Legislative Update: New Law Changes the Game on Public Claims

The Texas Legislature recently enacted a number of major changes affecting the construction industry, many of which represent victories for contractors and design professionals. Perhaps the most noteworthy is H.B. 1999.

This law imposes major new requirements on governmental entities asserting construction defect claims over public projects. Importantly, the new law requires notice of a purported defect to be sent to contractors and design professionals and requires the right to cure before a lawsuit or arbitration is initiated.

Under H.B. 1999 (now part of the Texas Government Code), governmental entities must, prior to being able to bring a claim, provide each contracting party a written report that clearly identifies the specific claimed defect, describes the project’s present physical condition, and describes the modification, maintenance, or repairs needed. In addition to this notice of an alleged defect, contractors and design professionals have the right to return to the project to inspect the condition and correct it prior to the governmental entity bringing a formal claim. If the entity fails to send a report or fails to allow a reasonable opportunity to inspect and cure before filing suit, the claim must be dismissed.

The obligations under this law are not solely placed on governmental entities. Rather, it also imposes proactive steps that the contractor must take after receiving such a notice from an entity. After receiving a notice, the contractor has five days to provide a copy of the report to each subcontractor and supplier whose work or materials are involved. It would be wise for a contractor who receives a notice to be overinclusive and send the notice to every subcontractor and supplier whose work or materials could conceivably be implicated, as this is too short a period for a thorough evaluation. Contractors should strongly consider copying the governmental entity on all notices to subcontractors and suppliers to alert the entity to potential parties, as section 2272.004 requires the claimant to allow known subcontractors and suppliers to inspect the project, regardless of the entity’s lack of contractual privity. Additionally, within 30 days from the governmental entity sending the report, the contractor must inspect the alleged defect. Further, within 120 days after the inspection, the contractor must either correct the defect or enter into a separate agreement with the governmental entity to correct the defect.

This law is a victory for contractors and design professionals because it provides an opportunity to cure defects before an arbitration proceeding or lawsuit, likely saving time and expense. Further, governmental entities will now be largely precluded from filing suit near the end of limitations or repose periods without first giving the appropriate parties notice and an opportunity to cure.

While this law clearly benefits construction industry members who work on public projects, there are a few caveats worth mentioning:

• First, the law does not apply to all public projects, as it excludes those relating to roads and civil works.
• Second, the law has several exceptions that relieve governmental entities of the right to cure obligation. Specifically, a public entity is not required to give a contractor the right to cure if the contractor is unable to provide a bond to cover the work. The owner is also not obliged to allow the right to cure if the party cannot provide liability insurance or workers’ compensation insurance or if the party has been convicted of a felony. Additionally, the statutory process does not apply if the governmental entity has previously terminated that party for cause or if the party previously made the issue worse in a prior repair attempt. Questions of whether a party was properly terminated for cause or whether a party previously made the issue worse will likely produce litigation, as these issues will often be complicated and deeply project-specific. Since termination for cause is usually governed by the parties’ contract, builders and designers should pay close attention to contractual termination for cause provisions, as they may exert serious influence over a party’s rights under this new law. For example, if a contract provides that a party may be terminated for cause for a non-material breach, the governmental entity may terminate the contract accordingly, thereby eliminating the application of this law altogether.
• Third, while this law requires a governmental entity to provide a report and outlines several elements that must be included in it, the law does not explicitly require the report to be authored by a third-party nor by an individual with any design or construction expertise. In contrast, the bill, as introduced in the Legislature, did require the governmental owner to obtain an inspection and report from an independent third-party licensed professional engineer. As enacted, however, it appears that the public entity itself may simply provide a write-up on the required elements, regardless of the entity’s construction knowledge.

H.B. 1999 is a positive step for contractors and design professionals. The notice and opportunity to cure construction defects in the public realm should help industry members avoid expensive lawsuits and arbitrations. At the same time, however, builders and designers must pay careful attention to their own requirements under this new law, as obligations flow both directions.

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This article was originally published in the January 2020 edition of Austin Construction News.