Posts By: Chris Wielinski

Pat Wielinski has published an article in the October edition of Construction News magazine. In this article, Pat covers how modifications to commercial general liability (CGL) insurance policies, including Controlled Insurance Programs (CIPs), especially the deletion of limited property damage exclusions and replacement with broad course-of-construction exclusions, can create significant coverage gaps. He also examines recent case law and offers strategies to help mitigate these risks through careful policy and contract review.

Controlled Insurance Programs (“CIPs,” “wrap-ups” or simply “wraps”) are promoted as particularly well-suited for large construction projects where all eligible participants are insured under a single program. Theoretically, a wrap eliminates multiple carriers and duplicated coverages. For successful wrap treatment, the project must be of sufficient dollar value to be eligible, the sponsor must be capable of administering the wrap, and coverages must be adequate to apply to claims for the wrap to be effective. However, depending on the entity sponsoring the owner-controlled insurance program (“OCIP”) or a contractor in a contractor-controlled insurance program (“CCIP”), it is the insurer that effectively maintains ultimate control of the claims. But the potential for gaps in coverage has emerged as a disadvantage where property damage occurs during construction operations.

While most wrap-up CGL policies utilize similar exclusions to those found in standard CGL forms, they are endorsed to add provisions to adapt the policy to the wrap-up platform, such as by extending the completed operations coverage to the length of the statute of repose, including all tiers on the project as named insureds, limiting the insured location to a specific project or projects, and revising certain exclusions in the policy. Often, standard property damage exclusions may also be deleted altogether, but are usually then replaced with another or others.

One of the most troublesome CIP modifications to the customary CGL property damage exclusions is an endorsement that deletes Exclusions j(5) and j(6), the operations and incorrect work exclusions. Those standard exclusions apply to operations in progress, stating that the insurance does not apply to property damage to “that particular part” of real property on which the named insured or its subcontractors are performing operations, if the property damage arises out of those operations, or if the property must be restored, repaired, or replaced because the named insured’s work was incorrectly performed on it. The “that particular part” formulation is intended to preserve coverage for other property damaged by the excluded particular part.

One might be tempted to believe that the deletion of the standard j(5) and(6) exclusions is a win for the insured participants and that coverage would be increased by the deletion of exclusions. Not so fast! While these two provisions are framed as exclusions, many courts have relied on the “that particular part” formulation to narrowly interpret the exclusion scope and uphold coverage.

Unfortunately, the deletion of these property damage exclusions from the CGL form is usually accompanied by attachment of a considerably more onerous and absolute endorsement to the CIP CGL policy, stating that the insurance does not apply to property damage at or to the insured project during the course of construction or operations (i.e., before the substantial completion of the project). Gone is the “that particular part” limitation, and the modification is often made through a stand-alone endorsement that may be labeled in various ways, such as “Property Damage to Work in Progress,” “Course of Construction Endorsement,” “Property Damage to Contract Works,” or “Exclusion  Damage to the Project During the Course of Construction.”

Insurance underwriters often refer to this type of provision as the “builder’s risk exclusion,” apparently on the assumption that builder’s risk insurance, rather than liability insurance, should provide coverage for property damage to the work that occurs during the course of construction. This overly simplistic approach ignores the fact that builder’s risk policies contain many gaps in coverage versus a standard CGL policy, particularly as to defective construction. The exclusion can thus create a significant gap for participants in a wrap-up project for property damage occurring during the course of operations, depending on their ability to coordinate and rely upon coverage within their own insurance policies. First and foremost, a builder’s risk policy is a first-party property policy that does not include a defense obligation for the insurer. Therefore, when the insured looks to the wrap-up CGL policy for defense of a claim involving property damage during construction, it may be excluded, and no defense is available under the CIP. In addition, builder’s risk coverage may not provide coverage for certain types of risks, such as consequential damages, certain soft costs, and faulty workmanship/design (absent an ensuing loss clause that preserves coverage for damage to other non-defective work caused by the defective work). Coverage for such damages may otherwise be covered under a CGL policy, but for a course of construction exclusion attached to a wrap-up.

The course of construction exclusion and its deletion of the broader j.(5) and j.(6) exclusions was touched on by the court in the recent case of Liberty Surplus Insurance Corp. v. Kaufman Lynn Construction, Inc., 130 F.4th 903 (11th Cir. 2025).  Though decided under Florida law, the opinion is one of the first to do so and is of potential country-wide impact. The AGC and NAHB filed an amici curiae brief in that case in support of the insured contractor, calling the court’s attention to the incongruity of denying course of operations coverage under a wrap-up program. Their efforts caught the court’s attention in what it hinted to be an unfair “sleight of hand” by attaching a more onerous course of conduct endorsement to a wrap-up policy intended to provide coverage for everyone on the project. Unfortunately, the court decided not to address that issue because the builder’s risk policy was not included in the court record. The result in the Liberty Surplus v. Kaufman case seems somewhat less than ringing, but the court’s observations moved the needle slightly away from the inclusion of course of construction exclusions in wrap-up policies.

Negotiation to remove or limit course of conduct exclusions in CIP CGL policies​ is not usually a viable option, as underwriters are hesitant to do so. Of course, all terms of an insurance policy, particularly manuscripted provisions, should be carefully reviewed at issuance because departures from standard policy language can create more opportunity for possible denial by insurers in the claims stage. Nevertheless, the following might mitigate the negative effects of an absolute course of conduct exclusion (or prevent other gaps):

• During underwriting, submit a specification of the insured project that closely tracks the contract, particularly for completion.
• Link or incorporate the definition of “complete” or “completion” in the course of construction exclusion with the standard definition of the “products-completed operations hazard” in the CGL policy that deems completion to occur when the owner occupies a portion of the project.
• Negotiate a provision in the contract specifying that standard unendorsed CGL coverage must be included in the wrap-up and that failure to provide those coverages allows the contractor to purchase it at the owner’s expense or reimbursement by the owner for a denied claim, similar to AIA Document A201, Section 11.2.2, as to builder’s risk coverage.
• Amend the participant’s practice CGL policies to include difference in conditions (DIC) coverage to fill in the gaps in a wrap-up program.

About the Author

Pat Wielinski is a principal in the Dallas/Fort Worth office of Cokinos | Young, having founded the firm’s insurance coverage and risk management group. With over 40 years of experience, he advises clients on insurance coverage, contractual risk transfer, and complex construction-related claims, while serving as a leading voice in the industry through his publications, national presentations, and amicus work on behalf of major construction trade organizations such as the Associated General Contractors of America. For inquiries regarding Controlled Insurance Programs or related coverage challenges, Pat can be reached at (817) 635-3620 or pwielinski@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 89^th legislative session of the Texas Legislature ran from January 14, 2025, to June 2, 2025. During that time, approximately 6,500 bills were filed, with over 300 ultimately passed into law. While these bills dealt with a variety of topics, construction-related issues, including the always vital “lien” and “trust fund” laws, were no exception. Key bills pertaining to the construction industry are detailed below, along with the current legislative status of the bill.

Senate Bill, “SB” 929, implemented a practical change to the Texas mechanic’s lien statute.

As many readers of this article will know, Chapter 53 of the Texas Property Code imposes strict deadlines for sending lien notices and recording lien affidavits. Prior to this session, if a statutory lien notice or filing deadline (under Chapter 53) fell on a weekend or holiday, ambiguity existed regarding whether that deadline was extended to the next business day. Thus, a diligent lien claimant needed to act before the weekend to avoid potentially losing its perfected lien rights. SB 929 addresses this issue. Any such deadline automatically extends to the first business day following the weekend or holiday. This clarification benefits general contractors, subcontractors, and suppliers alike, because it gives the mechanic’s lien statute uniformity with traditional calculations of deadlines under Texas law. The bill passed and was signed into law by Governor Abbott on May 21, 2025 (effective immediately).

SB 841 amended the Texas Construction Trust Fund Act to allow a “qualified assignee” to also be a beneficiary of the construction trust.

Before this legislative session, under the Texas Construction Trust Fund Act, a beneficiary was defined as an artisan, laborer, contractor, subcontractor, or materialman who labors or furnishes labor or material for the construction or repair of an improvement on specific real property.  In some cases, general contractors were not allowed to pursue subcontractors who had accepted payment but failed to pay their own subcontractors or suppliers, as only unpaid parties had a legal remedy. SB 841 sought to make this remedy available to any assignee of the party who did not receive payment by classifying an assignee as a beneficiary of the trust funds paid or received. Under the bill, an assignment of interest in unpaid trust funds is only enforceable if made in writing, not earlier than the date the assignee has paid the beneficiary in good and sufficient funds for the assignment, and is not made part of the beneficiary’s construction contract. Further, the assignee must be a beneficiary, trustee, or property owner on the contract, and written notice of the assignment must be provided to the property owner and contractor no later than the seventh day after the assignment is made. The bill seeks to restore the ability of contractors and suppliers to recover unpaid funds by providing for a qualified assignee of a trust fund claim. The bill passed and became effective September 1, 2025.

House Bill, “HB” 2960, voids venue selection clauses calling for out of state venue in disputes arising from construction projects in Texas. 

Introduced in response to In re MVP Terminalling, LLC, a 2024 case out of the 14^th Court of Appeals which held that because out of state venue provisions were “voidable” under existing law, prohibitions on such clauses could be waived by the parties, HB 2960 amended the Texas Business and Commerce Code to make such provisions void (as opposed to voidable). This adds the necessary clarity to the Texas law prohibiting out-of-state venue selection clauses for Texas contractors. Accordingly, once an out-of-state venue selection clause is determined void under the statute, an action must be brought in the county in Texas where the property subject to the litigation is located, absent an agreement between the parties after the dispute arises. HB 2960 went into effect on September 1, 2025.

SB 783 was introduced in an effort to update regulations for the construction and alteration of residential and commercial buildings.

Specifically, the bill amends Chapter 3000 of the Texas Government Code, which limits governmental actions affecting residential and commercial construction by adding additional exceptions to prohibitions on local ordinances imposing building standards. The additional exemptions include an energy code adopted by the State Energy Conservation Office (SECO) or the Health and Safety Code, an energy and water conservation design standard established by the SECO, and a high-performance building standard approved by the Board of Regents under the Education Code. The bill further clarifies that a new version of the IRC may not be amended or adopted more than once every six years, and requires SECO to first conduct an analysis calculating the impact on housing attainability and the incremental construction cost, including the payback period for any requirements that are more stringent than are in effect immediately before the change takes effect. The bill was introduced with the intention of allowing the SECO to adopt the 2021 IECC and the energy chapter of the 2021 IRC. The bill passed and became effective as of September 1, 2025.

SB 840 amended Chapter 211 of the Local Government Code to loosen zoning restrictions for the development of multi-family and mixed-use housing in commercial / office zones in certain cities.

The bill also restricts fees on new multi-family developments, allows the conversion of commercial spaces into residential use, and preempts certain municipal zoning regulations related to density, parking, height, and setbacks. This legislation benefits developers desiring to convert existing commercial buildings and those constructing new multifamily projects without zoning district limitations. This bill impacts approximately 20 cities across Texas, applying only to those with populations over 150,000 in counties with populations of 300,000. The bill was passed and went into effect on September 1, 2025.

SB 785 seeks to address a growing demand for affordable housing by removing regulatory barriers to the installation of HUD-code manufactured homes.

The bill limits a municipality’s ability to impose additional regulations on manufactured homes that are HUD-compliant. While passed, SB 785 does not take effect until September 1, 2026.

Like several bills this session, HB 1922 was introduced to clarify ambiguity in existing law relating to the accrual of claims under Texas’ “Right to Repair Statute” for government contractors.

The bill specifies that a cause of action accrues on the date the pre-claim report identifying the alleged defects is postmarked by the U.S. Postal Service. The date of the accrual of a cause of action for all other purposes is unaffected by the bill, including the date of an occurrence under applicable insurance policies, and whether the action is barred by limitations or repose. The bill is designed to protect contractors from disputes over technical filing dates. The bill passed and became effective September 1, 2025.

SB 687 extends existing protections for architects and engineers to registered professional land surveyors, as defined by the Occupations Code.

Construction contracts with land surveyors, like contracts with architects and engineers, can no longer contain certain duty-to-defend provisions. Further, the contractual duty of care is defined as services performed with the professional skill and care ordinarily provided by competent land surveyors practicing under the same or similar circumstances and professional licenses. Thus, this bill extends existing protections to an additional class of professionals. SB 687 became effective September 1, 2025.

HB 3005 clarifies that a bona fide dispute for a public work construction contract does not include an audit that continues for more than 60 days after the date of substantial completion.

This bill seeks to prevent delays in agreed-upon payments and the release of retainage already earned by contractors in projects subject to audits (to bring public projects in line with the goals of the Texas Prompt Payment Act). This benefits contractors and will likely facilitate the prompt payment of monies owed. This bill passed and applies to contracts entered into after September 1, 2025.

HB 3228 strengthens protections for landowners by requiring wind and solar facility agreements to require the provider to recycle and dispose of all components should the project be decommissioned.

This bill passed and became effective September 1, 2025.

HB 14 creates the Texas Advanced Nuclear Energy Office to oversee nuclear energy initiatives, funding programs, and provide regulatory assistance.

This bill was introduced in response to ERCOT’s projection that energy demand could reach 150 gigawatts by 2030. In addition to requiring additional studies, it establishes a reimbursement grant of up to $12.5 million, or half of the total project amount, for qualifying projects. The bill’s emphasis on promoting nuclear energy in Texas could pave the way for new construction projects and create opportunities for securing government funding. HB 14 passed and went into effect on September 1, 2025.

SB 1555 establishes a program to make more funds available for construction in Texas.

This program is designed to administer and fund the construction of railroad and rail-pedestrian grade separation projects at the intersection and crossings of railroads that are not part of the state highway system. All grants awarded under this program must be approved by the Texas Transportation Commission and require at least 10 percent of the total project cost to be provided by a source other than the state. This bill passed and took immediate effect on May 24, 2025.

As you can see, 2025 was an active session for construction-related bills, and 2026 promises to be no different! Keep a close eye on legislative activity and updates from the Cokinos | Young team to ensure you are informed of the latest developments.

About the Authors

James Richards is one of a small group of attorneys in the State of Texas to be Board Certified in Construction Law by the Texas Board of Legal Specialization. James serves as a trusted advocate and advisor for his clients and maintains a practice focused on construction, business, real estate, and related legal matters. If you have questions about the new legislative changes, or a related legal inquiry, James can be contacted via email at JRichards@CokinosLaw.com.

Allison Miller a trial attorney with extensive experience in construction, business, personal injury, and related disputes across Texas. Allison takes a practical, results-oriented approach to litigation, exploring creative settlements, mediation, arbitration, and trial strategies to achieve the best outcomes for her clients. If you have any questions about the new legislative updates, or a related legal inquiry, Allison can be contacted via email at AMiller@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.

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.

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Taylor V. Cooksey

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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.