Payment Bond Claims – Part 1

Over the next few posts I would like to go over payment bond claims for state and local public works projects.  You may have heard these described as Little Miller Act claims, or what was known as the McGregor Act.  In Texas the process is controlled under Chapter 2253 of the Texas Government Code.  Although it may appear that the primary purpose behind Chapter 2253 is to make sure contractors get paid for public works projects, it is also intended to protect the bond companies from being overwhelmed with claims.

The deadlines are set forth in the code in such a way that it puts the burden on the contractor to know them and follow them, or they will lose out on their claim.  On the flip side, if you are willing to do what is required by the law you have a good chance of getting the money that is owed to you.

First, we must review the timing of notifications.  The Texas courts have held up these deadlines and requirements, so they are very important to follow.

Second tier contractors that have a written agreement, must give written notice (sent by certified or registered mail) to the prime contractor and the surety.  The notice must be mailed on or before the 15th day of the third month after each month in which any of the claimed labor was performed or any of the claimed material was delivered.  The notice must be accompanied by a sworn statement of account that states in substance: (1) the amount claimed is just and correct; and (2) all just and lawful offsets, payments, and credits known to the affiant have been allowed.  The statement of account shall include the amount of any retainage applicable to the account that has not become due yet.

If there is no written agreement then these items must also be included in the notice: (1) the name of the party for whom the public work labor was performed or to whom the public work material was delivered; (2) the approximate date of performance or delivery; (3) a description of the public work labor or material for reasonable identification; and (4) the amount due.  The payment bond beneficiary must generally itemize the claim and include with it copies of documents, invoices, or orders that reasonably identify: (1) the public work labor performed or public work material delivered for which the claim is made; (2) the job; and (3) the destination of delivery.

Lower tier contractors have to follow the above rules for the third month notice but have one additional notice they need to provide.  This notice must be mailed to the prime contractor on or before the 15th day of the second month after each month in which the labor was performed or the material was delivered.

Retainage claims can be included in the above notices or by sending a separate retainage claim to the Prime contractor and surety on or before the 90th day after the final completion of the project.  The claim requires a notice to contain a statement of: (1) the amount of the contract; (2)  any amount paid;  and (3)  the outstanding balance.

A little leeway is given in the code for notice if the end of a notice period ends on a weekend, i.e. the 15th is on a Saturday, the notice is due on the next following non-holiday weekday.

Next time I’ll go over what can and can’t be included in a payment bond claim.

Texas Relinquishes Sovereign Immunity

When it pertains to federal, state, and local governments, one of the main doctrines of law is that they have sovereign immunity; i.e. the “sovereign or entity” cannot commit a legal wrong and is immune from civil suit or criminal prosecution.  In the last legislature, Texas passed a law which changed that with respect to contracts.  With HB 586, you are now allowed to bring a suit against a state agency with whom you had a contract and whom you allege is in violation of said contract.  Of course, as with any law, there are a myriad of rules and guidelines.

First, this only applies to a claim for breach of written contract for engineering, architectural, or construction services, and for materials related to those services by a party to the contract, and the contract must be with a state agency, not with a county, municipality, etc.  Additionally, the damages, not including attorney’s fees, penalties, costs, expenses, and prejudgment interest, must exceed $250,000.  This law does not apply to any contract that is subject to Section 201.112 of the Transportation Code; e.g., any TxDot contract.  Finally, the new law went into effect on September 1, 2013, so it will only apply to contracts entered into after that date.

If you were to succeed with your claim, it allows for the award to include the following items:

  • The balance due and owed by the state agency under the contract as it may have been amended, including any amount owed as compensation for the increased cost due to owner delay;
  • The amount owed pursuant to written change orders;
  • Reasonable attorney’s fees only if the written contract expressly provides recovery of fees;
  • Interest at a rate up to 10%.

And it cannot include:

  • Consequential damages;
  • Exemplary damages;
  • Damages for unabsorbed home office overhead.

After receiving a Judgment, you would then proceed with the collections process, which also has limitations.  Payment of a Judgment is not allowed to come from the State’s general revenue unless expressly given for that purpose.  Additionally, you are not allowed to seize, attach, garnish, or take any other normal creditor remedy typically used to satisfy a judgment.

Even despite these limitations and restrictions, this is a significant change in the law and helps keep the State accountable for contracts it enters into and is definitely a step towards making the State of Texas accountable under the same rules as everyone else.

Specially Fabricated Material Liens

One of the requirements for filing a lien is to have either physically installed material or physically made improvements to real property. Typically, when a job is cancelled, the resulting harm to the contractor, subcontractor, or fabricator is limited to lost profits from the missed opportunity to provide work. This is because no work has been performed on the real property yet, no wages have been paid to employees, and no supplies have been installed on the property.

Sometimes, however, the resulting harm can be much greater. For example, consider the situation where you order materials which must be specially fabricated for a project, the supplier produces the materials, and the project is subsequently cancelled? In such a situation, you can file a lien to recover the costs of the specially fabricated materials.

Under Texas law, a “specially fabricated material” is defined as a material fabricated for use as a component of the construction or repair so as to be reasonably unsuitable for use elsewhere.

As an example, let’s consider granite countertops. Once a slab of granite is cut to the required dimensions for a specific project, perhaps with a cut out for a sink, those pieces are usually unsuitable for use on another job.

In Texas, this scenario is addressed by Tex Prop. Code Section 53.021 (2) (b), which states that a “person who specially fabricates material has a lien even if the material is not delivered.” Further, the lien secures payment for “the specially fabricated material, even if the material has not been delivered or incorporated into the construction or repair, less its fair salvage value.” Tex. Prop. CodeSection 53.023 (2).

So, the caveat is that you are supposed to lower your damages by the fair salvage value of the product.

Now, of course, Texas can’t make it easy and have the same rule for all types of projects. There are more hoops if this is for a residential construction project. In such instances, an extra notice must be provided, and if you fail to provide the notice, you will only be able to file a lien for any items actually provided to the project. I’ll paraphrase it, but you can see the full details here: Tex. Prop. Code Section53.253.

• Notice must be given to the owner, or reputed owner, not later than the 15th day of the second month after the month in which you receive and accept the order for the material.
• The notice must contain a statement that the order has been received and accepted, and the price of the order must be included.
• The notice must be sent by registered or certified mail.

Filing a specially fabricated material lien is complicated. Are you following all of the proper procedures to protect your lien rights?

Texas Fast Track Procedure for Civil Lawsuits

In the last Legislature (82nd), House Bill 274 was passed, which made many changes to the Texas Government Code, Texas Rules of Evidence, and Texas Rules of Civil Procedure in order to try and control the speed and costs of legal actions. They took a two prong approach in order to do this: 1) create Rule 91a and amend Rule 47 of the Texas Rules of Civil Procedure, and 2) create Rule 169 of the Texas Rules of Civil Procedure and amend Rule 190 of the Texas Rules of Civil Procedure. The first changes made affect the ability to dismiss the case and damages. I will talk about these changes in another article. I would like to focus on the portion of the rule changes that promote an expedited action of the cases.

This part I personally believe have been needed for a while, in the sense that it has become too easy for some sides to make it their main defense strategy to delay, stall, and perform excessive discovery merely in an attempt to increase the attorney’s fees to amounts that eventually become un-payable by the claimants. Hopefully, the intent of the law will actually play out in real life, because we all know not everything works out as well as intended.

Again, the rules below only apply to cases where damages are less than $100K (including all penalties, costs, expenses, pre-judgment interest and attorney’s fees) and do not involve the Family, Property, and Tax codes or Chapter 74 of the Civil Practice & Remedies Code.

The first part of the changes involves instituting rules for expedited actions (Rule 169 of the Texas Rules of Civil Procedure). All this really means is that they are trying to put hard and fast deadlines in the case so one side can’t abuse the system with delay tactics, which will expedite the case and keep fees down. Here is a general breakdown (of course, there are exceptions and differences, so I have posted a link to full changes at the end of the article):

  • Discovery is governed by Rule 190.2 (covered below)
  • The court must set the case for trial within 90 days of the discovery period ending, and the court may continue the case twice, but the continuances may not exceed a total of 60 days.
  • As far as the trial goes, each side is allowed no more than eight hours to complete everything. However, the court may allow up to twelve hours per side.
  • The court may refer the case to an alternative dispute resolution procedure once, but may not exceed a half-day. Further, the ADR procedure is not to exceed the total cost of twice the amount of applicable civil filing, and must be completed no later than 60 days before initial trial setting.
  • A party may only challenge the admissibility of expert testimony as an objection to summary judgment evidence under Rule 166 or during the trial on merits.
The next part that was added was intended to stop discovery abuse or, at a minimum, keep discovery to reasonable levels (Rule 190 of the Texas Rules of Civil Procedure). These apply to any case that falls under the expedited actions discussed above and to divorce actions involving less than $50,000. Here are the limitations instituted:
  • All discovery must be completed within 180 days of the first request of discovery by either party.
  • Each party may have no more than six hours total to examine and cross-examine all witnesses in oral depositions. This may be expanded up to ten hours if both parties agree.
  • No more than 15 interrogatories.
  • No more than 15 requests for production.
  • No more than 15 request for admissions.
This is only an over view of the changes if you would like more info or the detailed updates to the rules here is a full copy to the changes of the rules:

Texas Construction Law update 83rd Legislature

It’s that time again to start watching the potential law changes that are coming out of Austin and may result from bill passage in the 83rd Legislature.  There may be some big changes in our future if the House and Senate can stay on track and pass a large portion of the bills that have been submitted.  One of the most dramatic bills trying to be passed is an overhaul to the Mechanic’s Lien Statutes.  Everyone who has dealt with the Mechanic’s Lien statutes in Texas agrees that they are a mess and need reworking.  However, most lawyers would agree that it would be impossible to legislate every issue that comes up under the lien laws.  I believe that the bill which is currently being presented completely reworks the current Mechanic’s Lien Statute.  Therefore, such a big change is unlikely to be passed in its infancy stage.  So, instead of going over the proposed Mechanic’s Lien changes, I thought I would go over a couple of other construction related Bills.

Since everyone always loves government regulation, Texas is trying to pass additional regulations (HB 613 & SB 802) to require foundation repair contractors to require licenses to be able to work in Texas.  HB 613 attempts to create an Advisory Board that would be made up of seven members appointed by the presiding officer of the Texas Commission of Licensing and Regulation.  The Board would then be responsible for determining all the details of the regulations and licensing.  While they are still working on some of the details, here are the some of the requirements, that are actually set forth in HB 613 & SB 802 relating to foundation repair contractors:

  1. Insurance requirement;
  2. Fee for licensing;
  3. Exam to obtain license; and
  4. Requirement to notify the local municipality (where work is done) of such license.

HB 888 & SB 311 are directed towards the roofing industry.  These bills are a little heftier than the ones covering the foundation industry.  For all of you that remember the TRCC, these bills seemed similar to a “mini” TRCC for the roofing industry instead of just regulating licensing.  Unlike the foundation bill, that has been voted on and has made it out of committee, this bill was left pending in committee and during the committee meeting the sponsoring Senator,  John Corona, has begun giving up many aspects of the bill.   So, while I don’t think that the roofers have any changes in their near future with these current bills, I wouldn’t doubt we would see the next legislature try again to regulate the roofing industry but with a little lighter hand approach.

Good News for a Client has Everyday Lessons!

Recently we received good news for one of our clients:  we had been waiting on the opinion for an appeal of the original trial where our client was awarded damages.  The really good news is that our client won their appeal and the other side lost their appeal.

I really wanted to share this information with you because the details of the appeal relate to items that often arise in everyday construction business practices.  This case was originally about a construction dispute between a contractor and an owner relating to oral change orders.  Sound familiar?  The dispute was not settled and it eventually ended up in court.  We prevailed on behalf of the contractor and against the Defendant, personally, as well his business.

When the owner originally signed the contract, he signed it personally and not on behalf of his company.  He filed the appeal claiming that he was personally “immune” and that it should only be the business that was liable.  One line of the court’s opinion basically settles this issue, and should serve as fair warning on how to sign documents for your business: “A person who fails to disclose that he is signing a contract as an agent may be held liable on the contract”.  So, the moral here is to always sign as an agent of the business.  One way to do this is to make sure your title in your company is listed on the document (President, CEO, Vice President…) and that you list the full name of your company including its designation of LLC or Inc.

We also counter-appealed, claiming that the original trial court wrongfully denied the contractor pre-judgment interest.  We argued that under the Prompt Payment Act of the Texas Property Code, we were entitled to eighteen percent pre-judgment interest.  The 5th Court of Appeals reviewed the facts of this case and found that the court erred in failing to award interest pursuant to the Prompt Payment Act, and that the Owner was not relieved of his obligation to pay pre-judgment interest on the amount awarded by the trial court.

If you would like to read the full opinion of the Court of Appeals of the Fifth District of Texas at Dallas you can find it here: