Less than a year ago, Texas Senate Bill 219, addressing liability for construction defects due to defects in design documents, went into effect and was codified as Chapter 59 of the Texas Business and Commerce Code. Where the statute applies, it generally provides that contractors do not bear the risk of design defects where the design documents are provided by somebody other than the contractor’s agents or subcontractors. Yet Chapter 59 contains some Texas-sized exceptions that will likely exclude most energy and infrastructure projects from its coverage, potentially leaving contractors on those types of projects on the hook for design deficiencies absent on-point contract language.
As addressed in detail in a Porter Hedges Texas Construction Law Blog post last year soon after SB 219 was passed, under Chapter 59 “[a] contractor is not responsible for the consequences of design defects in and may not warranty the accuracy, adequacy, sufficiency, or suitability of plans, specifications, or other design documents provided to the contractor by a person other than the contractor’s agents, contractors, fabricators, or suppliers, or its consultants, of any tier.” Tex. Bus. & Com. Code § 59.051(a). In other words, where the statute applies, contractors do not bear the risk of design defects where the design documents are provided by somebody other than the contractor’s agents or subcontractors. This represents a reversal of the Texas Supreme Court’s longstanding Lonergan holding that absent contract language to the contrary, the contractor bears the risk of deficiencies in the design documents.
Chapter 59’s Exceptions
However, as with any statute, it is important to read the exceptions that carve out where the statute does not apply. And in the case of Chapter 59, the statutory carve-outs are significant. First, Chapter 59 does not apply to design-build contracts or engineering, procurement, and construction (“EPC”) contracts where the alleged defect is in the design documents for which the contractor is responsible. Tex. Bus. & Com. Code § 59.002(c). These exceptions make sense, in that they confirm that the design-build or EPC contractor is responsible for deficiencies in the portions of the design that they provide. These exceptions also confirm that the owner is responsible for portions of the design that the owner provides. For instance, in the EPC context, this would likely limit the contractor’s responsibility for deficiencies in the design basis of the facility to the extent that the design basis is provided by the owner.
Second, Section 59.002(d) provides that Chapter 59 does not apply to the part of a contract where the contractor “agrees to provide input and guidance on plans, specifications, or other design documents to the extent that: (1) the contractor’s input and guidance are provided as the signed and sealed work product, of a person licensed under Title 6, Occupations Code [i.e. engineers, architects, land surveyors and related licensed professionals] and; (2) the work product is incorporated into the plans, specifications, or other design documents used in construction.” This exception also is intuitive, in that it confirms that a contractor who provides signed and sealed design work product that is incorporated into the design documents can be liable for deficiencies in the contractor’s work product.
However, the third category of Chapter 59’s exceptions is not nearly as intuitive. Section 59.002(b) provides that the statute does not apply to contracts for the construction or repair of a “critical infrastructure facility” or to contracts with the owner of a critical infrastructure facility for construction or repair of facilities “necessary to the operation of and directly related to” the owner’s critical infrastructure facility. Section 59.001(3) goes on to provide a broad definition of critical infrastructure facilities that “includes” 24 overlapping categories of facilities. These “critical infrastructure facilities” fall into the following primary categories:
- Oil and gas infrastructure in the entire upstream-midstream-downstream chain, and specifically including wellheads, tank batteries, pipelines, compressor stations, tank farms, production facilities, and refineries;
- Chemical plants;
- Power plants, substations, transmission and distribution lines, and related electrical infrastructure;
- Water treatment and distribution infrastructure; and
- Ports, rail yards, trucking terminals, and other freight transportation facilities.
Given the extent of energy infrastructure and related construction projects in Texas, the carve out to Chapter 59 for “critical infrastructure facilities” exception comes close to swallowing the rule—particularly for industrial contractors. Further, the definition of “critical infrastructure facility” in Chapter 59 is not limited to the specific examples, but “includes” the 24 categories on Section 59.001’s laundry list. And as no reported cases have yet interpreted or applied Chapter 59 or this “critical infrastructure facilities” exception, it is not clear how courts would draw the line for what projects qualify.
In most instances, commercial and residential contractors will benefit from Chapter 59’s protections. But for industrial contractors or for contractors on public infrastructure projects, there is a good chance Chapter 59 will not apply to their projects. This potentially leaves such contractors responsible for design defects under the Lonergan case if the contract does not shift this risk to the owner. As a result, general contractors operating in these fields should consider negotiating for contract provisions that expressly shift the risk of defects in the design documents to the owner in cases where the owner or the owner’s architect is responsible for the design.
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