Texas Attorney Blog

As a Texas real estate lawyer representing developers, builders and investors in Texas, I have found that my clients benefit from the availability of "alternate dispute resolution" remedies in their contracts. These remedies, such as mediation and arbitration, can result in satisfactory outcomes to disputes, without the cost of extended litigation. A recent Texas Supreme Court case illustrates that the contract remedy of arbitration can be waived, however.

In the case of Perry Homes, Inc. v. Robert and Jane Cull, the Culls sued their homebuilder for structural and drainage defects in the home built by Perry Homes. Initially, Perry Homes requested that the dispute be submitted to arbitration, but the Culls resisted. A ruling was never obtained by either party from the trial court on whether the case must be submitted to arbitration. The Culls then engaged in a course of extended (and expensive) discovery for 14 months. Four days before trial, the Culls requested that arbitration be ordered. The trial court ordered arbitration, and the arbitration resulted in an $800,000.00 award to the Culls.

The Texas Supreme Court states that: "(the Culls) got extensive discovery under one set of rules and then sought to arbitrate the case under another. They delayed disposition by switching to arbitration when trial was imminent and arbitration was not. They got the court to order discovery for them and then limited their opponents’ rights to appellate review. Such manipulation of litigation for one party’s advantage and another’s detriment is precisely the kind of inherent unfairness that constitutes prejudice under federal and state law." As a result,the Texas Supreme Court set aside the award, and sent the case back to the trial court for a trial, on the grounds that the Culls had waived their right to arbitrate this dispute.

While arbitration is often less expensive than discovery and trial, it has some downside: discovery and the scope of appeal is substantially limited in an arbitration proceeding. That's why it is faster and costs less. The moral here for clients and lawyers: the case should be analyzed in the beginning, to determine whether trial or arbitration is the best remedy. Once you embark down the path of discovery and trial, the arbitration door is going to swing shut!

As a Texas attorney representing both builders and construction companies in Texas on one hand, and Texas consumers of construction services on the other, I have had occasion to litigate a number of cases in which construction defects were the central issue in the case. I learned long ago (because I had some great mentors when I was a new lawyer), that when I represented a Plaintiff in a suit to recover damages for a construction defect, the claim should be characterized as both a breach of contract as well as breach of warranty. It always seemed redundant to me, but a recent case illustrates that it may not be. Consider the case of Medical City Dallas Ltd. v. Carlisle Corporation, decided recently by the Dallas Court of Appeals and subsequently heard by the Texas Supreme Court.

Medical City purchased a membrane type roofing system from Carlisle Corporation. Within a short time, the roof began to leak. Initially, Carlisle performed repairs. When the repairs appeared not to cure the leaks, Medical City obtained the advice of a roofing expert, who examined the membrane and determined that it was failing. Medical City requested that the roof be replaced, and when Carlisle failed to respond, this litigation ensued.

The opinion of the Dallas Court of Appeals held that a breach of warranty was different than a breach of contract, and in particular, a breach of warranty did not support an award of attorneys fees to the damaged party, even though the Texas Civil Practices and Remedies Code Section 38.001 clearly allows the injured party in a breach of contract case to recover attorneys fees. Since Medical City's pleadings contained only a claim for breach a warranty, the Dallas Court of Appeals held that it could not recover attorneys fees, only its damages.

The Texas Supreme Court opinion reversed this decision, and concluded that since a written warranty is a type of written contract, Texas Civil Practices and Remedies Code Section 38.001(8) supports an award of attorneys fees for breach of a written warranty.

I think this was a good decision. If you asked a non-lawyer what they they thought the difference between a written warranty and a written contract was, you would get a lot of blanks looks. Common sense tells us that they should be the same, and attorneys fees should be awarded if either is violated and causes damages.

In a previous post, I discussed the implications for Texas contractors and insurance companies and their attorneys of the decision of the Texas Supreme Court in Lamar Homes, Inc. v. Mid-Continent Casualty Company. The Court's decision had a second element that is notable, and will be helpful to attorneys who are trying to collect an insurance claim from a carrier.

Texas has what is commonly referred to as the "prompt payment" statute (Texas Insurance Code § 542.051 ) which provides for additional damages against an insurer who wrongfully refuses or delays payment of a claim. A “claim” is defined as a first party claim "made by an insured or policyholder under an insurance policy or contract or by a beneficiary named in the policy or contract [that] must be paid by the insurer directly to the insured or beneficiary.” The problem has been that the Texas Insurance Code does not separately define “a first-party claim,” and Texas court decisions have been divided as to what it means. Some Texas Courts have defined a first party claim as a claim paid under a first party insurance policy, such a life insurance policy or an auto policy, where the insured is buying insurance to cover their own life or property. The reasoning here is that third party insurance, where the insured is purchasing insurance to cover a loss to others (such as the other guy in a car wreck) is not a first party claim and is therefore not covered by the prompt payment statute.

The Texas Supreme Court in the Lamar Homes case decided that the insurance company's duty to defend Lamar Homes, even though the payment of attorney's fees for defense would go to a third party (Lamar's attorneys) was covered by the prompt payment statute. This part of the decision is, in my opinion, a good thing, because it requires insurance carriers to whom the statute applies to promptly review the claim, do their research and make a decision on the claim, rather than dragging their feet.

A decision by the Texas Supreme Court either delighted or horrified Texas attorneys, depending on whether they represented consumers of construction services, construction companies or insurance companies. In Lamar Homes, Inc. v. Mid-Continent Casualty Company, an opinion delivered on August 31, 2007 and which became final in December 2007, the Texas Supreme Court held that unintended construction defects constitute property damage under a commercial general liability policy ("CGL" policy), triggering a duty by the insurer to defend the home builder and to pay damages on behalf of the builder when a home owner sued the builder for construction defects.

This is a surprising decision in some ways because, in general, CGL policies in Texas cover claims for bodily injury, property damage, personal injury, and advertising injury (damage from slander or false advertising). A damage claim because something has been built defectively is usually not covered by a CGL policy. The CGL policy is intended to cover tort claims. A claim that something was built defectively is a breach of contract claim, As the dissent in this case so ably points out, this decision turns the construction industry and the CGL insurance industry on its head.

Attorneys representing home owners may smile at this decision, and think they have been handed another source from which to collect damages when a builder's construction (or the work of the builder's subcontractors) turns out to be defective. However, the real loser because of this decision may be the very person that this decision appeared to benefit: the consumer! If CGL insurers are now obligated to cover every real or imagined, major or minor, defect in new construction, then the premiums for those policies will most certainly rise. Those increased premiums paid by the contractor will be passed on to the consumer in both residential and commercial construction. Rents will ultimately increase. What this decision really does is spread the cost of construction defects among all of us. In addition, this decision really shields the bad builders in the short run: they can pass these costs on to their CGL carrier, rather than being liable themselves for shoddy work.

As I indicated in a previous post, a recent decision by the Texas Supreme Court contains an important lesson for Texas attorneys who represent Texas real estate owners, general contractors or subcontractors. Texas attorneys who practice construction law should be aware that, because of this decision, claims by a temporary labor service are covered by the Texas mechanic's lien statutes, and that service can file a mechanic's lien claim, just as an individual laborer can. As a result, when using a contractor who uses workers from a temporary labor service, an owner and/or general contractor must comply with the mechanic's lien statutes, including the portions of those statutes regarding the timing of payment and the withholding of payment to a contractor who has been using temporary workers. The Texas mechanic's lien statutes are complex, and not for the faint of heart. If you are a property owner or contractor, you would be well served by retaining an attorney who is experienced in construction law to review your contracts and explain the time limits in the statutes to you. This is one area where an ounce of preventive legal advice can save you a lot of money later!

It might seem obvious that workers from a temporary labor service should be considered as "labor" under the Texas mechanic's lien statutes. However, this issue does not seem to have been decided until recently by the Texas Supreme Court. In Reliance National Indemnity Co., L&T Joint Venture and Lamar Construction Inc. v. Advance'd Temporaries, Inc. the Texas Supreme Court decided that a temporary staffing agency could, indeed, file a mechanic's lien for unpaid labor services.

The case arose from the construction of an apartment building in Corpus Christi, Texas. L&T Joint Venture, the general contractor, hired Gonzalez, an individual, to do the framing, drywall and roofing at the project. Gonzalez supplemented his crew with additional workers from Advance'd. A written agreement between Gonzalez and Advance'd specified that the workers were employees of Advance'd, not Gonzalez. Reliance was the surety on the job.

At some point, L&T terminated Gonzalez, and paid him through the date of termination. Unfortunately, Gonzalez did not pay Advance'd. Advance'd gave a statutory mechanic's lien notice that it had not been paid to the owner, the general contractor and the surety .

The relevant Texas statute, Texas Property Code Section 53.021, recognizes a mechanic's lien for a person who "furnishes labor" for the construction of improvements on real estate. Being entitled to a mechanic's lien is extremely important, because it allows the claimant to place a lien on the real estate and to foreclose, if necessary, if a claim is not paid.

The general contractor and the surety argued that Advance'd did not actually furnish the labor to the apartment construction, because, in their view, the workers were really employees of Gonzalez, and not Advance'd. The Supreme Court looked to the written contract signed by Gonzalez and Advance'd, noted that the parties had agreed in the contract that the workers were employees of Advance'd, even though Gonzalez directed their work, and decided that the Advance'd claim really was a claim for the furnishing of labor under the mechanic's lien statutes.

A recent decision by the Texas Supreme Court contains some very specific lessons for attorneys who represent temporary labor services who supply workers for Texas construction projects.

Temporary staffing agencies or temporary labor services have become a popular and often cost effective way for a property owner or contractor to supplement a work crew or even to staff an entire construction job. According to the U.S. Bureau of Labor Statistics, in 2005 there were 5.7 million temporary workers, or approximately 4% of the labor force in the United States, with the construction industry accounting for about 13% of that number. Such an arrangement has many advantages for the owner or contractor: the labor service recruits the workers, and is responsible for workers' compensation and liability insurance, payroll and payroll taxes. The labor service simply presents an invoice for the use of the workers to the owner or contractor on a periodic (usually weekly) basis.

It might seem obvious that workers from a temporary labor service should be considered as "labor" under the Texas mechanic's lien statutes. Interestingly, however, this issue does not seem to have been decided by the Texas Supreme Court until recently. In Reliance National Indemnity Co., L&T Joint Venture and Lamar Construction Inc. v. Advance'd Temporaries, Inc., the Texas Supreme Court decided that a temporary staffing agency could indeed file a mechanic's lien for unpaid labor invoices.

In this case, the general contractor and the surety on an apartment construction project in Corpus Christi, Texas, refused to pay the claim of a temporary labor agency (Advance'd) that had supplied labor to one of the subcontractors. The general contractor and surety argued that Advance'd did not actually furnish the labor to the apartment project because, in their view, the workers were really employees of the subcontractor, and not Advance'd. The Texas Supreme Court looked to the written contract signed by the subcontractor and Advance'd, noted that the parties had agreed in the contract that the workers were employees of Advance'd, even though the subcontractor directed their work, and decided that the Advance'd claim really was a claim for the furnishing of labor under the mechanic's lien statutes.

What appeared to be important to the Supreme Court was not simply that the contract stated that the workers were employees of Advance'd, but that the contract contained a number of other terms that clearly showed that Advance'd retained control over the workers:

1. Advance'd was obligated to maintain workers' compensation and liability insurance on the workers.
2. Advance'd offered a limited guarantee on the workers' performance.
3. The contract prohibited the workers from operating any machinery, automotive equipment or working on ladders or      scaffolds without prior written consent of Advance'd.
4. Advance recruited the workers, qualified the legal status of each worker and did all related paperwork.
5. The subcontractor had to pay a fee of $2500.00 to Advance'd if the subcontractor hired any worker within three months      of the agreement.

A simple sentence in the contract between the temporary labor agency and the contractor that the workers are the agency's employees may not be enough. A careful lawyer will spell out the areas of control, and therefore help insure that his or her client will be entitled to claim a mechanic's lien if they don't get paid.

Texas real estate law generally provides that a property owner in Texas is not required to ensure that an independent contractor perform its work in a safe and non-negligent manner. In the recent case of Central Ready Mix Concrete Company, Inc. v. Luciano Islas, the Texas Supreme Court reaffirmed that principle, and refused to accept some apparently novel arguments in support of changing that law. The Plaintiff was clearly trying to find the "deep pocket" here, and was making some pretty tenuous arguments to try to get there. The Court's decision in this case makes sense.

Central, the property owner, was a ready-mix concrete company who hired an individual, Taylor, to come to the property owner's business premises to clean out concrete trucks. All parties agreed that Taylor was an independent contractor, and was not an employee of the property owner. Islas, the Plaintiff, was injured when another of Taylor's employee's turned on a concrete truck's drum while Islas was inside, severely injuring him. The Texas Supreme Court refused to extend premises liability law to cover this situation.

It was important to the Court's decision that the property owner had neither contractual nor actual control over the independent contractor's employees. In ruling in favor of the property owner, the Court disagreed with the following arguments:

1. Islas claimed that the concrete truck contained a "concealed hazard", and that the property owner had a duty to warn him of this hazard. The Court said that while a property owner does have a duty to warn an independent contractor of concealed and hazardous conditions on its real property, a property owner does not have a duty to warn an independent contractor about the hazards of the contractor's own work.

2. Islas argued that the property owner should have trained Taylor and/or Taylor's employees. The Court said that the property owner had no duty to train an independent contractor.

3. Islas claimed that the cleaning of the trucks was "inherently dangerous", and that the property owner had a nondelegable duty to warn him of the danger. The Court said that almost any machine, whether a small appliance or a piece of heavy equipment, can cause injury if it is activated when someone's fingers or limbs are inside it, and declined to find that cleaning a concrete truck was inherently dangerous.

Ironically, an inspector with the Occupational Safety and Health Consultation Program, a division of the Texas Workers' Compensation Commission, had recommended that the property owner use an independent contractor to clean its trucks in the first place.