1 Lien and Construction Contract Updates Stephanie O’Rourke “Construction Law Update” Breakfast Seminar Sponsored by: The Construction Zone Dominion Country Club San Antonio, Texas January 16, 2014 COKINOS BOSIEN & YOUNG

2 Lien Basics

3 COKINOS BOSIEN & YOUNG Introduction Mechanic’s lien laws in Texas are very complex, and are provided for both in the Texas Constitution and in the Texas Property Code. Whether working for the government or on private projects, contractors must comply with strict statutory requirements.

4 COKINOS BOSIEN & YOUNG The Constitution United States Constitution, Article XVI, Section 37, which has remain unchanged since 1876 provides: LIENS OF MECHANICS, ARTISIANS, AND MATERIALMEN. Mechanics, artisians and material men of every class, shall have a lien upon the buildings and articles made or repaired by them for the value of their labor done thereon, or material furnished therefore; and the Legislature shall provide by law for the speedy and efficient enforcement of said liens.

5 COKINOS BOSIEN & YOUNG Constitutional Lien The Texas Constitution grants certain self- executing liens. Constitutional liens are only available to those who contract directly with the project’s owner.

6 COKINOS BOSIEN & YOUNG New Section

7 COKINOS BOSIEN & YOUNG Constitutional Lien An original contractor is any entity that has a direct contract with the property owner. There may be multiple original contractors on a project.

8 COKINOS BOSIEN & YOUNG Lien Holders & Proper Subject of Lien Contractors, subcontractors, material suppliers, architects, engineers, surveyors, and landscapers who perform labor or supply materials directly to a private project may file a lien on the property. Statutory liens attach to the land and the improvements thereon.

9 COKINOS BOSIEN & YOUNG Three Types of Claimants: Contractor, Subcontractor, and Sub-Subcontractor Subcontractors and sub- subcontractors must comply with statutory notice obligations when perfecting lien affidavits. General Contractor and Sub. Sub-Contractor and Sub-Sub.

10 COKINOS BOSIEN & YOUNG Three Types of Claimants: Original Contractor, Subcontractor, and Sub-Subcontractor – Accrual of Indebtedness of Claimants For GC, the date of the accrual of indebtedness is typically on the last day of the month wherein the GC or the owner has notice that the contract has either been terminated, abandoned or completed. For subcontractors or sub-subcontractors, accrual of indebtedness occurs on the last day of the last calendar month they perform the work or furnish materials under the prime contract.

11 COKINOS BOSIEN & YOUNG To perfect a lien, entities having direct contract with an original contractor must provide certain information to the project owner prior to filing a lien affidavit. Perfecting a Subcontractor’s or Materialman’s Lien

12 COKINOS BOSIEN & YOUNG A subcontractor or materialman must give an owner written notice of an original contractor's failure to pay. The notice is sometimes referred to as a third month notice. The notice allows an owner to withhold funds statutorily owed to the original contractor. Perfecting a Subcontractor’s or Materialman’s Lien Notice

13 COKINOS BOSIEN & YOUNG A subcontractor must send notice of filing the lien affidavit to the owner and the original contractor by certified or registered mail within 5 days of filing the lien with the county clerk. Perfecting a Subcontractor’s or Materialman’s Lien Notice of Filing Lien Affidavit

14 COKINOS BOSIEN & YOUNG In Texas, sub-subcontractors and material providers have additional notice requirements. Perfecting a Subcontractor’s or Materialman’s Lien

15 COKINOS BOSIEN & YOUNG A sub-subcontractor or materialman who does not have a contract with an GC (but instead contracts with a subcontractor) is required to give two separate written notices by registered mail, return receipt requested – (1) to the GC by the 15 th day of the second month, with a copy to the sub; and (2) to the owner and GC with copy to sub by the 15 th day of the third month. Perfecting a Subcontractor’s or Materialman’s Lien Notices

16 COKINOS BOSIEN & YOUNG This “sub-sub” notice to the prime contractor is required on or before the 15 th of the 2 nd month after each calendar month labor or materials are supplied. Notice to the owner & prime is required on or before the 15 th of the 3rd month after each calendar month labor or materials are supplied. Notice to owner must contain statutorily required language. Once notice is properly given, the sub-subcontractor or materialman must file its lien affidavit. Invoice date does not control. Perfecting a Subcontractor’s or Materialman’s Lien Affidavit

17 COKINOS BOSIEN & YOUNG Perfecting a Subcontractor’s or Materialman’s Lien Filing Lien Affidavit Against Retainage If owner filed an affidavit of completion and sent a copy of the affidavit to the claimant then: — Claimant must file its lien affidavit within 40 days after the date of completion stated in the affidavit OR If owner sent a notice relating to termination or abandonment of the original contract to the claimant then: —Claimant must file its lien affidavit within 40 days after the date of termination or abandonment stated in the notice OR...

18 COKINOS BOSIEN & YOUNG Perfecting a Subcontractor’s or Materialman’s Lien Filing Lien Affidavit Against Retainage If owner sent a written notice of demand for claimant to file its lien affidavit, then: —Claimant must file its lien affidavit within 30 days after the date owner sent notice of demand to claimant.

19 COKINOS BOSIEN & YOUNG Demand for Payment to Owner If a sub or sub-sub notice is properly given to the owner, it will “trap funds” in the hands of the Owner. An Owner can be liable if it pays “trapped funds” to an original contractor.

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21 COKINOS BOSIEN & YOUNG Anti-Indemnity Portion of Chapter 151 Application When indemnitor is provided or procures insurance pursuant to a CIP. When indemnitor procures coverage subject to Title 10 of the Texas Insurance Code (property and casualty). “Have no fear of perfection –you’ll never reach it.” (Salvador Dali)

22 COKINOS BOSIEN & YOUNG What is a “Construction Contract?” A contract, subcontract, or agreement, or a performance bond assuring the performance of any of the foregoing, entered into or made by an owner, architect, engineer, contractor, construction manager, subcontractor, supplier, or material or equipment lessor for the design, construction, alteration, renovation, remodeling, repair, or maintenance of, or for the furnishing of material or equipment for, a building, structure, appurtenance, or other improvement to or on public or private real property, including moving, demolition, and excavation connected with the real property. The term includes an agreement to which an architect, engineer, or contractor and an owner's lender are parties regarding an assignment of the construction contract or other modifications thereto.

23 COKINOS BOSIEN & YOUNG Types of Construction Contracts Contracts for public or private construction Demolition and excavation contracts Design contracts Performance bonds Assignment agreements with owner’s lender

24 COKINOS BOSIEN & YOUNG What’s Prohibited? Requiring the indemnitor to indemnify against a claim caused by the negligence or fault, breach of statute, breach of contract, etc. of the indemnitee.

25 COKINOS BOSIEN & YOUNG Scope of Indemnity Permitted Comparative fault or limited form indemnity only to the extent of the indemnitor’s own negligence or fault. No transfer of the indemnitee’s own negligence or fault.

26 COKINOS BOSIEN & YOUNG Employee Exception An indemnity provision requiring a person to indemnify another party against a claim for the bodily injury or death of an employee of the indemnitor or its subcontractor.

27 COKINOS BOSIEN & YOUNG Scope of Indemnity Permitted – Third Party Over Actions An indemnitee can be indemnified for liability arising out of the bodily injury or death of an employee of the indemnitor or its subcontractor as alleged in a third party over action. Broad form indemnity allowed as to sole negligence or fault of the indemnitee in causing the injury.

28 COKINOS BOSIEN & YOUNG Anti-Indemnity: CIP Exceptions An insurance policy issued under a CIP. Cause of action for breach of contract or warranty that exists independently of the indemnity obligation for which insurance is provided under a CIP.

29 COKINOS BOSIEN & YOUNG Anti-Indemnity: Other Exceptions Financing documents other than construction contracts to which the contractor and lender are parties. General agreements of indemnity required by sureties. Worker’s Compensation benefits

30 COKINOS BOSIEN & YOUNG Benefits or protections under governmental immunity laws Single family residential construction Municipal contracts Anti-Indemnity: Other Exceptions (cont.)

31 COKINOS BOSIEN & YOUNG Anti-Indemnity: Joint Defense Agreements The statute does not apply to a joint defense agreement entered into after a claim is made.

32 COKINOS BOSIEN & YOUNG Anti-Indemnity: Effective Date “Original Contracts” with owners entered into on or after January 1, The prime contract determines the applicable law to the subcontracts, purchase orders and insurance policies.

33 COKINOS BOSIEN & YOUNG General Indemnity Clause Contractor shall defend, indemnify and hold harmless Owner from and against all claims... arising out of the performance of Contractor’s Work provided that any such claim is attributable to bodily injury, sickness, disease, or death, or to injury to or destruction of tangible property, including the loss of use resulting therefrom, but only to the extent caused or alleged to be caused in whole or in part by any negligent act or omission of Contractor... “The minute you read something that you can’t understand, you can almost be sure that it was drawn up by a lawyer.” (Will Rogers)

34 COKINOS BOSIEN & YOUNG Employee Injury Indemnity Clause CONTRACTOR SHALL DEFEND, INDEMNIFY AND HOLD HARMLESS OWNER AGAINST ALL CLAIMS … ARISING OUT OF BODILY INJURY TO, OR SICKNESS, DISEASE OR DEATH OF, ANY AGENT, EMPLOYEE OR REPRESENTATIVE OF CONTRACTOR OR ANY OF ITS SUBCONTRACTORS, REGARDLESS OF WHETHER SUCH BODILY INJURY, SICKNESS, DISEASE, OR DEATH IS CAUSED BY OR IS ALLEGED TO BE CAUSED BY THE PARTIAL OR SOLE NEGLIGENCE OF OWNER. IT IS THE EXPRESS INTENT OF OWNER AND CONTRACTOR THAT CONTRACTOR IS TO DEFEND, INDEMNIFY AND HOLD THE OWNER HARMLESS FROM THE CONSEQUENCES OF OWNER’S OWN NEGLIGENCE, WHETHER IT IS THE SOLE OR CONCURRING CAUSE OF THE BODILY INJURY, SICKNESS, DISEASE OR DEATH.

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36 COKINOS BOSIEN & YOUNG Two Pending Cases Concerning Design Professionals Martin K. Eby Constr. Co. V. LAN/STV, No (Tex.) Atkins North America, Inc., fka PBS&J v. CCE, Inc., No (Tex.)

37 COKINOS BOSIEN & YOUNG 1.What constitutes a “negligent misrepresentation” by a design professional? 2.What damages are recoverable against a design professional for negligent misrepresentation? Two Legal Issues for the Texas Supreme Court

38 COKINOS BOSIEN & YOUNG “Supplying false information for the guidance of others” Restatement (Second) of Torts §552 “Significantly, the sort of ‘false information’ contemplated in a negligent misrepresentation case is a misstatement of existing fact.” AKB Hendrick, LP v. Musgrave Enterprises, Inc., 380 S.W.3d 221, 237 (Tex. App.---Dallas 2012) See also McCamish, 991 S.W.2d at 794 What is A “Negligent Misrepresentation?”

39 COKINOS BOSIEN & YOUNG What About Damages? 1.The damages recoverable for a negligent misrepresentation are those necessary to compensate the plaintiff for the pecuniary loss to him of which the misrepresentation is legal cause, including: a.the difference between the value of what he has received in the transaction and its purchase price or other value given for it; and b.pecuniary loss suffered otherwise as a consequence of the plaintiff’s reliance upon the misrepresentation. 2.The damages recoverable for a negligent misrepresentation do not include the benefit of the plaintiff’s contract with the defendant. Restatement (Second) of Torts §552B Federal Land Bank v. Sloane, 825 S.W.2d 439, 442 (Tex. 1991).

40 Questions?

41 Thank You! Stephanie O’Rourke