly reminder of the importance of jurisdiction, especially in the context of arbitration. In this case, the Texas-based general contractor sought to vacate a Florida court’s enforcement of a Florida-based arbitration award. See id. at 572. Step one of the court’s analysis highlighted the most well-known limitation of the Due Process Clause when it comes to jurisdiction of out-of-state defendants: that of “minimum contacts.” See id. at 573. The court pressed that we must always ask whether our counterparts “purposefully avail[ed] [themselves] of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.” See id. (citing World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297-98 (1980)). Here, the general contractor defendant pressed that this was a standard breach of contract dispute where “minimum contacts” existed because (1) subcontractors solicited a business relationship with the general contractor in Texas, (2) the subcontractors contracted with the general contractor, which has an office in Texas, (3) subcontractors mailed invoices to general contractor’s office in Texas, and (4) the parties’ contract has a Texas choice-of-law clause. Id. The court found that none of these facts established “minimum contacts.” Importantly, in response to facts (3) and (4), the Fifth Circuit held that, mailing payments, especially when all of the work is performed outside the state, is insufficient to establish “minimum contacts” and choice-of-law clauses are probative, but not dispositive, of purposeful availment. See id. at 574.

With its terse ‘this is not our problem’ ending, the court emphasized that any doubts as to the legitimacy of arbitration should be put to bed. Case law, in conjunction with the Federal Arbitration Act (“FAA”), makes clear that there exists a liberal policy of promoting arbitration, thus making arbitration agreements “valid, irrevocable, and enforceable.” 9 USC § 2. As we all know, arbitration is favored amongst many construction clients due to its privacy, speed, and finality. But with every decision comes a cost. In agreeing to arbitrate, the cost to parties is the relinquishment of much of their right to a court’s decision. Parties may still seek court review of an arbitrator’s decision, but the courts will set that decision aside only in very unusual circumstances. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995). In fact, grounds for vacating arbitral awards are few and far between[1] – and if you’re still not convinced of just how rigorously courts enforce arbitral awards, consider the fact that the Manifest Disregard of Law Doctrine remains one of the few proper grounds of vacatur of an arbitral award and there exists a circuit split as to whether even that is proper. See Philip D. O’Neill, Jr., International Commercial Arbitration 459 (2012).

In conclusion, the case of Sayers Construction, 976 F.3d at 574, is a reminder to experienced lawyers not to lose sight of either the legal frameworks of personal jurisdiction or the FAA. And, of course, litigators everywhere beware: don’t mess with Texas.

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[1] Per the New York Convention on the Enforcement of Foreign Arbitral Awards of 1958 (the “New York Convention”) and the Federal Arbitration Act (“FAA”), courts are directed to confirm arbitral awards unless it is found that there exist grounds for refusal or deferral of recognition. Those grounds include 1(a): incapacity of a party; invalidity under the law to which the parties subjected their agreement, or invalid under the law of the country where the agreement was made; (b) lack of proper notice; an inability by a party to present their case; (c) exceeding the scope of the arbitral agreement; (d) composition of the arbitral authority or process was not as the parties agreed; (e) set aside by a competent authority or in accordance with the law of the arbitral seat; (2)(a) the subject matter may not be lawfully resolved under the law of the place of enforcement; or (b) contrary to the public policy of that jurisdiction. In short, the legal framework and the New York Convention (Article V) provides that the decision to decline to enforce an award is a matter of stringent discretion, for “recognition and enforcement of the award may be refused,” but only very limited circumstances. See Philip D. O’Neill, Jr., International Commercial Arbitration 405-06 (2012).

Author Lexie R. Pereira is a third year J.D./M.B.A. candidate at Boston College Law School and Carroll School of Management, studying to become a litigator, with a specialty in construction law. Currently, she works as a Law Clerk at Consigli Construction Co., Inc., serves on the Editorial Team of the ABA’s Forum on Construction Law’s Dispute Resolver blog, and acts as the 2020 Student Liaison of the ABA's Forum on Construction Law. At school, Lexie is the President of the Real Estate Law Society and the President of the Eagle-to-Eagle Mentoring Program. Lexie grew up in the construction industry and has spent time working as an estimator, field engineer, laborer, and, of course, in the legal capacity at Consigli and formerly Hinckley Allen as a Summer Associate. 

Contact Lexie: pereirle@bc.edu | https://www.linkedin.com/in/lexie-pereira/

Texas Supreme Court Denies General Contractor’s Negligent-Misrepresentation Claim Against Architect for Increased Construction Costs Caused By Deficient Plans

The Texas Supreme Court recently held that the economic-loss rule bars claims of negligence and negligent misrepresentation from a general contractor against an architect because there was no contract between the parties. Instead, the contractor was limited to its claims for breach of contract against the project’s owner. LAN/STV v. Martin K. Eby Constr. Co., 435 S.W. 3d 234 (Tex. Jun. 20, 2014).

The Dallas Area Rapid Transportation Authority (the “Owner”) contracted with the architect, LAN/STV (the “Architect”), to prepare plans, drawing, and specifications for the construction of a rail line within downtown Dallas. The Architect agreed to be responsible for the professional quality, technical accuracy, and coordination of all designs, drawings, specification, and to be liable to the Owner for all damages caused by the Architect’s negligent performance of any of the services furnished. The Owner incorporated the Architect’s plans into its solicitation for competitive bids to construct the rail line. The project was awarded to Martin K. Eby Construction Company (the “Contractor”). The construction contract contained administrative procedures for the Contractor to follow if asserting disputes against the Owner, including any design problems. There was no contact or contractual privity between the Contractor and the Architect.

Just after starting construction, the Contractor discovered that the Architect’s plans were replete with errors. While the Contractor expected that only 10% of the plans would be changed, eventually 80% of the Architect’s plans had to be changed. This greatly disrupted the construction schedule and required additional labor and materials. In total, the Contractor calculated that it lost nearly $14 million on the Project.

After settling with the Owner, the Contractor filed this tort action against the Architect alleging claims for negligent misrepresentation. The jury apportioned some responsibility to the Owner and the Contractor, but found that the Architect was 45% responsible. Judgment was subsequently rendered in favor of the Contractor for about $2.25 million. The Court of Appeals affirmed the judgment.

The Texas Supreme Court analyzed whether the economic-loss rule barred the Contractor’s recovery for negligent misrepresentation. Under the economic-loss rule in Texas, a plaintiff suffering purely economic loss cannot recover under negligence theories against a defendant if the duties allegedly breached arose solely from the defendant’s contract with a third-party. Put another way, the economic-loss rule means that there is “no general duty to avoid the unintentional infliction of economic loss.” Restatement (Third) of Torts: Liability for Economic Harm, § 1.

The economic-loss rule does not create a bright-line standard, and has caused some confusion among courts as to its application. In the construction context, the Court recently explained that the economic-loss rule does not bar an owner’s negligence claims directly against a subcontractor for damage to the owner’s property caused by defective work. Though the owner had no contract directly with the subcontractor, the subcontractor owes all persons (including the owner) the duty to perform its work with reasonable care to avoid causing damage to other persons’ property. In that case, the property damage was to the owner’s property and fell outside the scope of work in the subcontractor’s construction contract with the general contractor. Thus, the owner’s negligence claims were permitted to proceed. Chapman Custom Homes, Inc. v. Dallas Plumbing Co., 445 S.W. 3d  716 (Tex. 2014). The case is analyzed in further detail here.

In the LAN/STV case, in contrast, the Contractor sought to recover only for its increased costs of construction resulting from the Architect’s failure to comply with the standards of performance required under its design contract with the Owner. The Court explained that participants in construction projects typically cannot recover their economic losses from parties with whom they did not contract. A roofing subcontractor, for example, could not recover its economic losses through negligence claims against a foundation subcontractor that caused construction delays by failing to perform its work in a timely manner. Rather, the roofing subcontractor’s recovery, if any, would lie in claims for breach of contract against the general contractor, the only party with whom the roofing subcontractor had an agreement.

With respect to the Contractor’s negligent-misrepresentation claims against the Architect, the Court felt that the same reasoning barred any recovery. This is a divergence from the recent Restatement on the issue, which suggests that an architect’s duty to a contractor arises from the expectation that plans are prepared for contractors to rely upon to carry out the construction. Restatement (Third) of Torts: Liability for Economic Harm, § 6, cmt. b. While the Court agreed with this concept, it held that the contractor’s “principal reliance must be on the presentation of the plans by the owner, with whom the contract is to reach an agreement, not the architect, a contractual stranger.” The Court felt that contractors were sophisticated parties who could protect their interests adequately through allocating risk in their construction contracts with the owners.

As the Court noted, there are significant differences of opinion among various states as to whether contractors may assert negligent-misrepresentation claims against architects absent contractual privity. Indeed, prior to this case, several Texas courts of appeals permitted such claims. However, this case clarifies that, in Texas, contractors may not recover purely economic losses through negligent-misrepresentation claims against architects with whom they lack contractual privity.

Thanks to Ian Fullington at Griffith Davison& Shurtleff, P.C. for assistance with preparing this post.

Texas Supreme Court Adopts Restyled Evidence Rules

The Texas Supreme Court recently announced that it has adopted revisions to the Texas Rules of Evidence. The revisions are intended to mirror the recent style revisions to the Federal Rules of Evidence. As with the Federal Rules, the revisions to the Texas Rules are intended to make them easier to read and understand.

According to the Court, only two substantive changes have been made:

• Amendments to Tex. R. Evid. 511 align Texas law with Fed. R. Evid. 502 on waiving privilege by voluntary disclosure.
• Amendments to Tex. R. Evid. 613 retain the requirement that a witness be given an opportunity to explain or deny (a) a prior inconsistent statement or (b) circumstances or a statement showing bias or interest, but the requirement is no longer part of the foundation that an examining attorney must lay before introducing extrinsic evidence of the statement or its circumstances.

The revisions are subject to a comment period that will end on February 28, 2015. Final approval of the revisions will be effective April 1, 2015.

For the full announcement, click here.

A Contractual-Liability Exclusion to Insurance Coverage Might Not Apply to Defective-Work Claims Against a Contractor.

The U.S. Court of Appeals for the Fifth Circuit recently held that, under Texas law, an insurer could not exclude coverage for property damage claims against a general contractor that were based on violations of express warranties of good workmanship and repair. Such claims did not fall within the typical contractual-liability exclusion used in the general contractor’s commercial general liability policy (“CGL policy”). The Fifth Circuit reversed the district court and rendered summary judgment in favor of the homeowners asserting the insured’s rights, remanding for a determination of attorneys’ fees.

Crownover v. Mid-Continent Cas. Co., --- F. 3d ----, No. 11-10166, 2014 U.S. App. LEXIS 20737 (5th Cir. Oct. 29, 2014), on reh’g from 757 F. 3d 200 (5th Cir. 2014).

No-Damages-For-Delay Provision Does Not Shield Owner from Liability for Deliberate Interference With a Contractor’s Work.

In a much-anticipated decision, the Texas Supreme Court has ruled in favor of a general contractor seeking to recover funds withheld by an owner for delays that the jury found were caused by the owner’s deliberate and wrongful interference. The Court addressed the effect of a no-damages-for-delay provision in the construction contract, as well as whether language in the waivers the contractor submitted for progress payments also waived the contractor’s claims for delay damages. Finally, the Court analyzed at length whether the applicable statutes waived the governmental immunity of the owner, a local port authority.

Background

Zachry Construction Corporation agreed to construct a wharf for the Port of Houston Authority for over $62 million. The construction contract gave Zachry control over the means and methods of the work. It also stated that Zachry could not recover any damages from delays in the work, even if the delays resulted from “the negligence, breach of contract or other fault of the Port Authority.” The parties agreed to a provision that permitted the Port to recover its attorneys’ fees from Zachry if Zachry brought an unsuccessful claim under the contract.

As part of the construction of the wharf, Zachry planned to utilize an innovative technique that involved creating a long U-shaped berm made of frozen earth that would extend into the water to surround the worksite. Water would then be removed from the worksite, allowing Zachry to work “in the dry” for much of the construction work. Zachry believed that this technique would make the work less expensive, complete it more quickly, and provide environmental benefits to the Port.

Nine months into the project, the Port asked Zachry to add another section to the wharf, expanding the scope of the project by almost $13 million. To continue to meet the time deadlines in the project, Zachry proposed building a cutoff wall through the middle of the worksite, splitting the work area into two parts. Though the Port had reservations about this plan, it did not raise its concern before the parties executed the change order.

Two weeks later, the Port ordered Zachry to revise its plans to remove the cutoff wall. This forced Zachry to finish only a portion of the wharf “in the dry,” and then to remove the wall. The remainder of the project had to be finished “in the wet,” resulting in a delay of about two and a half years.

Zachry sued the Port several weeks after its refusal to allow construction of the cutoff wall. Zachry claimed about $30 million in delay damages. The Port argued that the contract precluded delay damages. The trial court disagreed, finding that the provision unenforceable if Zachry showed that the Port’s intentional misconduct caused the delay.

Zachry also sought to recover about $2.36 million in contract funds withheld by the Port as liquidated damages for delays. In response, the Port argued that Zachry had waived its claims by submitting applications for progress payments that included releases of certain claims. The trial court found the waiver language ambiguous and submitted the issue of its meaning to the jury.

In its defense, the Port contended that governmental immunity precluded Zachry’s claims. The Port also counterclaimed for close to $1 million in repair costs to remedy defective wharf fenders installed at the project, and for all of its attorneys’ fees under a contract provision that permitted the Port to recover all attorneys’ fees for any of Zachry’s claims that were not successful.

After a trial, a jury found that the Port breached the contract by rejecting the cutoff wall design, causing about $18.6 million in delay damages. According to the jury, the delay resulted from the Port’s “arbitrary and capricious conduct, active interference, bad faith and/or fraud.” The jury found that Zachry had not released its claim to the withheld funds, but also found in favor of the Port on the counterclaims for defective work.

On appeal, the court of appeals reversed the judgment in favor of Zachry. It found that the no-damages-for-delay provision barred any recovery of delay damages, regardless of whether the Port had intentionally or arbitrarily caused the delays. The court also held that the progress-payment releases were unambiguous and precluded any claims for the withheld funds. Finally, the court of appeals rendered judgment in favor of the Port on its claim for attorneys’ fees, awarding the Port almost $10.7 million.

Summary of the Texas Supreme Court’s holdings

The Texas Supreme Court reversed the court of appeals, holding that:

1. The no-damage-for-delays language did not apply, as a matter of public policy, to claims for delays caused by the owner’s intentional or arbitrary interference;
2. The actual waiver that the contractor signed for the progress payments was not ambiguous, and it did not waive the claims for the withheld claims;
3. Governmental immunity did not bar the contractor’s delay claims;
4. The Port was entitled to recover on its defective-work claims; and
5. The Port was not entitled to the award of attorneys’ fees.

Though the decision was 5-4, the dissent agreed with the majority on points 2 and 4, above. The dissent primarily concerned the governmental immunity issue (point 3), and thus did not reach the public-policy issue (point 1).

A contractor cannot waive claims for delays caused by the owner’s intentional or arbitrary interference

The Court found the no-damages-for-delay provision unenforceable against delay claims based on the owner’s intentional or reckless misconduct. While a contractor generally may agree to assume the risk of construction delays, exceptions to their enforcement apply where the delay resulted from the owner’s fraud, misrepresentation, or bad faith, or where the delay resulted from the owner’s active interference or other wrongful conduct, which includes arbitrary acts, willful misconduct, acting without due consideration, and acting in disregard of other parties’ rights. As the jury found that the Port caused the delays through “arbitrary and capricious conduct, active interference, bad faith and/or fraud,” the Court found that the Port could not enforce the provision against Zachry.

The Court noted that it was “doubtful” that the waiver of delay damages due to the Port’s “negligence, breach of contract or other fault” would even apply to deliberate, wrongful misconduct. It cited an amicus brief from the Associated General Contractors of Texas, which pointed out that contractors can (and often do) include in their estimates potential delaying events such as quality and completeness of plans and specifications, material shortages, weather issues, and soil conditions. These foreseeable issues can be taken into account using the contractors’ years of experience, education, and training. But no contractor can accurately assess potential delays “that may arise due to an owner’s direct interference, willful acts, negligence, bad faith fraudulent acts, and/or omissions.”

Under Texas law, contractual provisions seeking to exempt a party from tort liability for its own future intentional or reckless misconduct are void as against public policy. The Court applied the same rule to contract liability, to avoid “incentiviz[ing] wrongful conduct and damag[ing] contractual relations.” Even though Texas, unlike many other states, does not impose a duty of good faith and fair dealing in the performance of all contracts, the Court found such a duty unnecessary to prohibit provisions allowing a contracting party to evade liability for deliberate misconduct in the future.

A contractual requirement for the contractor to waive claims does not prevail over the actual language of the waivers signed

Next, the Court reversed the court of appeals’ ruling that Zachry had waived its claims for the $2.36 million that the Port withheld as liquidated damages. The Court disagreed with the trial court’s finding that the waiver language was ambiguous, instead holding that language unambiguously did not include Zachry’s claims. In particular, the progress-payment application released claims on “the portion of the Work completed and listed on” the invoice. The liquidated damages withheld by the Port, in contrast, were for delayed work that had not been completed, rather than work already finished.

Interestingly, the Court admitted that Zachry’s underlying construction contract could be read to require Zachry to waive such claims when it applied for progress payments. However, the language in the waiver Zachry actually submitted (whether it complied with the contract or not) did not encompass the claims for the withheld funds.

The Texas Supreme Court narrowly held that there was no governmental immunity for the contractor’s delay claims under these circumstances

Finally, a large portion of the majority, and the entire dissent, focused on whether the Texas legislature had waived the Port’s governmental immunity for Zachry’s delay claims. A more detailed examination of this issue is beyond the scope of this post, but the dispute concerned a statute waiving the governmental immunity of a local governmental entity for a contractor’s claims for its “balance due and owed . . . under the contract.” The majority and the dissent agreed that this issue was jurisdictional, but disagreed on whether delay damages were “owed under the contract” where, as here, the contract expressly prohibited delay damages. The majority found that such damages fell within the scope of the waiver.

Parties to construction contracts could use the public-policy exception to avoid damage waivers

This decision could significantly narrow the enforcement of contract provisions limiting recovery of damages in Texas. With some exceptions, Texas has prohibited contractual provisions that require a contractor to indemnify another person for property damage resulting in whole or in part from the fault of the other person, its agent, or its employee. Tex. Ins. Code § 151.102. The Zachry decision adds a public-policy exception invalidating waivers of damages caused by intentional or reckless misconduct. Contractors could argue that this exception applies to more than delay claims. For example, a waiver of consequential damages could be invalidated if a general contractor showed that the owner’s intentional or reckless misconduct caused the damages. Moreover, the Court’s reasoning might apply to conduct that is less culpable than recklessness, such as acting “without due consideration,” arbitrarily, or “in disregard of other parties’ rights.”

Zachry Constr. Corp. v. Port of Houston Auth., ---S.W. 3d ----, No. 12-0772 (Tex. Aug. 29, 2014) (Hecht, C.J.), (Boyd,J., dissenting).

Texas Supreme Court Reinforces that Subcontractors May be Liable to Property Owners

by Kat Statman and Eddy De Los Santos

On August 22, 2014, the Texas Supreme Court ruled that both the trial court and the court of appeals improperly dismissed a property owner's claim for negligence against a subcontractor for improper plumbing installation in Chapman Custom Homes, Inc. v. Dallas Plumbing Company. The Court reiterated that a subcontractor has an implied duty to perform with both care and skill and that breach of this duty may result in liability to property owners. The Court's ruling in this case makes it clear that a subcontractor may be directly liable to a property owner even when the property owner and subcontractor do not have a contractual relationship.

In Chapman, Chapman Custom Homes was hired as a general contractor to build a home in Frisco, Texas. Chapman hired Dallas Plumbing Company to install the plumbing in the new house. The plumbing was allegedly installed improperly, and leaks from the plumbing significantly damaged the structure. The property owner sued Dallas Plumbing alleging breach of contract, breach of warranty, and negligence.

The trial court granted summary judgment for Dallas Plumbing because the property owner did not have a contract with Dallas Plumbing. Additionally, the trial court found the property owner did not allege a violation of a duty owed to it by Dallas Plumbing, independent of the contract.

 

Looking to a case from 1947, the Texas Supreme Court reversed the decision of the court of appeals. The Court found that, even though Dallas Plumbing and the property owner did not have a contractual relationship, Dallas Plumbing still had a duty to perform the contract with both care and skill. Therefore, the property owner's suit alleging that Dallas Plumbing had performed work negligently was sufficient to raise an implied duty by Dallas Plumbing to perform its work with care and skill.

The Court further rejected Dallas Plumbing's argument that the property owner was barred from recovery under the economic loss rule. The economic loss rule states that a party may not recover damages for failure to perform under a contract when the only damages are losing what the party expected to receive under the terms of the contract. The Court specifically noted that, when the tort duty is independent of the contract itself, the economic loss rule will not preclude recovery. In this case, the Court found that Dallas Plumbing had an independent duty to perform with care and skill. Because this duty was independent of the contract between Dallas Plumbing and Chapman Custom Homes, the economic loss rule did not preclude recovery.

There are a number of cases that state a subcontractor cannot be sued by a property owner for defective work because the property owner does not have a contract with the subcontractor, only with the general contractor. This case makes it clear that, while a property owner may not have a contract suit against a subcontractor with whom they do not have a contract, they may have a negligence claim. Importantly, this potential liability is independent of any contract with the subcontractor.

This case also reinforces an independent legal duty that subcontractors have to property owners when they are conducting work. At all times, they must perform the work with both care and skill. Failing to perform a contract with both care and skill may result in liability to the property owner in addition to potential contract liability to the general contractor.

Finally, because this duty and potential liability is independent of the contract between the subcontractor and general contractor, a subcontractor will not be able to escape liability under the economic loss rule. If a subcontractor breaches its duty to perform with care and skill, it will be liable for all damages caused by the breach. 

For your reference, the opinion is linked here.

Certificates of Merit are Not Required to Assert Third-Party or Cross-Claims Against a Design Professional in Texas.

In certain states, a plaintiff seeking to file a lawsuit against a design professional (such as an architect or engineer) based on the provision of professional services must include a “certificate of merit” with the initial pleading. In Texas, this certificate must be a sworn affidavit from a professional with the same license as the defendant that is knowledgeable in the defendant’s area of practice. Tex. Civ. Prac. & Rem. Code § 150.002. It must specifically describe the allegedly negligent acts of the defendant, including the factual basis for each claim. Id. Failure to file the certificate of merit with the initial pleading will result in dismissal, possibly with prejudice. Id.

As a practical matter, this requirement has created tactical problems for general contractors and other construction companies whose scope of work includes responsibility for design. If an owner sues a general contractor for damages arising from alleged design problems, the general contractor must evaluate whether to bring in its design professional as a third-party defendant to bear responsibility for the claims. If the certificate-of-merit requirement applies to such claims, then the general contractor is left with the dilemma of deciding whether to provide sworn proof of the design problems (potentially admitting the general contractor’s liability to the owner) or refraining from joining the design professional (and therefore giving up the benefits of seeking indemnity while the owner’s lawsuit is pending).

In Texas, this issue was recently resolved. In Jaster v. Comet II Construction, the Texas Supreme Court held, in a 5-4 plurality opinion, that defendants and third-party defendants who filed third-party claims or cross-claims against design professionals are not required to file certificates of merit accompanying those claims.

The Court’s decision rested on an analysis of the language of Chapter 150 which requires “the plaintiff” in “any action or arbitration proceeding for damages arising out of the provision of professional services by a licensed or registered professional” to file a certificate of merit (an affidavit signed by a design professional specifically stating what was done incorrectly) with the petition. The Court drew a distinction between “plaintiff” and “third-party plaintiff”/ “cross-claimant” by finding that a plaintiff initiates the lawsuit whereas a “third party-plaintiff”/ “cross-claimant” does not. The Court also found support for that distinction when it interpreted “action” to mean the filing of a lawsuit as opposed to “causes of action” which are the individual claims that make up a lawsuit. The action would be filed brought by the plaintiff as well as causes of action whereas only causes of action would be brought by third-party plaintiffs/cross-claimants.

The Court explicitly did not render an opinion as to whether, in multi-plaintiff suits, each plaintiff would be required to submit a certificate of merit, as that issue was not before the Court.

Notably, there is no majority opinion in this case, which means that the case technically cannot be used as binding precedent. However, the similarity of the concurrence written by Justice Willet to the plurality opinion written by Justice Boyd makes it likely that lower courts can and will consider the majority opinion binding. The concurrence takes the same textual approach as the plurality but instead of focusing on the distinction between “plaintiff” and “third-party plaintiff”/ “cross claimant” the plurality honed in on the phrasing of the statute that describe “the plaintiff” and “the complaint.” The concurrence found that the modifier “the” means a singular plaintiff, thus excluding later claimants, and the initial pleading, not subsequent causes of action added to the complaint. Thus, coming to the same conclusion as the plurality, that the first plaintiff filing the original petition must include a certificate of merit, but subsequent third-party plaintiffs and cross-claimants need not.

Jaster v. Comet II Const., Inc., No. 12-0804 (Tex. July 3, 2014).

Thanks to Nick Brooks at Griffith Davison & Shurtleff, P.C. for assistance with preparing this post.

Partial Disclosure of a Source of Potential Bias Justifies Vacating an Arbitration Award in Texas

When compared with traditional litigation judgments, it is much harder to vacate arbitration awards after they are issued. The Texas Supreme Court recently addressed the standard by which an award can be vacated due to inadequate disclosures by the arbitrator.  In particular, the Court had to evaluate whether an award should be vacated due to an arbitrator’s partial disclosure of a source of potential bias or conflict. Tenaska Energy, Inc. v. Ponderosa Pine Energy, LLC, 57 Tex. Sup. J. 617 (Tex. 2014).

The AAA Commercial Arbitration Rules require that “any person appointed or to be appointed as an arbitrator shall disclose…any circumstance likely to give rise to justifiable doubt as to the arbitrator’s impartiality or independence, including any bias or any financial or personal interest in the result of the arbitration or any past or present relationship with the parties or their representatives.” 

The underlying arbitration proceedings were based on a contract dispute between Tenaska and Ponderosa.  The parties’ arbitration agreement provided for a panel of several arbitrators. Lawyers from Nixon Peabody represented Ponderosa and selected Samuel Stern as their arbitrator.  After his selection Stern disclosed the following information to the parties regarding his relationship with Ponderosa and Nixon Peabody: (1) Nixon Peabody had designated him as an arbitrator in three other proceedings, (2) Stern, on behalf of a company named LexSite, had discussions with Nixon Peabody about outsourcing litigation discovery tasks to LexSite, and (3) “Nixon Peabody and LexSite have done no business, and it is not clear that Nixon Peabody would ever have any business to give LexSite.”  Stern, as part of a divided panel, eventually awarded $125 million to Ponderosa.

Tenaska moved to vacate the award in state court, arguing Stern was neither impartial nor free from bias.  The parties conducted extensive discovery on the issue prior to the hearings on the opposing motions. Ultimately, the trial court vacated the arbitration award based on Stern’s failure to disclose that his only contacts at Nixon Peabody were the two lawyers representing Ponderosa, he owned stock in the litigation services company that was pursuing business from Nixon Peabody, he served as president of the company’s U.S. subsidiary, he conducted significant marketing for the company, he had additional meetings and contact with the Nixon Peabody lawyers to solicit business from the firm, and he allowed one of the Nixon Peabody lawyers to edit his disclosures to downplay the relationship with the firm. The court of appeals reversed, holding that Stern’s disclosures were sufficient to put Tenaska on notice of a potential conflict. 

The Texas Supreme Court ultimately upheld the trial court’s vacation of the arbitration award, reasoning that Stern’s failure to disclose the extent of his relationship with LexSite and his attempts to solicit business from Nixon Peabody demonstrated evident partiality and supported vacating the award.  The Federal Arbitration Act allows a court to set aside an arbitration award “where there was evident partiality.” 9 U.S.C. § 10(a)(2).  The U.S. Supreme Court has interpreted the statute to impose a requirement on arbitrators to “disclose to the parties any dealings that might create an impression of possible bias.”  Commonwealth Coatings Corp. v. Cont’l Cas. Co., 393 U.S. 145, 147 (1968). Moreover, the Texas Supreme Court had previously held that “if the arbitrator does not disclose facts which might, to an objective observer, create a reasonable impression of the arbitrator’s partiality,” then the arbitrator exhibits evident partiality. 

Based upon these cases, the Texas Supreme Court held an arbitration award can be vacated if an arbitrator fails to disclose facts which might, to an objective observer, create a reasonable impression of the arbitrator’s partiality. However, information that is trivial will not rise to this level and need not be disclosed.  Looking at the facts regarding Stern’s business relationship, his potential financial gain from procuring Nixon Peabody’s business, and his decision to allow Ponderosa’s attorneys to downplay their relationship, the Court held that the information was not trivial and might have conveyed an impression of partiality toward Nixon Peabody’s client to a reasonable person. Accordingly, the failure to disclose the information demonstrated evident partiality, and the trial court properly vacated the award. 

While this case was decided under Texas law, the Texas Supreme Court’s interpretation of the Federal Arbitration Act suggests that its reasoning could be applied more broadly to cases across the country. In particular, the Court’s decision to evaluate the extent to which a partial disclosure could be misleading could give rise to more challenges to arbitration awards based on disclosure issues.

Thanks to J.P. Neyland at Griffith Davison & Shurtleff, P.C. for assistance with preparing this post.

Superseding the Implied Warranty of Good and Workmanlike Repair in Texas

In a case involving foundation repairs to a residence, the Texas Supreme Court addressed the question of whether the implied warranty for good and workmanlike repair of tangible goods or property can be disclaimed or superseded.  The Court held that the implied warranty cannot be disclaimed, but it can be superseded by the parties. Gonzalez v. Southwest Olshan Foundation Repair Company, LLC, 400 S.W. 3d 52 (Tex. 2013).

In Gonzalez, a homeowner (“Gonzalez”) hired Olshan Foundation Repair Co., LLC (“Olshan”) to repair the foundation of their home.  The repair contract (the “Contract”) included two warranty provisions.  First, the Contract stated Olshan would use the Cable Lock system of foundation repair and would adjust the foundation for the life of the home.  Second, it required Olshan to perform all of the necessary work in a good and workmanlike manner.  Olshan repaired the foundation, but Gonzalez continued to experience foundation problems. 

Gonzalez ultimately sued Olshan for, among other things, breach of express warranty, breach of the common law warranty of good and workmanlike repair, and DTPA violations.  The jury found that Olshan did breach the implied warranty of good and workmanlike repair and committed DTPA violations, but did not breach any express warranty.  The Court of Appeals reversed this holding on the grounds that the implied-warranty and DTPA claims were barred by the two-year statute of limitations.  The case then proceeded to the Texas Supreme Court. 

Olshan argued that its express warranty superseded any implied warranty of good and workmanlike repair.  Therefore, because the jury held Olshan did not breach any express warranty, liability was precluded on Gonzalez’s implied-warranty claims. The Texas Supreme Court agreed.  The Court stated that Texas law recognizes an implied warranty to repair or modify existing tangible goods or property in a good and workmanlike manner, and that such implied warranty cannot be disclaimed or waived.  The Court then analogized this implied warranty with the implied warranty of good workmanship related to new home construction. See Melody Home Manufacturing Co. v. Barnes, 741 S.W.2d 349, 354 (Tex. 1984).  The Court held that the implied warranty of good and workmanlike repair may be superseded if the parties’ agreement sufficiently describes the manner, performance or quality of the services to be provided. 

In the case at bar, the Court found the Contract sufficient to supersede the implied warranty.  The Contract specified the manner, performance or quality of the services by stating that Olshan would perform the work in a good and workmanlike manner and would use the Cable Lock foundation repair system and would adjust the foundation for the life of the home.  Accordingly, because the implied warranty was superseded, the jury’s finding that there was no breach of an express warranty was conclusive on Gonzalez’s claims.  

Texas Court Rejects General Contractor's Fraud Claims Against Owner's Lender

A Texas court of appeals recently rejected a general contractor's claims for fraud against the project owner's lender.

In that case, the general contractor did not receive several progress payments for its work on the project, and was not paid its retainage by the owner. The owner defaulted on its construction loan, which led to the lender foreclosing on its lien on the property.

The general contractor filed suit against the lender, claiming (among other things) that lender fraudulently misrepresented that it was withholding retainage from the loan amounts disbursed to the owner for the general contractor's periodic pay applications. The trial court granted summary judgment in favor of the lender on the fraud and constructive-trust claims.

The court of appeals affirmed. It pointed out that the general contractor had failed to present evidence showing the lender had made any "misrepresentations" concerning retainage. The lender's witness stated that the lender did not actually withhold any retainage, but instead forwarded the full amounts to the owner. The general contractor, in turn, did not present any evidence that its requests for payment were presented directly to the lender, or that the lender withheld any of the retained funds for the owner. Absent such evidence, the court held that the general contractor failed to raise an issue of material fact on whether the lender made any misrepresentations.

The opinion is David Wight Constr. Co., Ltd. v. FDIC, No. 14-12-01003-CV (Tex. App--Houston [14th Dist.] Feb. 25, 2014, no pet. h.).

Though the court did not discuss the issue, by analogy, some statutes in Texas expressly exempt lenders from certain obligations concerning construction loans. For example, the Texas Trust Fund Act expressly exempts lenders from any obligations to hold construction payments in trust for the contractors who work on projects. Tex. Prop. Code Sec. 162.004(a). However, this exemption would not excuse the lender from liability for any fraudulent misrepresentations to the general contractor.

Has anyone seen a successful claim for fraud or negligent misrepresentation by a contractor against a lender? Would allowing such claims expand the lenders' liability in a manner that would interfere with the normal administration of pay applications in commercial construction projects?

Texas Jury Sentences General Contractor to Three Years in Prison for Fraudulent Nonpayment of Subcontractors

The Dallas Morning News reports that a jury in Fort Worth, Texas recently gave the principal of a general contractor a three-year prison sentence for fraud in connection with his failure to pay amounts due to subcontractors for work performed on the construction of a car dealership. According to the article, the Tarrant County District Attorney's Office stated that the criminal conviction, which came after a week-long trial, was the first of its kind in the country.

The press release from the Tarrant County District Attorney's Office offers some additional details about the case. It states that the general contractor had submitted payment applications to the owner claiming all subcontractors were being paid. This turned out not to be the case, as subcontractors filed seven liens totaling about $100,000 against the owner's property. The owner filed a complaint against the general contractor's principal with the Tarrant County District Attorney's Office. The principal was then indicted, arrested, and tried on a felony charge of making a false statement to obtain property or credit.

The defendant had no prior felony convictions, and therefore faced punishment ranging from probation to ten years in prison. During the punishment phase, prosecutors presented evidence of prior civil lawsuits against the defendant filed by subcontractors, as well as repeated bankruptcy filings to avoid liability. After considering this evidence, the jury sentenced the defendant to three years in prison with a $10,000 fine.

As civil defense attorneys, we often view potential liability for nonpayment on construction projects in civil, rather than criminal terms. Has anyone else experienced situations where criminal charges were asserted? Is this the type of conduct that merits criminal punishment rather than civil liability for damages?

Texas Court Clarifies What Is Required to Order a Party to Turn Over Hard Drives During Discovery

As with most complex commercial litigation, lawsuits over construction often involve investigations into electronically stored information (“ESI”). In Texas, a recent case has clarified the requirements necessary to order a party to turn over hard drives during disputes over production of ESI.

In 2013, a Texas Court of Appeals in Houston granted a writ of mandamus and vacated an order to compel production of computer and network hard drives.

In the lawsuit, several former co-owners of businesses had a falling out and sued one another alleging various claims. Central to the case was whether one of the parties had misrepresented his educational background to the other.

After several disputes regarding whether responsive ESI had been produced, the trial court issued an order requiring production of forensic images of the defendants’ computer hard drives and the drives of their network servers. Forensic images are digital duplicates of hard drives prepared used to prevent any changes being made to the original source of the ESI.

The defendants sought mandamus relief from the court of appeals, arguing the trial court had abused its discretion. They argued that the order was overly broad, giving the plaintiff “carte blanche to rummage through” their hard drives without any reasonable limits to address privilege, confidentiality, or privacy.

The court of appeals granted the writ of mandamus and vacated the order. It examined the Order in light of the applicable Texas Rules of Civil Procedure, as well as a seminal Texas Supreme Court case on electronic discovery, In re Weekley Homes, 295 S.W. 3d 309 (Tex. 2009). In Texas, courts have held that providing direct access to electronic information systems is particularly intrusive and should be discouraged. An order requiring electronic data storage systems to be turned over is not appropriate unless and until the moving party has shown that existing discovery responses were inadequate and the proposed searches of the storage systems could recover the relevant missing information.

In this case, the court found that a conclusory statement that “emails must exist” was insufficient to overcome the threshold question of whether there was an inadequate production. The moving party had to present actual evidence that the production was somehow deficient. Moreover, even with such a showing, the moving party had not shown that there was deleted relevant information which could feasibly be recovered by taking a forensic image of the hardware. To do so, the requesting party should have provided information from his forensic imaging expert as to why his methods would have produced relevant deleted information.

The court also examined the requests for production at issue, and found them insufficiently specific to justify the trial court’s order. The moving party made a blanket request for servers, tablets, and laptops, which was insufficient because it did not inform the opposing parties of the exact nature of the information sought.  Specific discovery requests must be aligned with the request for the production of hardware.

The widespread use of ESI to conduct business continues to require attorneys and courts to evaluate how far parties may go to uncover documents through discovery. This case suggests that a party seeking to search its opponents’ hard drives must prepare a detailed and thorough justification of the request before a trial court can permit the searches to proceed.

In Re Pinnacle Engineering, 405 S.W.3d 835 (Tex. App.—Houston [1st Dist] 2013, no pet.).

In Texas, Contractual-Liability Exclusions Do Not Exclude Coverage for Property-Damage Claims Based on Failure to Perform Work in a Good and Workmanlike Manner.

The Texas Supreme Court recently held that insurance coverage for property damage resulting from violations of a general contractor's contractual duty to perform work in a good and workmanlike manner are not excluded by the standard exclusion for "contractual liability" in a commercial general liability policy. Ewing Const. Co., Inc. v. Amerisure Ins. Co. --- S.W.3d ----, 2014 WL 185035 (Tex. Jan. 17, 2014).

 In Ewing, a general contractor had constructed some tennis courts for a school district. After construction was completed, the tennis courts began cracking and became unsuitable for use. The school district sued the general contractor for repairs, claiming the work had not been performed in a good and workmanlike manner.  

The general contractor sought defense and indemnity from its liability insurer, but the insurer denied coverage. In the ensuing coverage lawsuit in federal court, the insurer relied on the contractual-liability exclusion in the policy to deny it had any obligation to defend or indemnify the general contractor. 

Contractual-liability exclusions are common in commercial general liability policies in Texas.  The provision at issue in Ewing excluded coverage for property damage "for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.” The construction contract with the school district required the general contractor to perform its work in a good and workmanlike manner. As the school district claimed the problems with the tennis courts resulted from the general contractor's failure to meet this standard, the insurer argued the contractual-liability exclusion applied. 

The district court granted summary judgment in favor of the insurer based on the contractual-liability exclusion. The Fifth Circuit initially agreed with the district court, but then vacated its opinion and certified the question of whether the exclusion applied to the Texas Supreme Court. The Texas Supreme Court held that the exclusion does not apply.

Central to the Court’s decision was an opinion issued several years ago that interpreted the contractual-liability exclusion. In Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, a contractual-liability exclusion excluded coverage for claims based on liability outside of what the general contractor would have had absent the contract. 327 S.W.3d 118 (Tex. 2010). Specifically, the contractor in Gilbert had agreed to assume liability for damage caused to adjacent landowners' property. 

The Ewing Court distinguished its holding in Gilbert by pointing out that Gilbert addressed whether a CGL policy’s contractual liability exclusion applied to exclude indemnity coverage for a third party’s property-damage claim where the only basis underlying the claim was the insured’s contractual agreement to be responsible for the damage. The contractual agreement at issue in Gilbert specifically obligated Gilbert to repair or pay for damage “resulting from a failure to comply with the requirements of th[e] contract,” thus extending Gilbert’s obligations beyond what would exist under general principles of law.

            In Ewing, the general contractor's agreement to construct the work in a good and workmanlike manner did not enlarge its obligations beyond any general common-law duty it might otherwise have. In Texas, contractors are obligated to perform their work with skill and care even absent an express contractual provision requiring them to do so. The Court reasoned that the exclusion “means what it says,” and excludes liability for damages the insured assumes by contract, such that “assumption of liability” means liability for damages that exceeds the liability an insured would have under general law.  Thus, the Court concluded that a general contractor who agrees to perform its construction work in a good and workmanlike manner, without more, does not enlarge its duty to exercise ordinary care in fulfilling its contract and does not “assume liability” for damages arising out of its defective work so as to trigger the Contractual Liability Exclusion. 

            This decision is generally positive for contractors insured under CGL policies in Texas, as it reduces the substantial uncertainty about coverage of property-damage claims based on construction defects that arose after the Gilbert decision was issued in 2010. However, as the Court acknowledged in Ewing, CGL policies are not performance bonds. Claims based on faulty workmanship are often excluded from coverage by other exclusions specific to the construction industry. For example, CGL policies often exclude claims for property damage to the insured's own work under the "your work" exclusion.

U.S. Supreme Court Enforces Forum-Selection Clause in Construction Subcontract

On the Best Practices Construction Law blog, Matt DeVries posted an interesting summary of the U.S. Supreme Court's recent opinion concerning enforcement of forum-selection clauses in construction contracts in Atl. Marine Const. Co., Inc. v. U.S. Dist. Ct. for the W. Dist. of Tex., 2013 U.S. LEXIS 8775, 2013 WL 6231157 (Dec. 3, 2013), reversing 701 F. 3d 736 (5th Cir. 2012). Matt's article analyzes the Court's reasoning and some of the practical implications of the ruling.

In the case, the Supreme Court held that forum-selection clauses requiring litigation in federal courts in other districts should be enforced by motions to transfer under 28 U.S.C. § 1404(a), which governs transfers "[f]or the convenience of the parties and witnesses," rather than through motions to dismiss under 28 U.S.C. § 1406(a) or Federal Rule of Civil Procedure 12(b)(3) for improper venue. (Forum-selection clauses requiring litigation in state courts can be enforced through the common-law "residual doctrine of forum non conveniens," as the statute permits only transfers and not dismissals.)

The case involved a Texas subcontractor that filed suit for nonpayment on a construction project located at Fort Hood in Texas. The general contractor was located in Virginia, and the parties' subcontract included a forum-selection clause requiring the parties to litigate their disputes in state or federal court in Virginia. The subcontractor filed suit in the U.S. District Court for the Western District of Texas, which denied the general contractor's motions to dismiss or transfer venue based on the forum-selection clause. The U.S. Supreme Court reversed, pointing out that forum-selection provisions should be granted deference absent "extraordinary circumstances" not present in the case.

Early reactions to the opinion have been mixed. Tom Ichniowski at Engineering News-Record interviewed Atlantic Marine’s attorney Michael Sterling (Vandeventer Black, LLP), who believes the ruling supports the enforceability of forum-selection provisions in construction contracts. The article presents an opposing view from attorney Eric Travers (Kegler Brown Hill + Ritter), who filed an amicus brief on behalf of the American Subcontractors Association. He pointed out that the Supreme Court remanded the case for consideration of public-policy interests, and that 24 states have found similar forum-selection clauses invalid.

As a Texas-based construction attorney, I'll add a public-policy wrinkle: Texas has a statute which gives a subcontractor performing construction or repair work on a project in Texas the option to void any contractual provision making disputes "subject to another state's law, [or] litigation in the courts of another state." Tex. Bus. & Comm. Code § 272.001. On remand, the subcontractor might raise this statute (if it hasn't already) as support for its argument that the case should not be transferred to federal court in Virginia.