Texas law has certain peculiarities which must be followed when a project is located in Texas. To avoid surprises and unanticipated liability on construction projects, the parties should modify contracts consistent with Texas law—or at least be aware of the limitations that are in place due to certain Texas statutes. While there are many changes that should be made, this article explains the top 5 modifications to consider on private commercial construction projects.
- Retainage. In Texas, the owner of a project is required to retain 10% of all payments to the prime contractor pursuant to Texas Property Code § 53.101. The owner should withhold retainage for 30 days after final completion of the work. The best practice is to write this requirement into the prime contract. The only way to avoid the retainage requirement is to obtain a payment bond in conformance with Texas Property Code § 53.202. Prime contractors should also consider whether to include retainage requirements in subcontracts given that an owner is required to withhold 10% of prime contractor payments.
- Indemnity. The Texas construction anti-indemnity statute makes a provision in a construction contract void and unenforceable to the extent that it requires an indemnitor (the party providing indemnity) to indemnify or defend a party against claims caused by the negligence or other fault of the indemnitee (the party seeking indemnity) and its agents. Tex. Ins. Code § 151.102. There is an exception in the statute relating to bodily injury or death. Specifically, § 151.102 does not apply to a provision in a construction contract that requires a person to indemnify or defend another party to the construction contract against a claim for the bodily injury or death of an employee of the indemnitor, its agent, or its subcontractor of any tier. Tex. Ins. Code § 151.103. In other words, the bodily injury exception allows indemnification even when the indemnitee is negligent. Indemnification provisions that do not comply with the statute may be unenforceable, but many parties choose to modify the contract to the fullest extent permitted—particularly with respect to the bodily injury exception.
- AI Coverage. Requiring additional insured status is unenforceable to the extent it is intended to avoid indemnity limitations. Texas Insurance Code § 151.104 makes a provision in a construction contract that requires the purchase of additional insured coverage void and unenforceable to the extent that it requires coverage as an end run around the prohibitions on indemnity agreements. Therefore, seeking AI coverage that is more broad than what the statute allows may be unenforceable in certain respects.
- Texas Law. For construction projects in Texas, Texas law and a Texas forum may be required. Texas Business and Commerce Code § 272.001 provides that “if a construction contract or an agreement collateral to or affecting the construction contract contains a provision making the contract or agreement or any conflict arising under the contract or agreement subject to another state’s law, litigation in the courts of another state, or arbitration in another state, that provision is voidable by a party obligated by the contract or agreement to perform the work.” As a result, provisions in construction contracts requiring the application of another state’s law or an out-of-state venue may be modified by the court—even if not modified by the project participants in the agreement.
- Lien Releases. Any waiver and release of lien or payment bond claim is unenforceable unless a waiver and release is executed and delivered in compliance with Chapter 53 of the Texas Property Code. To be enforceable, the waiver and release must be substantially in the form required by Texas Property Code § 53.284. Note, that the statutory form is not notarized, but it should be. Id. § 53.281.
Failure to make sure that an agreement complies with Texas law on these points and others can result in unplanned risk. We recommend that before entering into a contract in Texas for any portion of the construction of a project you consult with a construction attorney to make sure the contract complies with Texas law.
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