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Texas Construction Law Blog

For Subcontractors & Suppliers

Softening a Hurricane’s Blow: Force Majeure and Builder’s Risk

Posted in Construction Contracts

 

Co-authors: Russell Jumper and Tim Fandrey

Hurricane Harvey caused severe destruction in Texas with its significant winds and historic rainfall. But Harvey may also prove to be a costly lesson for many project owners and contractors. As Texas begins to focus on recovery in the coming weeks, Harvey will further serve as a reminder to all construction industry stakeholders that hurricanes, and other “acts of God”, are risks that must be effectively managed during the pre-construction and construction phases of every project. While it is difficult to effectively avoid the risks attendant to a highly-destructive, low probability event that occurs on short notice, owners and contractors have two primary tools at their disposal to mitigate the effects of such an event: (i) contractual force majeure provisions; and (ii) builder’s risk insurance.

Force Majeure

Force majeure events are events that are beyond the control of a contracting party. A properly drafted force majeure provision relieves parties of their contractual duty to perform upon the occurrence of a force majeure event. While the precise definition varies depending upon the language of the contract, generally, an event must be extreme to constitute an event of force majeure. Common examples within the context of construction contracts include war, famine, embargoes, and “acts of God” such as hurricanes, earthquakes and tornadoes. Although sometimes written off as “boiler plate” language—or in some cases completely ignored—the force majeure clause is crucial for impacted parties to obtain relief from performing their contractual duties.

Commonly accepted force majeure provisions are not without their pitfalls and limitations. They may be drafted too narrowly such that the particular event affecting a party does not meet the contract’s definition of force majeure. Further, many force majeure clauses contain strict notice provisions that can result in a party accidentally or unknowingly waiving its right to the relief the force majeure clause provides if written notice is not given within the time prescribed by the notice provision. Providing strict contractual notice is likely the last thing on an owner or contractor’s mind in the chaos that follows a force majeure event, and the notice deadline may lapse unnoticed. Even when force majeure clauses are properly invoked, the relief available is often limited by the terms of the contract. In most cases, the clause does not relieve a contracting party from ultimately performing its obligations, rather it temporarily relieves a party of its contractual obligations to perform only while the force majeure event actually prevents the party from being able to perform. It does nothing to address property damage to completed construction or construction in progress, stored materials, and cost impacts resulting from the delays caused by the event. Hence the related significance of builder’s risk insurance.

Builder’s Risk Insurance

Builder’s risk insurance can fill in the gap left by the force majeure clause. It provides monetary relief for property damage and economic damages suffered as a result of a force majeure event such as Hurricane Harvey. As the name implies, “builder’s risk” insurance covers loss and damages that occur during the course of construction–generally covering losses sustained by owners and contractors. The typical builder’s risk policy covers the hard costs of construction, damaged or destroyed materials and equipment, completed or partially completed work, lost rent, and soft costs such as extended general conditions, bond premiums and real estate taxes.

Too often, builder’s risk insurance is overlooked in project preparation and planning. Construction contracts do not always expressly require a party to secure builder’s risk insurance. Without an express directive to obtain the insurance, builder’s risk insurance may be disregarded or considered “non-essential”. Even when a builder’s risk policy is in place, it may not adequately address the risks facing a particular project. Not all insurance policies are created equal and some provide greater coverage than others. There may even be differences in coverage within a particular policy. For instance, builder’s risk policies often distinguish between flood water and winddriven rain water. Although the water may have the same damaging effect on the constructed improvements, flood damage can be subject to a different coverage limit and deductible than rain damage. A policy holder must carefully review the policy language to ensure the coverage provided matches the possible risks during construction so there are no surprises with respect to insurance when tragedy strikes.

Bottom Line

Force majeure provisions and builder’s risk insurance, when used effectively, can operate as a one-two punch to greatly mitigate the effects of an otherwise catastrophic force majeure event. However, taking full advantage of these tools requires forethought. It is crucial for the construction industry professional to take time ensure these tools are in place, and then provide any required notice when it becomes necessary. The stakes are high, so be sure to consult with a construction law attorney while engaging in due diligence for your next project.

“Buy American” Law Changes How Texans Buy Iron and Steel

Posted in Construction Legislation

 

Co-authors: Jeff Leach, Tim Fandrey

As a result of newly enacted Texas Senate Bill 1289, buying American iron and steel is now a requirement on certain public infrastructure projects in Texas. Promoted by President Trump, passed by the Texas Legislature in May and signed in to law this summer by Governor Greg Abbott, the new law, effective Sept. 1, 2017, requires that iron and steel be purchased from an American supplier unless the American supplier price is more than 20 percent higher than the price of the cheaper foreign importer. Foreign iron and steel may also be used if American suppliers are not prepared to supply a project, or if there is a compelling state interest that warrants the use of a foreign manufacturer’s steel.

Designed to encourage and support investment in America’s workers and critical industries, the law has far-reaching application in Texas as it applies to all infrastructure projects constructed by Texas state agencies. It does not, however, apply to county and municipal projects. Further, it is the intent of the legislation that it apply only to iron and steel that is permanently incorporated into the constructed improvements. Iron and steel in manufactured goods, electrical components, equipment, systems and appurtenances necessary for the operation of the completed public infrastructure are exempted from the law’s effect.

Supporters of the law believe that its passage will encourage reinvestment in the United States and Texas manufacturing industries, and that will in turn lead to more high-paying, high-skill jobs in Texas. They further maintain that by buying American iron and steel, more Texas tax dollars will remain in America and will not be paid to foreign countries that do not share American values in areas such as the environment, human rights and labor conditions. An excerpt from the bill’s statement of intent authored by Senator Brandon Creighton succinctly describes the supporters’ view of the problem and the law’s purported solution:

Iron and steel manufacturing facilities have closed in Texas, and we will continue to lose iron and steel manufacturing jobs. The reason is because foreign countries, like China and Turkey, subsidize their iron and steel manufacturing, circumvent our trade laws, and flood the United States (U.S.) with cheap iron and steel. Texas-based iron and steel manufacturers cannot compete with foreign countries who have a proven track record of environmental and human rights violations. Until the U.S. aggressively enforces our federal trade laws, Texas must act to level the playing field or risk losing more iron and steel manufacturing jobs.

The law is not without its detractors. Some believe that the up to 20 percent price increase on expensive and large building material will drive up the total cost of the projects, costing taxpayers more money, and reducing the overall funds available for Texas public infrastructure projects. Some Senators worry that the law will harm U.S. – Canada trade relations. They attempted to exempt Canadian iron and steel from the law’s effect. Still other Senators think the law does not go far enough to support the Texas economy. They believed the law should have been “buy Texan” instead of “buy American”.

While the true effect of the law has yet to fully be seen, all construction industry stakeholders will need to take the law into consideration for upcoming projects. One thing is certain, however: the new law will have far-reaching impacts on project budgeting, bid pricing and scheduling, and contractors should accordingly take note.

When is an Unforeseen Condition a “Differing Site Condition”?

Posted in Construction Contracts

I was reviewing various articles I have written over the years and came across a prior version of this one about differing site conditions, written nearly twenty years ago.   I was curious – does this cup still hold water?  It does.

Many construction contracts contain some version of a “differing site conditions” clause.   It is found in the current version of AIA’s A201 general conditions, as well as in the EJCDC equivalent.   It also appears in most state DOT specifications, as well as in federal government construction contracts.   Generally, it provides for a change order (subject to procedural compliance) when the contractor encounters (i) subsurface or other concealed conditions that differ materially from the conditions indicated by the contract documents or (ii) unknown physical conditions of an unusual nature differing materially from those ordinarily encountered and recognized as inherent to the work provided for in the contract documents.   But, as they say, “timing is everything.”   This adage applies, too, to a differing site conditions claim.

In Olym­pus Corp. v. United States, 98 F.3d 1314 (Fed. Cir. 1996), the United States Federal Circuit Court of Appeals was confronted with the following ques­tion: Are delays caused by a govern­ment caused hazardous materi­als spill compensable under the federal Differing Site Condi­tions clause?  The court an­­­­­s­wered “no” based on its con­clusion that to be con­sidered a differing site con­dition, the condition must exist at the time the contract was formed.

Olympus entered into a fixed price contract with the United States to pave the plant yards at the Stratford Army Engine Plant located in Strat­ford, Connecticut. As man­­­­­­­­­­­­­dated by the Federal Acquisition Regulation, 48 C.F.R. ‘ 52.236-3 (1995), the contract contained a standard Differing Site Conditions clause which provided, in part, for an equitable adjustment, upon notice, of  “subsurface or latent physical conditions at the site which differ materially from those indicated in [the] contract.”

The plant site was man­aged under a separate contract be­­­tween the United States and Tex­tron Lycoming.  Short­ly after the Notice to Pro­ceed, Tex­tron cut open an oil pipe in the plant yard which caused a spill that contaminated soil in the yard and prevented Olympus from paving.  Olympus was delayed by the clean up effort and sought additional compensation under the Differing Site Conditions clause.  After rejecting the Contracting Officer’s offer of additional compensation as inadequate (Olympus also had an additional claim for delay caused by a strike of Textron employees), Olympus filed suit in the U.S. Court of Federal Claims.  That court found, in part, the Differing Site Conditions Clause only provided com­pensation for delays caused by conditions which existed at the time the contract was formed.  Olym­pus ap­­­­­­­­­­­­­­­­­­­pealed.

The Court first dis­­­­­­­­­­cussed the purpose of the Differing Site Conditions clause, pointing out it is historically used to shift to the government the risk of adverse subsurface or latent physical conditions, as such risk would be normally born by the contractor in a fixed price contract.   Through inclusion of the clause, the government encourages “more accurate bidding”
by discouraging contractors from including con­tingencies in their bids to cover the risk of differing site conditions.  However, according to the court, the clause only shifts those risks which are consistent with the policy of the clause — encouraging more accurate bidding.  It does not shift the risk of all unanticipated conditions.  As such, the court implied the clause did not operate to transfer the risk of nonexistent conditions since such conditions do not affect the accuracy of bidding.

Next, the court established the fact its “precedent has long imposed a temporal limitation on the applicability of the Differing Site Conditions clause.”  Particularly, it cited John McShain, Inc. v. United States, 179 Ct. Cl. 632, 375 F.2d 829 (1967) and Arundel Corp. v. United States, 96 Ct. Cl. 77 (1942) for the prop­osition that for “half a century,” federal courts have interpreted the clause as not applying to conditions which “come into being only after the contract has been executed of the work commenced.”

Finally, the court dismissed Olympus’ argument that there was no express provision in the differing site conditions clause which limited its operation to conditions existing at execution of the contract.  Olym­pus particularly argued that adoption of the government’s interpretation inappropriately gave effect to the governments “subjective intent” over the clear terms of the contract.  The court acknowl­edged that it was obligated to interpret the contract according to its “ordi­nary and commonly ac­­­cepted meaning.”  However, it also stated it was obliged to inter­pret the contract from the per­spective of a “reasonable and prudent contractor” and is bound by precedent.  Based on precedent, the court found a “reasonable and prudent con­­­­­tractor…would have been familiar with the long-stand­ing limitation on a Differing Site Conditions clause to con­ditions existing when the con­tract was executed.”   Since the soil was not contaminated by the oil spill at the time of execution of the contract, the Court rejected Olympus’s claim in its entirety.

Comment

Olympus is still good law.   See Extreme Coatings, Inc. v. United States, 109 Fed. Cl. 450 (2013).  However, Olympus only discussed com­pensability under the fed­eral Differing Site Conditions Clause.  Other avenues may well have been available for recovery of the damages caus­ed by the spill, including change, breach of warranty, suspension of work, and breach of duty not to hinder or delay. The Court even implied as much.

A case awarding compen­sation to the Contractor under similar circumstances but using a different theory is Shea v.  City of Los Angeles, 6 Cal.  App. 2d 534, 45 P.2d 221 (1935).  It involved an action for costs of extra work created when a sewer leaked into a drain­age excavation.  The leak caused flooding of the excava­tion and its collapse.  The con­tract purported to place the risk of “any unforeseen obstruction or difficulties, either natural or artificial, which may be en­countered in the pro­secution of the work…on the Contractor.”  The court found, however, that “the contract did not contem­plate that [the Contractor] should bear the burden of the city’s negligence in doing or permitting acts which would constitute an obstacle to the [Contractor’s] fulfilling the obligations imposed by the Con­­tract.”  Similar logic ap­plies to the oil spill encoun­tered by  Olym­pus.  The gov­ernment should not have per­mitted activities which would jeopardize Olym­pus’ ability to perform the work.

It is unclear why other the­ories were not before the Olym­pus court.  The court hinted that it considered the actions of the plant manager, Textron, as the actions of a third party for whom the govern­ment was not responsible.  Such an argument may have affected the trial court’s ruling on the other listed possible theories, if such theories were before the court.

More significantly, how­ever, the Appellate Court seemed to ignore the fact that Textron was acting in its ca­pacity as a separate govern­ment contractor. As such, the government should have had some sort of duty to coordinate Tex­tron and Olympus’ work such that Textron did not inter­fere with Olympus.  Ob­viously, the government could better control Textron and its perfor­mance than Olympus.  As such, the government could more easily bear the risk of damages caused by Textron’s actions.  Many government contracts are indeed written to place risks on the shoulders of the party best able to control them.

In order to fairly allocate risks, many state and local gov­ernment contracts, as well as private ones, now place the risk of unforeseen hazardous conditions on the government.  We have seen this ac­complished in a separate con­tract clause or via modifica­tions to standard differing site conditions clauses.  Absent such a modification or reallo­cation of risk, “reasonable and prudent contractors” need be aware that while the govern­ment may shoulder the burden of hazardous conditions at a work site which exist prior to contract formation under the traditional Differing Site Con­ditions clause, as interpreted by the Federal Circuit, that clause does not place the risk of unforeseen subsurface or la­tent physical conditions created after contract formation.

ICE is coming for Undocumented Workers – How to Prevent Corporate Frostbite

Posted in Uncategorized

Co-author: Michael Kelsheimer

Whatever your political views, undocumented workers and the businesses that knowingly or unknowingly employ them are coming under the microscope.

If you compile recent headlines, you’ll know the President has implemented two immigration bans, is challenging so-called “Sanctuary Cities” that do not help Federal immigration enforcement, has instructed government agencies to become more aggressive in enforcement of immigration laws, and is already reviewing proposals to strengthen the border wall.  On top of this, the E-Verify program for verifying worker status is likely to become mandatory.

Further, employers who try to do it right by using the H-2B program have been dealt a stiff blow.  The Returning Worker Program, which dramatically extended the stingy 66,000 nationwide cap on H-2B non-immigrant workers, has not been renewed.  The H-2B cap has already been reached for 2017, so the hope for help there is gone.

A 2013 study by the Workers Defense Project and University of Texas found that 50 percent of surveyed construction workers in Texas were undocumented. Approximately one in every thirteen people in the Texas workforce labors in construction, meaning as many as 400,000 Texas construction workers are undocumented. The national unemployment rate is presently at 4.7 percent, almost at a 10-year low.  If all the undocumented workers vanish, there will be hardly any place to find replacements.

Making things more risky for businesses, fines are up.  Knowingly hiring undocumented workers carries fines between $539 and $4,313 per worker on a first offense.  Failing to properly complete the Form I-9 carries a fine of $216 to $2,156 per document.  Employers found to engage in a pattern or practice of hiring or recruiting undocumented workers may be penalized up to $3,000 per undocumented worker and receive six months in jail.

As contractors in Texas seek to offset the impact of the current labor shortage crisis, many will continue the long standing tradition of simply acquiring the most amount of labor possible in an attempt to timely complete work and not run afoul of any contractual default provisions. This being the case, some contractors will undoubtedly hire illegal, undocumented, or improperly documented immigrant workers. Therefore owners, general contractors, and first tier subcontractors must plan accordingly to protect their respective businesses from delay damages and back-charges, as well as, fines and jail time.

Develop an I-9 Compliance Program

For those responsible for providing labor compliance is not just about making sure to follow the I-9 directions.  It is about making sure your business is not letting applicants get by with shoddy documentation, no documentation, or requiring extra proof if they suspect someone is undocumented; while at the same time, not imposing requirements above and beyond what the I-9 requires, which can result in a lawsuit by the government or an applicant.

To protect against these issues, funnel handling I-9 issues through one person within your organization and make sure that person is trained to properly handle completing I-9s.  The government finds, on average, five errors in each I-9 when it does an audit and each error can result in a fine.  Create and maintain an internal I-9 compliance policy and mandate that it be followed by all hiring supervisors to ensure consistency in handling I-9s (this will even be helpful to protect the owners from liability if they consolidate handling I-9s with one person and that person does not follow the policy).  Note, there is a new I-9 form for 2017.  Be sure it is used with all new hires.

A good I-9 compliance policy will:

  • Control who completes the I-9 paperwork;
  • Mandate the timing to complete the I-9;
  • Outline the correct procedure (and clarify incorrect procedures like asking for additional information, accepting suspect documents, or preferring certain documents over others);
  • Arrange for the retention of I-9s;
  • Mandate the re-verification of temporary employment authorizations. Failure to re-verify documents that expire is a huge issue and a solid compliance policy will include a procedure to calendar and follow up on reverification; and
  • Plan for an I-9 self-audit once a year.

Let me also offer a word about using independent contractors.  Many businesses try to avoid the I-9 and other issues by treating individuals who should be employees as contractors.  They assume that doing so will protect them from violations.  That is a fantasy.  The government will also pursue business owners who intentionally circumvent the I-9 rules by trying to treat undocumented workers as contractors.  It may be wise to require all contractors to ensure I-9 compliance for their employees and provide access to their I-9s on request for verification.

Conduct an I-9 Self-Audit

It is wise for business owners to conduct an I-9 self-audit on a regular basis to be sure their records are in top shape for an audit.  This is especially true for business owners who delegate the responsibility to complete I-9s to another employee.  A second set of eyes with the goal of making sure the forms are perfect will usually find some errors.

In addition to examining each form to be sure it is correctly filled out, employers should check whether I-9s on former employees are properly retained, how no-match communication from the government has been handled, and whether re-verification procedures are on schedule.  If you find any errors, initiate correction procedures immediately.

Prepare for an Audit or Raid

Audits are conducted both by U.S. Immigration and Customs Enforcement (ICE) and, on a cursory level, by the Department of Labor.  In either case, employers are entitled to three days’ notice before an I-9 audit.  Raids are a different story.  If ICE appears with a warrant, you will not have any notice and the agents will not care about interrupting your business operations.

If you receive notice of an audit, immediately contact your employment or immigration lawyer.  They will protect you from inadvertently making mistakes with the auditor.  Then work with your lawyer to conduct an I-9 audit immediately and correct any errors before the audit begins.

If ICE appears for a raid, immediately contact counsel and ask them to come to the site.  ICE will not wait for your lawyer to arrive if they have a search warrant, so it will be necessary to examine the warrant yourself.  Carefully review the warrant to ensure it is genuine.  If you observe agents exceeding the warrant authority, ask to speak to the agent in charge and raise the issue.  If you do not stand up for your rights, you may lose the opportunity.

If you are concerned a raid might happen, keep a current copy of all I-9 records and related documents on a flash drive to provide the agent in charge when they arrive.  This may help minimize the time the agents spend at your facility.

Provide Guidance for Workers

If you are audited or the subject of a raid, government representatives may seek to speak with your employees about your procedures and their status.  You can provide guidance to all your employees to help them avoid issues with government officials, but do not single any employee out for advice.  Singling an employee out suggests you think there is a problem and can be used against you.

Years ago the Maryland Court Appointed Special Advocates created a guide for citizens that spread across the country.  That advice still warrants consideration.  Individual who have concerns when faced with an ICE raid should: (1) stay calm and not run away; (2) exercise their right to remain silent; (3) refuse to sign any document without showing it first to a lawyer; (4) carry all legal identification documents at all times, implying fake or illegal documentation should not be carried; (5) identify a well-qualified immigration attorney who can represent the employee if issues should arise and keep the lawyer’s contact information handy at all times.

Impact on the Construction Industry

If a construction project is interrupted by labor raids, investigations, and ultimately the removal of a vital portion of the project labor force, the project will be delayed and damages will flow. From the owner’s perspective, it is imperative to make sure all labor immigration issues are borne by its original contractor, thus ensuring they have no role in the process, except to the extent required by law.

Whether or not such issues are contractually delegated to a general contractor, it is the best business practice for general contractors to always be aware of applicable provisions in their prime contracts with owners relating to liability associated with delays caused to a project for any reason. In the context of this discussion, general contractors should be additionally vigilant to protect against liability associated with delays resulting from disruptions caused by a lack of labor due to immigration issues caused by subcontractors and their labor force. General contractors may attempt to draft accordingly within their prime contracts to remove liability in the event of immigration issues being the sole cause of a labor impact and related delay. As owners do unto general contractors, general contractors must do unto subcontractors by contractually requiring subcontractors to accept as much of the responsibility as possible for labor immigration issues.

In protecting themselves from a general contractor’s attempt to pass through liability associated with labor immigration concerns, subcontractors should make every effort to ensure immigration related delays are not a specifically enumerated breach or event of default or that they should not give rise to special liability to the general contractor. It would be most advantageous to subcontractors to have the ability to simply cure the impact of a diminished work force by quickly providing new labor, thus avoiding the possibility of termination or liquidated damages. Since subcontractors typically contract with or employ the direct labor on a construction project, to the fullest extent possible they should contractually place the burden of providing accurate information of laborer citizenship status upon the actual laborers or labor source if a broker is involved.

How to Circumvent “No Damages for Delay” Clauses

Posted in Collection, Construction Contracts, Delay Damages, Uncategorized

Most commercial construction contracts contain a “No Damage For Delay” Clause and most contractors mistakenly believe they are Kings X for any potential claims related to delay caused by an owner or original contractor. While nearly every commercial construction contract contains the same or similar provisions, it is important to keep in mind they all have different authors, which means typically no two clauses are ever drafted the same.

This is particularly important when it comes to “No Damage For Delay” Clauses as the actual breadth of the language and scope will set the tone for their enforcement or circumvention. There are several common law exceptions to “No Damage for Delay” clauses recognized in Texas, which may be neutralized or ignored by the particular language of a “No Damage for Delay” Clause.

Per the recent case Zachry Constr. Corp. v. Port of Houston Authority of Harris County, 449 S.W.3d 98 (Tex. 2014) the Texas Supreme Court recognizes the following 5 common law exceptions:

(1) the damage producing delay was not intended or contemplated by the parties to be within the purview of the provision;

(2) the damage producing delay resulted from fraud, misrepresentation, or other bad faith on the part of one seeking the benefit of the provision;

(3) the damage producing delay has extended for such an unreasonable length of time that the party delayed would have been justified in abandoning the contract;

(4) is not within the specifically enumerated delays to which the clause applies; and

(5) the damage producing delay was based upon active interference, or other wrongful conduct including arbitrary and capricious acts, willful and unreasoning actions, without due consideration, and in disregard of the rights of other parties. Id, citing Green International, Inc. v. Solis, 951 S.W.2d 384, 387-388 (Tex. 1997).

The most critical issue regarding these exceptions as discussed in Zachry is whether or not the “No-Damage For Delay” Clause is drafted either so specifically or globally for the express purpose of circumventing the common law exceptions. If a “No Damage for Delay Clause” specifically addresses the 5 common law exceptions, there is likely no way around its harsh effect. However, if a particular clause fails to address all or some of the 5 common law exceptions there is room for maneuverability to defeat its strict enforcement.

Please feel free to share your thoughts and experiences.

Implied Warranties: Part One (Goods)

Posted in Construction Contracts

Texas law imposes certain implied warranties on the sale of goods, regardless of whether the warranties are mentioned in the contract.  In particular, Texas law creates the warranty of “merchantability” and the warranty that the goods are “fit for a particular purpose.” Continue Reading

7 Ways to Manage the Credit Risk of a New Customer

Posted in Collection

Get the project information up front

You should ask your customer for the owner’s name and address, the location of the project, a copy of the payment bond (if any), and the general contractor’s name and address (if you are a second tier subcontractor or supplier).  Having this information at the outset will help you quickly send out bond and lien notices if the new customer falls behind on making payments. Continue Reading

Increasing Your Recovery Under a Federal Payment Bond Claim

Posted in Bonds

Federally owned construction projects are covered by a Miller Act Payment Bond for the benefit of the subcontractors and suppliers thereof.  If you make a claim for payment under the Miller Act, you may, under certain circumstances, also have a claim for attorney fees and interest.  The text of the Miller Act is silent with respect to attorney fees and pre-judgment interest.  However, federal common law allows the recovery of both under certain circumstances. Continue Reading