2009 Legislative Update
The 2009 legislative session included many new laws that will directly affect the Texas construction industry. What follows are the most important laws coming out of the recent session, as well as a few bills that may be revived in the 2011 legislative session or if the governor calls a special session later this year.
Fraudulent Lien Statute
The legislature revised this statute to afford greater protection to lien claimants. This statute gives a property owner the right to sue a lien claimant for fraud if the claimant filed an invalid lien. The previous version, as well as recent court decisions, indicated that a claimant could commit fraud under the statute even if the claimant was unaware that its lien was invalid. The statute now requires the property owner to demonstrate that the claimant acted with intent to defraud in order to obtain relief.
Construction Trust Funds
The Legislature revised the Construction Trust Fund Statute. First, the revisions clarified ambiguity as to whether payments to a contractor under a cost plus contract (including payments for costs) was exempt from the statute. Now it is clear that only a contractor’s fee is exempt. Second, the new law addresses the problem of contractors receiving payment, waiving their lien rights and then having the funds confiscated in bankruptcy proceedings. The additions to the law make clear that payments under a contract are never subject to confiscation by a court because they are never the “property” of the payor/debtor, but belong to the contractor/subcontractor who is owed the funds.
Criminal Background Checks
Texas legislators refined the requirement that a contractor perform background checks on employees on certain jobsites. Texas law prohibits individuals from working at a school when that individual has been convicted of a crime that would otherwise prevent him/her from obtaining a teaching certificate. While the previous law was uncertain as to the extent of the contractor’s duty to investigate, the law makes it clear that a contractor is responsible for checking its own employees, not the subcontractors, who are responsible for checking their own employees and certifying compliance to the contractor. The requirements only apply to contracts with school districts, open enrollment charter schools and shared service arrangements.
Contingent Payment Law
There is an interesting footnote to the contingent payment law passed during the 2007 Legislative Session. The 2009 legislators moved the contingent payment law to another section of the code, potentially creating a five month gap in the law’s enforceability. They set the repeal date of the old statute to April 1, 2009, and the effective date of the new statute to Sept. 1, 2009.Any contingent payment clause signed during those five months is arguably unenforceable.
The legislators repealed a statute that prohibited contractors from recovering attorney’s fees in suits for breach of contract against cities, school districts, and other local governmental entities unless certain criteria were met. A new provision now allows contractors to recover “reasonable and necessary attorney’s fees that are equitable and just” in such suits, whether or not expressly authorized by contract.
Several other new laws will affect the construction industry. The Legislature raised the minimum threshold at which entities such as school districts, counties, local governmental entities and port authorities must solicit competitive bidding from $25,000 to $50,000. Lawmakers limited smaller municipalities’ discretion in awarding contracts to resident, now-lowest bidders, setting the maximum contract price for such at $100,000. Lawmakers also added an express provision allowing governmental entities to use Design-Build on horizontal construction projects valued over $100,000.
Laws That Did Not Pass
Some construction legislation did not become law, but nevertheless should be watched in 2011 or in the event of a special session. The most important called for the elimination of “broad form” and “intermediate form” indemnity clauses. These clauses place the financial burden of personal injury or property damage on subcontractors and suppliers, even when the claims arise either solely or in part from the contractor’s own negligence. These indemnity clauses are common and, at least for now, will continue to be enforceable in Texas if written correctly. A second failed bill would have permitted private parties to sue state agencies in state district court for breach of contract suits $250,000 or less. Finally, a bill seeking to rectify differing opinions in appellate court cases would have added an affirmative statement to Chapter 2251 of the Texas Government Code that no governmental entity may assert a sovereign immunity defense in suits to recover interest on unpaid contract balances under the Prompt Payment Act.
Sunset of the Texas Residential Construction Commission
During a special session after the end of the legislative term, lawmakers refused to extend the Sunset date of the Texas Residential Construction Commission. As of Sept. 1, 2009, Title 16 of the Property Code (Ch. 401 Texas Property Code), which includes regulations relating to registration, state-sponsored inspections, statutory warranties, and state-wide standards for residential construction, is no longer in effect for new construction projects. The commission itself will remain in place for one year to deal with residential contracts entered before Sept. 1, 2009, and the standards set forth in Title 16 will continue to apply to these contracts.