S.B. 219 & H.B. 2116: Legislative override of Lonergan decision opens door to big changes in construction projects and claims in Texas

S.B. 219 and H.B. 2116 made substantial changes to both the Texas Business and Commerce Code and the Texas Civil Practice and Remedies Code, significantly affecting owners, contractors, and design-professionals alike. S.B. 219 shields contractors from responsibility for the consequences of defects in design documents, with some exceptions. H.B. 2116 prohibits design professionals from agreeing to defend others against claims for an owner’s negligence, fault, or breach of contract. And both bills redefine the applicable standard of care for architectural or engineering services that are part of a construction contract.

S.B. 219—The “Anti-Lonergan” Bill

Part I: Anti-Lonergan Provisions. During the 87th Regular Session, the Texas Legislature passed S.B. 219, which shields contractors from responsibility for the consequences of defects in design documents—unless they fail to disclose discovered defects, or defects that the contractor reasonably should have discovered with ordinary diligence.

Prior to S.B. 219, the Texas Supreme Court’s opinion in Lonergan v. San Antonio Loan & Trust had long been interpreted to shift responsibility for defective design documents to contractors as a default, if the construction contract with the owner was silent on the owner’s responsibility. And in 2012, the Texas Supreme Court appeared to confirm that default rule in El Paso Field Services v. Mastec.   

S.B. 219 added Chapter 59 to the Texas Business and Commerce Code, which (i) relieves a contractor from “responsibility for the consequences” of defects in design documents provided to it by parties other than its own subcontractors and agents, and (ii) prohibits contractors from being able to warrant the “accuracy, adequacy, sufficiency, or suitability” of such design documents—with some exceptions.

Chapter 59 applies to contracts for “the construction or repair of an improvement to real property,” and its provisions cannot be waived. But the following construction contracts are explicitly excluded: (i) design-build contracts; (ii) engineering, procurement, and construction (EPC) contracts; (iii) contracts in which the contractor “agrees to provide input and guidance” that is incorporated into the design documents, to the extent such input and guidance is provided as the “signed and sealed work product” of a person licensed or registered under the Occupations Code;  and (iv) contracts for “critical infrastructure” facilities (or other facilities necessary to operate and directly related to such facilities). Within Chapter 59, “critical infrastructure facility” encompasses many different types of facilities in the realm of energy and infrastructure, including water and wastewater storage and treatment facilities, gas processing plants, pipelines and drilling sites, telecommunications central switching offices, commercial airport facilities, and many others.

A contractor must also disclose, in writing, to the party with which it contracted either (1) “known” defects in the design documents, or (2) defects “that reasonably should have been discovered by the contractor using ordinary diligence, before or during construction.” A contractor may be liable for the consequences of undisclosed defects under these circumstances.

Finally, Chapter 59 makes clear that design services provided in design-build contracts, EPC contracts, and contracts under which contractors give licensed/sealed input and guidance incorporated into the design documents are subject to the standard of care set forth in Texas Civil Practice and Remedies Code (TCPRC) § 130.0021—which brings us to the second part of S.B. 219.

Part II: Standard of Care for Architects and Engineers. Under S.B. 219, which amends various sections of TCPRC Chapter 130, construction contracts with any architectural or engineering services component must now require that those services “be performed with the professional skill and care ordinarily provided by competent architects or engineers practicing under the same or similar circumstances and professional license.” Any contract provisions attempting to establish a different standard of care are void, and the enumerated standard applies.

Part III: Effective Dates. S.B. 219 applies to contracts entered into on or after September 1, 2021. However, subcontracts or purchase orders associated with original contracts for the construction or repair of an improvement to real property that were entered into before September 1, 2021, are governed by the law in effect when the original contract was entered into, regardless of when the subcontracts or purchase orders were entered into.

In addition, S.B. 219 amends § 474.003 of the Transportation Code, which limits the responsibility of contractors entering into agreements with governmental entities for the “accuracy, adequacy, sufficiency, suitability, or feasibility” of project specifications. S.B. 219 adds a subsection to this statute that clarifies its inapplicability to design-build contracts. S.B. 219 also notes that this amendment is “intended to clarify existing law and apply to a contract entered into before, on, or after” September 1, 2021. In light of this clarification, the amendment arguably applies retroactively to Transportation Code § 474.003 to the extent of any conflict with the revised version.

H.B. 2116—The “Duty to Defend” Bill

Similar to S.B. 219, H.B. 2116 makes amendments to TCPRC Chapter 130 that refine the applicable standard of care for certain design professionals and limit their ability to agree to defend others against claims for an owner’s negligence, fault, or breach of contract.

TCPRC § 130.002(a) prohibits contractors from agreeing (in construction contracts) to indemnify architects and engineers from liability for personal injury, death, or property damage resulting from defects in design documents. Section 130.002(b) prohibits architects and engineers from agreeing to indemnify owners from liability for damage resulting from the owner’s negligence, except in construction contracts for single- or multi-family residences.

H.B. 2116 adds four subsections to § 130.002, the first of which prohibits architects and engineers from contractually agreeing to defend any party against a claim based in whole or in part on an owner’s (or the owner’s agent, employee, or entity over which the owner exercises control) negligence, fault, or breach of contract (Subsection (c)). These design professionals can, however, agree to reimburse an owner’s reasonable attorneys’ fees in proportion to their liability (Subsection (c)), and add owners to their insurance policies as additional insureds, if allowed (Subsection (d)). The remainder of the subsections exclude design-build contracts and contractual agreements to defend against a claim for negligent hiring of a design professional from Subsection (c)’s prohibition (Subsections (e), (f)).

Interestingly, H.B. 2116 also adds the identical version of § 130.021 to TCPRC Chapter 130, as does S.B. 219—addressing the applicable standard of care for architects and engineers.

TCPRC § 130.002(c) (limiting architects’ and engineers’ duty to defend) is effective for “covenants or promises in, in connection with, or collateral to a contract entered into on or after” September 1, 2021. In contrast, TCPRC § 130.002(d) and § 130.021 (ability to add owners as additional insureds and new standard of care for architects and engineers) apply only to contracts entered into on or after September 1, 2021. The distinction is minor, but the suggestion is that if “covenants or promises” are made prior to, but incorporated in, a contract that is executed after September 1, 2021, those covenants or promises may be subject to Chapter 130’s new duty-to-defend limitations.  Construction industry members and their counsel should pay close attention to the terms and timing of their contracts during this time of transition.