Posts By: Chris Wielinski

San Antonio Principal, Kyle Zunker, wrote an article for the July edition of Construction News magazine. Kyle dives deep into the Texas Supreme Court’s TotalEnergies decision, which refined the law regarding delegation of arbitrability issues, raised new questions, and underscored the importance of every single word in arbitration clauses, especially in complex construction contracts.

Arbitration clauses are commonplace in contracts for Texas construction projects. These clauses hold that disputes will be subject to binding arbitration rather than in-court litigation. That may seem straightforward, but sometimes—especially in cases with multiple contracts or multiple parties—a procedural dispute arises over whether the substantive dispute is subject to arbitration. And sometimes it goes even deeper, and a dispute arises over who (the court or the arbitrator) will decide whether the substantive dispute is subject to arbitration.

It has long been Texas law that “[w]hether parties have committed their disputes to arbitration is a gateway matter for the court to decide[.]” Bonsmara Nat. Beef Co., LLC v. Hart of Tex. Cattle Feeders, LLC, 603 S.W.3d 385, 397 (Tex. 2020).

However, in 2023, the Texas Supreme Court decided TotalEnergies E&P USA, Inc. v. MP Gulf of Mexico, LLC, 667 S.W.3d 694 (Tex. 2023) and altered the landscape of this legal issue.

In TotalEnergies, two parties had entered into at least three separate but related contracts for oil-and-gas ventures. When a dispute arose, the two parties instituted three separate legal proceedings in three different forums: (i) litigation in Texas state court, (ii) arbitration with the International Institute for Conflict Prevention and Resolution, and (iii) arbitration with the American Arbitration Association (“AAA”). This resulted in a procedural dispute that worked its way up to the Texas Supreme Court.

The Court recognized the default rule that courts determine challenges to arbitration agreements, but held that “parties can agree that arbitrators, rather than courts, must resolve disputes over the validity and scope of their arbitration agreement.” Id. at 702. In other words, contracting parties can “delegate arbitrability to an arbitrator.” Id. The Court noted that “courts will only enforce an agreement to delegate arbitrability to the arbitrator if that agreement is ‘clear and unmistakable.’” Id.

Having set the table with this legal framework, the Court cited to the language of the arbitration clause at issue:

“[A]rticle 16.16.1 of the System Operating Agreement provides that, “[i]f any dispute or controversy arises between the Parties out of this Agreement, the alleged breach thereof, or any tort in connection therewith, or out of the refusal to perform the whole or any part thereof,” and if the parties are unable to resolve that dispute or controversy through negotiations or mediation, the dispute or controversy “shall be submitted to arbitration … in accordance with the rules of the AAA and the provisions in this Article 16.16.” And article 16.16.2 provides that the “procedure of the arbitration proceedings shall be in accordance with the Commercial Rules of the AAA, as may be modified by the panel of arbitrators.”

Id. at 699.

The Court held that “as a general rule, an agreement to arbitrate in accordance with the AAA or similar rules constitutes a clear and unmistakable agreement that the arbitrator must decide whether the parties’ disputes must be resolved through arbitration.” Id. at 708.

In order to see the impact of this ruling on the construction industry, we need to look at the relevant section of the AAA Construction Industry Arbitration Rules and Mediation Procedures (the “AAA Construction Rules”), which provide:

R-9. Jurisdiction

(a) The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement.

(b) The arbitrator shall have the power to determine the existence or validity of a contract of which an arbitration clause forms a part. Such an arbitration clause shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitrator that the contract is null and void shall not, for that reason alone, render invalid the arbitration clause. . .

Under the legal reasoning of TotalEnergies, an arbitration clause that says “in accordance with the AAA Construction Rules” would incorporate Rule 9 and would appear to delegate to the arbitrator the authority and responsibility to determine all challenges to the arbitration clause. However, the situation may not be that simple.

First, Rule 9 says that the “arbitrator shall have the power to rule on . . . the existence . . . of the arbitration agreement.” That raises a difficult question. If the arbitrator’s authority comes from the agreement, how can the arbitrator rule whether the agreement exists in the first place? In TotalEnergies, the Court said: “We recognize that because arbitration is a matter of contract, courts must decide in the first instance whether a valid arbitration agreement exists.” 667 S.W.3d at 720. Thus, even in a situation of “clear and unmistakable” delegation to the arbitrator, challenges to the existence of the arbitration agreement itself (e.g., by a non-signatory to the agreement) are for the court to decide.

Second, in TotalEnergies, Justice Busby authored a thoughtful dissent, pointing out that specific language in the parties’ arbitration clause was inconsistent with the broad grant of authority in the arbitration rules. In other words, Justice Busby argued that there was no “clear and unmistakable” delegation to the arbitrator because some of the language in the clause indicated the court would determine issues regarding the scope of the arbitration clause. Specifically, Justice Busby noted that the clause used an “if . . . then . . .” format, which gave the court (not the arbitrator) the right to determine the if issue.

What does all of this mean for the construction industry? Ultimately, the Court’s holding in TotalEnergies increases the attention that must be given to every single word when drafting an arbitration agreement, especially in complex contractual arrangements. If a procedural dispute arises about the arbitrability of a certain claim, the precise language of the arbitration clause may control who determines that challenge.

About the Author

Kyle Zunker is a Principal in the San Antonio office of Cokinos | Young and a go-to lawyer in complicated and high-pressure disputes because of his ability to distill voluminous facts and complex issues into succinct and persuasive arguments. As an attorney who handles appeals, litigation, arbitration, and contract drafting, Kyle advocates with a holistic perspective and is driven by his passion to provide clients with effective and efficient solutions rather than aimless and expensive legal busywork. If you have any questions about arbitration agreements and related challenges, Kyle can be reached at (210) 293-8751 or kzunker@cokinoslaw.com.

About Cokinos | Young

Cokinos | Young has led Texas construction and real estate law for over three decades. And today, our 100+ dedicated professionals operate coast to coast and proudly handle all aspects of construction law for owner/developers, project managers, general contractors, design professionals, subcontractors, sureties, and lenders. We provide both dispute resolution and transactional services to clients through all phases of commercial, industrial, pipeline, offshore, civil, and residential construction. Our reputation was built on relentless commitment to client service and the industries we serve, and that remains our primary driver. Dedicated. Resilient. Expertise. That’s Cokinos | Young. Learn more at cokinoslaw.com.

Overview

On June 30, 2025, the New Jersey Senate passed, in a vote of 39-0 with one abstention, a bill that prohibits State agencies acting as owners on public projects from withholding more than two percent (2%) of retainage from contractors for partial payments. See NJ S4028. The bill, first introduced in January 2025, sponsored by Deputy Majority Leader Paul A. Sarlo (D), amends the New Jersey Prompt Payment Act (NJPPA), codified at N.J.S.A. 2A:30A-2, to include two new subparagraphs that affect payment on public projects in New Jersey. The amendment takes effect “immediately.” Ibid.

Basics of the New Jersey Prompt Payment Act

N.J.S.A. 2A:30A-2 governs payments to contractors on public projects, the timing requirements for those payments, and alternative dispute resolution mechanisms when payments are disputed. It provides that where a contractor has completed work and the owner or its agent has certified the billing for that work, the owner must pay the contractor the amount due within the time prescribed by their contract, but certainly within thirty (30) days; unless a governing body must vote on the authorization of payment, in which case the payment may be made beyond the 30-day deadline. “The billing shall be deemed approved and certified 20 days after the owner receives it unless the owner provides… a written statement of the amount withheld and the reason for withholding payment, except that in the case of a public or governmental entity that requires the entity’s governing body to vote on authorizations for each periodic payment, final payment or retainage monies, the amount due may be approved and certified at the next scheduled public meeting of the entity’s governing body, and paid during the entity’s subsequent payment cycle, provided this exception has been defined in the bid specifications and contract documents.” N.J.S.A. 2A:30A-2(a).

Similarly, contractors must pay subcontractors within ten (10) calendar days for satisfactory work performed. N.J.S.A. 2A:30A-2(b). If payment is late, the liable party is responsible for paying the amount owed under the contract and interest at the prime rate plus one percent (1%). N.J.S.A. 2A:30A-2(c). Upon seven (7) calendar days’ written notice to a party failing to make timely payments, the contractor and/or subcontractor owed monies can suspend performance without penalty for breach of contract. N.J.S.A. 2A:30A-2(d). Any disputes concerning payments may be referred to alternative dispute resolution, and a prevailing party may be awarded legal costs and fees. N.J.S.A. 2A:30A-2(f).

July 30, 2025 Amendment to the NJPPA

Under the new amendment, subsection (g) was added to require that a “State agency,” as defined in N.J.S.A. 52:13D-13(2)(a), acting as an owner of real property to be improved cannot withhold more than two percent (2%) “of the amount due on each partial payment owed to the contractor … if the contractor has provided a performance bond within 15 days of the award or conditional award.” N.J.S.A. 2A:30A-2(g). The new subsection (h) provides, “Subsection g. of this section shall not apply when a contractor has been subject to termination of a contract for cause at any point in the five (5) years prior to the award or conditional award. In that circumstance, the State agency may, at its discretion, withhold partial payments exceeding two percent of the amount due on each partial payment owed to the contractor.” N.J.S.A. 2A:30A-2(h).

What the Amendment Means for Contractors and State Agency-Owners

1. Limited Applicability to State Agency Contracts, Partial Payments, Where Performance Bond Provided
   
   This amendment is not as exciting for contractors as it may seem. The new two percent (2%) cap is fairly limited in scope because this amendment only applies to State agencies, and only to partial payments owed. Moreover, the two percent (2%) cap only applies if the contractor has timely provided a performance bond
   
2. Oddly Familiar; 2% Not So “New”
   
   Even though the amendment applies to limited circumstances, a two percent (2%) cap on retainage is familiar to New Jersey contractors. Municipal and county public works projects already have a two percent (2%) cap on retainage. See, e.g., N.J.S.A. 40A:11-16.3. Similarly, most State agency projects were already limited to a two percent (2%) to five percent (5%) cap on retainage. See, e.g., N.J.S.A. 18A:18A-40.3, N.J.S.A. 27:7-34. Therefore, this new cap on retainage doesn’t feel that new.
   
3. State Agencies Have Broad Discretionary Authority to Withhold More than 2%
   
   What is truly newsworthy is the greater flexibility State agencies now have to exceed the cap on retainage they withhold. The new subsection (h) provides a significant exception to the two percent (2%) cap. Using broad language, subsection (h) grants State agencies discretionary authority to withhold more than two percent (2%) retainage on partial payments to contractors that have been “subject” to termination for cause in the prior five (5) years. N.J.S.A. 2A:30A-2(h). This language encompasses not just those contractors that were indeed terminated over the previous five (5) years, but also those that were not terminated but could potentially have been terminated. There is little, if any, explanation from the Legislature as to the intentions behind including the words “subject to” in the new subsection (h).
   
   It is unclear whether the Legislature defines it as “subject to termination for cause.” Some questions that arise with respect to this language are: Does it encompass contractors that were subject to termination on only state projects, or any public project? Does it include those on projects beyond New Jersey’s jurisdiction? If a contractor was terminated for cause on a Tennessee DOT program in 2021, is it now a victim of a higher retainage withholding under subsection (h)? Is a contractor considered “subject to” termination for cause when it simply signs a contract agreeing to a termination for cause provision, or at some time later when it defaults on performance and has to cure?
   
4. State Agencies Deciding to Withhold More Than 2% Have No Ceiling on How Much They Withhold
   
   Even more troubling than the potential widespread application of subsection (h) to virtually any contractor is that there is no cap on the amount the State agency can withhold using its discretionary authority under subsection (h). Previously, similar laws required caps of four percent (4%) or five percent (5%). See, e.g., N.J.S.A. 18A:18A-40.3, N.J.S.A. 27:7-34. Subsection (h) provides no such ceiling for State agencies. Also of note is that subsection (h) applies to contractors subject to termination in the last five (5) years, whether or not they are performing satisfactorily on the specific project for which retainage is being withheld. Compare N.J.S.A. 2A:30A-2(h) with N.J.S.A. 27:7-34 (“[a]t any time during the performance of the work, if work is not progressing, … the commissioner may, at the commissioner’s discretion, increase the withholding to 4% of the payment due.”)

Conclusion

As the two percent (2%) cap is so limited, and the exception to it so broad, this isn’t as big of a win for contractors as it seems at first glance. It remains to be seen how courts will interpret this new language, but it appears the balance of power to withhold greater amounts of retainage still rests with State agencies, through the sneaky addition of the syntax, “subject to,” and the omission of a cap on State agencies’ discretionary authority to exceed the two percent (2%) cap. Contractors should be prepared to face potentially greater withholdings of their retainage for State projects, even if they are performing satisfactorily on that project.

About the Author

Alexandra Colby is an Attorney in the New Jersey office of Cokinos | Young, and she approaches each client matter with a strong work ethic and commitment to the client’s holistic success. If you have any questions about the 2% Cap update or any related challenges, Ali can be reached at (609) 412-8211 or acolby@cokinoslaw.com.

About Cokinos | Young

Cokinos | Young has led Texas construction and real estate law for over three decades. And today, our 100+ dedicated professionals operate coast to coast and proudly handle all aspects of construction law for owner/developers, project managers, general contractors, design professionals, subcontractors, sureties, and lenders. We provide both dispute resolution and transactional services to clients through all phases of commercial, industrial, pipeline, offshore, civil, and residential construction. Our reputation was built on relentless commitment to client service and the industries we serve, and that remains our primary driver. Dedicated. Resilient. Expertise. That’s Cokinos | Young. Learn more at cokinoslaw.com.

Chance Decker wrote the following article for the June edition of Construction News magazine. Chance explores how a missed lien deadline and nonpayment don’t always spell the end for a subcontractor’s recovery efforts. In certain scenarios involving questionable contracting arrangements, provisions of the Texas Property Code may allow subcontractors to assert lien rights typically reserved for original contractors, though pursuing this option requires thoughtful analysis due to potential legal risks.

Imagine you’re a subcontractor who hasn’t been paid in months, and the general contractor you did the work for has disappeared. Your lawyer tells you that your statutory lien deadline has passed, and thus, you don’t have any rights against the owner. You’re stuck, and your prospects of payment seem negligible. Do you have any options?

One solution may be Section 53.026 of the Texas Property Code—the Sham Contract Statute. This statute provides:

“A person who labors or furnishes labor or materials under a direct contractual relationship with a purported original contractor is considered to be an original contractor for purposes of perfecting a mechanic’s lien.”

Section 53.001(7-a) of the Property Code defines a “purported original contractor” as

“… an original contractor who can effectively control the owner or is effectively controlled by the owner through common ownership of voting stock or ownership interests, interlocking directorships, common management, or otherwise, or who was engaged by the owner for the construction or repair of improvements without a good faith intention of the parties that the purported original contractor was to perform under the contract.”

Thus, the statute elevates a subcontractor who contracts with a “sham” or “purported” original contractor into original contractor status for purposes of perfecting mechanics’ liens if:

• The owner can effectively control the original contractor or the original contractor can effectively control the owner through:
  • Common ownership of voting stock or ownership interests;
  • Common management,
  • Or otherwise, or
• The original contractor was engaged by the owner without a good faith intention that the original contractor would actually serve in that capacity.

Though this statute and its predecessors have been on the books for decades, caselaw interpreting it is scant. However, the cases below answer several important questions about the statute.

1. Does the Sham Contract Statute apply to Constitutional Liens?  Yes.
   
   “[B]y changing a subcontractor’s position in the construction contract chain, the statutory provisions allow a subcontractor hired under a sham contract to assert and enforce a constitutional lien because he is deemed to have a direct contractual relationship with the owner.”
   
   Trinity Drywall v. Toka Gen. Contrs., 416 S.W.3d 201, 212-13 (Tex. App.—El Paso 2013, pet. denied).
   
2. Does the Sham Contract Statute apply to contractual liability?  No.
   
   “[C]onsidering Chapter 53 in its entirety, it is clear that the only reasonable and just interpretation of section 53.026 is to construe ‘in direct contractual relationship’ as an effort to effectuate the timetables for filing liens and not an effort to control liability of an owner.”
   
   Southwest Properties, L.P. v. LITE-DEC of Texas, Inc., 989 S.W.2d 69, 72 (Tex. App.—San Antonio 1998, pet. denied).
   
3. Could the Sham Contract Statute subject a claimant to fraudulent lien liability if Sham Contract allegations are made without sufficient evidence?  Yes.
   
   “[T]here was evidence that [Owner] and [Contractor] were not unified in interest, such that those entities had a ‘sham contract,’ and that [Subcontractor] had no reasonable basis to state otherwise in the affidavits. This evidence supports a finding that the liens were filed in bad faith, or with dishonesty, or a lack of integrity, and thus were fraudulent.”
   
   Charter Drywall Houston, Inc. v. Matthews Investments Southwest, Inc., 2023 WL 3476909 at *6, Tex. App.—Houston [14th Dist.] 2023, no pet.).

Thus, in certain narrow circumstances, the Sham Contract Statute can excuse a subcontractor’s failure to serve a pre-lien or “trapping” notice for its statutory lien and make a Constitutional Lien available to the subcontractor. The Constitutional Lien is self-executing (does not require a notice filing) and can be enforced for up to four years. So, before throwing in the towel on your payment claim, evaluate whether the Sham Contract Statute might apply to your situation.

About the Author

Chance Decker is a Principal in the San Antonio office of Cokinos | Young and is an aggressive and tactical litigator. Chance focuses on resolving high-stakes disputes for businesses in the energy, pipe and steel distribution, construction and real estate industries. He can be reached at (210) 293-8725 or cdecker@cokinoslaw.com.

About Cokinos | Young

Cokinos | Young has led Texas construction and real estate law for over three decades. And today, our 100+ dedicated professionals operate coast to coast and proudly handle all aspects of construction law for owner/developers, project managers, general contractors, design professionals, subcontractors, sureties, and lenders. We provide both dispute resolution and transactional services to clients through all phases of commercial, industrial, pipeline, offshore, civil, and residential construction. Our reputation was built on relentless commitment to client service and the industries we serve, and that remains our primary driver. Dedicated. Resilient. Expertise. That’s Cokinos | Young. Learn more at cokinoslaw.com.

The Chambers and Partners Real Estate 2025 Practice Guide for Texas provides a comprehensive overview of the state’s real estate legal landscape. Authored by Taylor Cooksey, Philip Kinkaid, Serena Kramer, and David Brooks, this guide offers analysis of the key legal issues shaping real estate transactions and investments. It delves into the financial aspects of securing and financing commercial real estate, while examining the regulatory and governmental frameworks governing real estate development and construction. Additionally, the guide explores the various entity structures available for real estate investment, highlighting their legal and compliance requirements. It also addresses critical legal and financial considerations in commercial leasing and the effective management of construction projects. Finally, the guide concludes with a summary of certain taxes impacting real estate investments.

Taylor V. Cooksey

Philip M. Kinkaid

David A. Brooks

Serena A. Kramer

About Cokinos | Young

Cokinos | Young has led Texas construction and real estate law for over three decades. And today, our 100+ dedicated professionals operate coast to coast and proudly handle all aspects of construction law for owner/developers, project managers, general contractors, design professionals, subcontractors, sureties, and lenders. We provide both dispute resolution and transactional services to clients through all phases of commercial, industrial, pipeline, offshore, civil, and residential construction. Our reputation was built on a relentless commitment to client service and the industries we serve, and that remains our primary driver. Dedicated. Resilient. Expertise. That’s Cokinos | Young. Learn more at cokinoslaw.com.

Patrick Wielinski authored a news article, Wrap Up Insurance and the Risk of Coverage Gaps: A Case from the Eleventh Circuit, that appeared last week in the AGC of America websites and newsletters. The topic is “course of conduct exclusions” (also referred to as “builders risk exclusions”). These exclusions are inserted into most wrap-up insurance policies (OCIPs and CCIPs) on large projects that exclude coverage for defense and indemnity for property damage to the project that occurs prior to completion. The exclusions relating to property damage under the standard CGL policy that preserve coverage for many construction defects are deleted from CIPs in favor of an absolute replacement exclusion that denies coverage for all property damage that occurs prior to completion on the pretense that a builders’ risk policy is more appropriate to provide that coverage. However, in many instances, the CGL policy will provide broader coverage and a defense. Unfortunately, many risk managers and agents/brokers are unaware of the gap, believing that the insured usually wins when any exclusion is eliminated.

The article reports on the recent case out of the Eleventh Circuit applying Florida law, Liberty Surplus Insurance Corp. v. Kaufman Lynn Construction, Inc., 130 F.4th 903 (11th.Cir. 2025), in which CY submitted an amici curiae brief on behalf of the AGC of America and NAHB in support of the contractor against its CGL insurer that denied coverage under the CCIP. The major issue was whether the policy provided completed operations coverage as each individual phase was completed (because the course of construction applied). The Eleventh Circuit somewhat obtusely held that the policy did not provide coverage, contrary to the policy’s underwriting. Nevertheless, the court acknowledged the bait-and-switch aspect of the policy that the AGC and NAHB, as amici, pointed out. Unfortunately, that argument did not carry the day because the builders’ risk policy was not included in the appellate record. Thus, the construction industry has some support the next time this issue arises as more cases involving CIPs are entering the pipeline so all is not lost. A national Teams call by the AGC on this issue is being planned. The firm intends to be involved in this effort. For more information, please feel free to contact Pat Wielinski or Travis Brown.

About Cokinos | Young

Cokinos | Young has led Texas construction and real estate law for over three decades. And today, our 100+ dedicated professionals operate coast to coast and proudly handle all aspects of construction law for owner/developers, project managers, general contractors, design professionals, subcontractors, sureties, and lenders. We provide both dispute resolution and transactional services to clients through all phases of commercial, industrial, pipeline, offshore, civil, and residential construction. Our reputation was built on relentless commitment to client service and the industries we serve, and that remains our primary driver. Dedicated. Resilient. Expertise. That’s Cokinos | Young. Learn more at cokinoslaw.com.