Category Archives: Construction Law

Navigating Commercial Construction Subcontracts in Texas: Key Clauses Every Subcontractor Should Know

As a Texas attorney Certified in Construction Law by the Texas Board of Legal Specialization, I spend a significant amount of my time reviewing, drafting, and litigating commercial construction subcontracts. Texas is experiencing a massive commercial construction boom, but a booming market doesn’t mean you can afford to sign on the dotted line without reading the fine print.

General contractors (GCs) draft subcontracts to protect their interests, effectively transferring as much risk down the chain as possible. If you are a subcontractor, understanding the language in your agreements is the difference between a profitable job and a company-ending lawsuit.

Here are the key clauses in a commercial subcontract you need to be acutely aware of under Texas law.

1. Scope of Work and “Flow-Down” Clauses

The most fundamental part of your subcontract is what you are actually hired to do. A poorly defined Scope of Work (SOW) is an invitation for scope creep and unpaid change orders.

Furthermore, you must look out for flow-down (or pass-through) clauses. These clauses state that the subcontractor assumes toward the GC all the same obligations, rights, and duties that the GC assumes toward the Owner in the prime contract.

What to look for: If there is a Flow-Down Clause (and there will be), then be sure to review the Prime Contract. You cannot agree to terms you haven’t seen. Ensure your SOW specifically excludes items you are not bidding on, and clearly outline the process for approving change orders before the extra work begins.

2. Contingent Payment Clauses: Pay-If-Paid vs. Pay-When-Paid

These clauses dictate when you get paid, and the distinction between the two is vital.

• • Pay-When-Paid: This acts as a timing mechanism. The GC gets a reasonable amount of time to pay you after receiving funds from the owner. Even if the owner never pays the GC, the GC is still eventually liable to pay you.
  • Pay-If-Paid: This is a risk-shifting mechanism. It states that the GC’s receipt of payment from the Owner is a condition precedent to paying you. If the owner goes bankrupt or refuses to pay, you do not get paid.

The Texas Nuance: Pay-if-Paid clauses are enforceable in Texas, but Texas Business & Commerce Code Chapter 56 provides some limited relief. The statute provides “safe harbors” for subcontractors to object to these clauses if the owner’s failure to pay is due to the owner’s insolvency, or if the subcontractor provides written notice objecting to the enforceability of the clause.

3. Broad Form Indemnification

Indemnification clauses require you to defend and hold the GC and Owner harmless from liabilities, damages, and claims arising out of your work. GCs will often try to slip in “broad form” indemnity, where they ask you to indemnify them even if the damage was caused by the GC’s own negligence.

The Texas Nuance: Fortunately, Texas has a strong Anti-Indemnity Statute (Texas Insurance Code Chapter 151). For most commercial construction contracts, any provision attempting to require a subcontractor to indemnify a GC or Owner for their own negligence (whether sole or concurrent) is void and unenforceable. However, there are exceptions (such as claims for bodily injury to the subcontractor’s own employees), so the exact phrasing still requires careful legal review.

4. Retainage Requirements

Retainage is the withholding of a portion of the contract price (typically 10%) until the project is substantially complete. The contract should clearly specify the retainage percentage and the conditions for its release.

The Texas Nuance: Texas Property Code Chapter 53 requires owners to withhold 10% statutory retainage. As a subcontractor, you must be incredibly diligent about your notice deadlines. To secure your mechanic’s lien rights on that retainage, you must send proper statutory notices, often before the retainage is even due to be paid. Do not let a contract clause override your statutory timeline to file a lien.

5. Dispute Resolution, Venue, and Choice of Law

If a project goes south, how and where will the dispute be resolved?

• • Arbitration vs. Litigation: Subcontracts often mandate binding arbitration. Arbitration can be faster and more private, but it is also expensive and generally cannot be appealed.
  • Venue: Out-of-state GCs will often try to insert a clause requiring that any lawsuit or arbitration take place in their home state (e.g., New York or California) and under that state’s laws.

The Texas Nuance: If you are working on a project located in Texas, Texas Business & Commerce Code Chapter 272 is your best friend. It voids any provision in a construction contract that requires the contract to be subject to the laws of another state, or requires litigation/arbitration to occur in another state. If the dirt is in Texas, the dispute stays in Texas.

Protecting your bottom line starts before you ever mobilize to the site. Taking the time to negotiate these clauses upfront saves immense time, money, and stress on the back end.

A quick legal review now can save you from a company-ending lawsuit later. If you are unsure about the language in a subcontract you’ve just been handed, don’t risk it. Contact us today to speak with Mr. Jacob D. Thomas, a Texas attorney Certified in Construction Law by the Texas Board of Legal Specialization at Saunders | Walsh, to ensure your rights are protected before you sign on the dotted line.

Disclaimer: This blog post is for educational and informational purposes only and does not constitute legal advice. Every contract is unique. Reading a blog post does not create an attorney-client relationship. Always consult with a qualified, Board Certified construction attorney regarding your specific legal matters.

 

Changes to Mechanic’s and Materialman’s Liens Law Effective January 1, 2022

Major changes to Chapter 53 of the Texas Property Code go into effect on January 1, 2022.  On June 15, 2021, Governor Abbott signed into law House Bill 2237, which makes sweeping changes to the primary source of law for lien and bond claims in Texas.  The following is an overview of the changes that will have the greatest impact on contractors, subcontractors, and the attorneys who represent them.

Applicability of Changes

It is important to note that, while the changes go into effect on January 1, 2022, these changes apply only to an original contract entered into on or after the effective date.  Therefore, it will be especially important for subcontractors and suppliers to obtain a copy of the original contract between the owner and the prime contractor.  The date on which the original contract was entered into will dictate the appliable law.  Even if the subcontractor’s contract was signed after January 1, 2022, if the original contract pre-dates January 1, 2022, then the old law will apply.

Changes to Terminology

It is evident from the changes made that the legislature intended to simplify Chapter 53 to make it more accessible to the layman and to take away some of the technical requirements that often made the difference between a valid and an invalid lien.  Only time will tell whether these goals were achieved.  To that end, some defined terms were added, some were changed, while others were combined.  The following are just a few of the changes to words and phrases used in Chapter 53:

• “Improvement” – under the old version of the Act, the various things that qualified as “improvements” were somewhat scattered throughout the Act. The revision broadens the term, makes its use more consistent throughout the Act, and puts the entire definition in one location.
• “Prosecution of the work” has replaced “performance of the work.”
• “Consumption” has been replaced by “use” – For example: “Material” means all or part of the material, machinery, fixtures, or tools ordered and delivered for incorporation or use. Since the definition of “material” includes “machinery” or “tools,” the word “use” is more appropriate than “consumption.”
• “Purported original contractor” – the sham contract provision of Chapter 53 has been simplified by defining the term “purported original contractor.”
• “Retainage,” “retain,” “reservation” and “reserved funds” – the word “reserve” has replaced “retain” and “withhold” throughout the Act, as those two phrases had been used inconsistently. Also, “retainage” has been changed to “reservation” or “reserved funds,” when referring to the funds withheld by the owner.  However, a claimant still has a “claim for unpaid retainage.”  This was probably done to address uses of the term that were inconsistent with the statutory definition:  “Retainage” means an amount representing part of a contract payment that is not required to be paid to the claimant within the month following the month in which labor is performed, material is furnished, or specially fabricated material is delivered.

Substantive Changes

While the changes in terminology may be largely academic, there are quite a few substantive changes that will have an impact on perfecting and enforcing lien claims.  The following changes will have the greatest impact:

• Delivery of Notice – Under the original Act, all notices had to be delivered in person or sent via certified mail to be effective. Under the revised Act, notices can be sent via certified mail or “any other form of traceable, private delivery or mailing service that can confirm proof of receipt.”  However, certified mail will remain the preferred method, because it is effective upon “depositing or mailing.”
• Deadlines Extended by Weekends and Holidays – While the overwhelming majority of the deadlines established under Chapter 53 land on the 15^th day of the month, those deadlines were often shortened when the 15^th landed on a weekend or holiday. Under the revised Act, any deadline that falls on a weekend or holiday is extended to include the next business day.
• Licensed Professionals and Landscapers – A licensed professional (architect, engineer, or surveyor) no longer has to have a direct contractual relationship with the owner in order to have lien rights. This revision grants lien rights to consultants, such as HVAC designers, who previously did not have the ability to file a lien.  In addition, landscapers are no longer required to have a written contract in order to assert a lien claim.
• Subcontractor’s Retainage Lien Claims
  • The Intent to Lien Notice – a claim for retainage can be included, wholly or partially, in the standard 3rd-month notice. However, if the claim is purely retainage and no prior notices have been sent, a subcontractor must provide notice of an intent to file a retainage lien by the 30^th day after the date the claimant’s contract is complete, terminated, or abandoned, or the 30^th day after the date the original contract is complete, terminated or abandoned, whichever is earlier.  There is also a new standardized form for this notice.
  • The Lien Affidavit – The deadline for a subcontractor to file a retainage lien claim has been reduced from four months after the completion of the project to three months. A subcontractor claiming a lien for retainage must file a lien affidavit by the 15^th day of the third month after the month in which the original contract was completed, terminated, or abandoned.
• 2^nd Tier Subcontractors Have One Less Notice to Send – Under the original Act, 2^nd Tier Subcontractors, those subcontractors and suppliers who contract with a subcontractor, had to send notice to the original contractor by the 15^th day of the second month after each month during which work was performed. Under the revised Act, this is no longer a requirement.  The 2^nd Tier Subcontractors just have the 3rd-month notice requirement; there is no 2nd-month notice.  In short, all subcontractors, regardless of tier, now have the same notice obligations.
• Standardized Notice – Claimants no longer have to carefully read through a list of information that must be included in an intent to lien notice. The revised Act provides a standard form that must be used.  It is important to note that the new standard form requires the claimant to identify the “type of labor or materials provided,” which is information that was not previously required to be included in an intent to lien notice, just the lien affidavit.
• One-Year Statute of Limitations – The original statute of limitations to foreclose on a mechanic’s lien was one (1) year for residential projects and two (2) years for commercial projects. Now, it is one (1) year regardless of whether the project is commercial or residential.  This is a very significant change for commercial contractors.  The Act now reads, “Suit must be brought to foreclose the lien not later than the first anniversary of the last day a claimant may file the lien affidavit….”  A foreclosure suit that is barred by limitations cannot be revived by a suit that is solely brought to discharge the lien on the basis that the limitations have expired.

Minor Changes

There were a handful of changes worth mentioning, but which should not have a significant impact.

• Summary Motion to Remove Invalid or Unenforceable Lien – The notice of hearing requirement has been extended from 21 days to 30 days, and the claimant is entitled to expedited discovery of relevant information.
• Requirements for Residential Contracts and Lien Claims – The statutory disclosures for contracts involving improvements to residential homesteads, and the language that must be included in an intent to lien notice for a residential project, have been revised to reflect the changes in defined terms (discussed above). While the old disclosures are substantially similar to the new versions, residential contractors will need to update their forms.
• Lien Waivers No Longer Have to be Notarized – In an effort to reduce subcontractors’ costs, lien waivers no longer have to be notarized.

The changes made to Chapter 53 by HB 2237, when they go into effect, should make things easier for lien claimants.  The changes that will have the biggest effect on lien claimants is the required standardized notice forms and the reduced statute of limitations.  Once the industry fully adopts the standardized notices, the transition should be largely complete.  For our readers’ convenience, the new and revised forms can be found below.

2022 – Intent to Lien Notice – 3rd Month Notice
2022 – Notice of Claim for Unpaid Retainage
2022 – Residential Construction Contract Disclosures
2022 – Statutory Notice Language for Residential Liens

Lien Waivers
Lien Waiver- Conditional Final
Lien Waiver- Conditional Final Lien Waiver- Conditional Progress Payment
Lien Waiver- Unconditional Final
Lien Waiver- Unconditional Progress Payment

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Jacob D. Thomas is a civil litigation and board-certified construction lawyer helping individuals and businesses with their legal needs since 2003. Mr. Thomas was named a Texas Rising Star from 2015-2018 and a Texas Super Lawyer in 2020 and 2021. With his experience, knowledge, and skill, Jacob competently guides his clients through the complex legal system. Whether the situation calls for a hard-nosed fighter or a subtle negotiator, Jacob tailors his approach to each case based upon the particular needs of the client.

Texas Lien Law

Mechanic’s and Materialmen’s Liens

Mechanic’s and Materialmen’s Liens are legal tools for contractors and suppliers to collect payment for their goods and services. Texas law protects the interests of general contractors, subcontractors, and suppliers by providing them with lien rights against construction projects. A lien is a claim or legal right against assets used as collateral to satisfy a debt. However, the law is complex and full of many hurdles to overcome in order for a claimant to perfect (or secure) its lien.

Chapter 53 of the Texas Property Code is the primary—though not exclusive—source of Texas lien law. Chapter 53 describes the parties who are entitled to a lien, the notices that must be given, the form of the documents that must be filed, and a multitude of related rules, defenses, and restrictions. In fact, Texas lien law is so varied and complex that it poses a challenge to some of the state’s best lawyers. A claimant who chooses to wade into those waters without a lawyer’s assistance should proceed with great caution.

Determining Your Lien Rights

The first step is to determine whether a potential claimant is granted lien rights under the statute.  Not every person who is involved in a construction project has lien rights.  Certain trades, such as architects, engineers, landscapers, and demolition experts are required to have a written contract—a verbal contract will not suffice.  On residential projects, the original contractor must have a written contract, signed by the owners (e.g., both spouses) before the original contractor or any of its subcontractors can assert lien rights.  However, most contractors and subcontractors on a commercial project do not need to have a signed, written agreement with the upstream party in order to claim lien rights. A verbal contract can serve as the basis for a lien claim in most circumstances on commercial projects.

If a potential claimant qualifies (based on the above criteria), the next step is determining the proper notices that must be sent, to whom, and when.  The types of notices necessary to perfect a lien claim, and the accompanying deadlines, depend on a variety of facts. The types of notices are different for specially fabricated materials and claims for retainage (i.e., the portion of the agreed-upon contract deliberately withheld until the work is completed).

The specific wording of the notices will control whether an owner may withhold payment from a general contractor to satisfy a subcontractor’s claim. The deadline for the notices, how many notices the claimant must send, and to whom the notices must be addressed, varies depending upon the following: 1) whether the project is residential or commercial; 2) if the claimant is an original contractor, subcontractor, or supplier; and 3) whether the claim is for a progress payment, final payment, or retainage.

For example, a subcontractor, on a commercial project, must give notice of its intent to file a lien against the owner and general contractor by the fifteen day of the third month after each month in which work was performed for which payment has not been received.  In contrast, the same subcontractor, on a residential project, must send notice by the fifteenth day of the second month after each month in which work was performed, as well as additional, specific notice language.

Filing & Delivering Notice of Your Lien

Drafting and filing the lien affidavit is no less complex than the notices which must be sent in advance. The affidavit (or sworn statement of fact) claiming a lien must contain specific information and, under some circumstances, very specific wording. The information which must be included varies depending, again, upon whether the project is residential or commercial and whether the claimant is an original contractor, subcontractor, or supplier. In addition, the deadline for filing the lien affidavit varies based upon a number of factors (i.e., when the claimant’s work was performed, whether the project was completed, or the original contract terminated, and whether the owner has made a written demand for lien claimants to file their lien affidavits). A claimant may have lien rights, send the proper notices, and still fail to file a valid lien affidavit by the applicable deadline.

Even after a qualified claimant sends proper notices and timely files a valid lien affidavit, the owner of the project may still have defenses against the lien claim preventing a claimant from realizing a full recovery.  The deadline for filing suit to foreclose on a lien varies depending upon whether the project is residential or commercial. Liens against residential projects are only good for one year, while liens against commercial projects have a two-year statute of limitations.  In addition, the owner may have withheld the statutorily required retainage, thereby limiting the owner’s liability and protecting the project from foreclosure. In short, after a valid lien is perfected, the war is not over.

Seek Competent Legal Assistance

The Texas legislature has considered making changes to the Texas lien statutes to simplify the process. As of the writing of this article, no significant changes have occurred.  Perhaps one day the process will be easier, but until that day, it is vitally important for a potential lien claimant to seek the advice and assistance of an experienced construction lawyer.

Jacob D. Thomas is a civil litigation and construction lawyer in McKinney, Texas. Jacob has helped individuals and businesses with their legal needs since 2003. He has the confidence earned only through arduous study, preparedness, and experience.  Jacob competently guides his clients through the complex legal system. Contact Jacob today for assistance with lien claims or claims for payment.