Posts By: Chris Wielinski

Austin attorney Abigail Chacon wrote the following article for Construction News Magazine in the June 2024 issue. The article highlights the necessity for parties to provide clear, compelling evidence and well-supported expert testimony in arbitration proceedings. Read the full article below.

It is well known that an arbitrator’s final decision is not automatically subject to review by filing an appeal. In most cases, the arbitrator’s decision will be final and binding on the parties unless one of a few narrow exceptions allowing for judicial review of the decision is met. A party may request judicial review of an arbitration award when it is unclear whether an arbitrator exceeded its powers, imperfectly executed its powers, or manifestly disregarded the law.

The ‘manifest disregard of the law’ argument was the basis for the US Southern District Court of New York’s May 3, 2024, opinion regarding Mercantile Global Holdings, Inc. v. Hamilton M&A Fund arbitration award. Hamilton contended that the arbitrator’s admission that the award was based on a guess was a ‘manifest disregard of the law’ for not applying the ‘reasonable certainty’ test to the damages awarded to Mercantile.

Summary of the case:

Hamilton and Mercantile entered into several investment agreements. Under the terms of those agreements, Hamilton was to “provide funds to Mercantile… in exchange for preferred shares of Mercantile’s stock.” However, those funds were never transferred to Mercantile. Mercantile brought an arbitration claim for breach of contract against Hamilton, for which it was ultimately successful and was awarded damages.

While Mercantile was not awarded lost profits as it did not meet the ‘reasonable certainty’ standard—a legal requirement for a high degree of certainty in calculating lost profit damages—it was, however, awarded expectations damages. The arbitrator did not use the “reasonable certainty” standard in determining its expectations damages; instead, it employed an estimate based on the testimony of the experts on the case.

During Arbitration, Mercantile argued the shares were “worthless,” while Hamilton argued the shares were worth the full contract price. Neither party presented evidence as to the current market value of the shares. Rather, Mercantile’s damages expert testified that the proper way to determine the resale value of the shares would be to determine the value of a replacement investment and discount that value to account for the delay. Hamilton’s damages expert agreed with Mercantile expert’s approach but testified the discount rate Mercantile proposed was excessive.

The arbitrator treated the testimony of both damages experts as a mutually agreeable method between the parties and then proceeded to “estimate” the market value of the shares in order to deduct it from the contract price in the investment agreements. Notably, the arbitrator stated in his award that the amount he calculated from this formula “[was] no more than a guess.” Hamilton argued that, by stating the damages calculation was “no more than a guess,” the arbitrator had failed to apply the applicable “reasonable certainty” test. Upon review, the Court nevertheless denied vacatur and confirmed the arbitration award. The Court employed the “barely colorable justification” test, a standard of review in which an arbitrator’s decision is entitled to substantial deference. Opining that even though the arbitrator acknowledged that his award was ‘no more than a guess,’ he relied on it because it was ‘the only estimate offered in this case.

The Court criticized that although the parties had an adequate opportunity to provide an estimate of the shares’ market value, both parties failed to provide the arbitrator with better estimates. Thus, the arbitrator had relied upon a figure that he ‘understood to be acceptable to both sides’ damages experts, which was the most accurate estimate offered. Albeit, the only one provided by the parties.

Texas Implication:

While this ruling originates from the Southern District of New York, the ‘barely colorable justification’ test has also been cited in past Texas Arbitration Award challenges. This was evident in the 2008 case, Saipem Am., Inc. v. Wellington Underwriting Agencies, Ltd, where the U.S. Southern District Court of Texas emphasized that “an arbitrator’s decision is entitled to substantial deference, and the arbitrator need only explicate his reasoning under the contract ‘in terms that offer even a barely colorable justification for the outcome reached’ in order to withstand judicial scrutiny.” Although in this case the “barely colorable justification” was not applied to the ‘reasonable certainty’ standard for damages, it underscores the continued relevance of the ‘barely colorable justification’ in Texas and its potential expansion.

Lessons Learned:

The crucial lessons from Mercantile v. Hamilton are that arbitrators are accorded a significant amount of deference in their awards and the reasoning behind them. Therefore, it is imperative that parties present the importance of ensuring that the arbitrator is provided with the tools to award damages fairly, including alternative methods of damage calculation, to withstand scrutiny through judicial review. This case highlights the importance of ensuring that the arbitrator is provided with the tools to award damages fairly. Additionally, damage experts should exercise caution in their testimony and ensure they include the appropriate qualifications and observations when discussing other experts’ opinions.

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.

Austin Principal Shelly Masters wrote the following article for the May edition of Construction News magazine. Shelly discusses how to “factor” in the risk of selling construction receivables.

When times get tough, more construction companies turn to alternative financing solutions, such as factoring. Factoring is the practice of selling unpaid accounts receivable to a third-party company or “factor” in exchange for short-term liquidity. Factoring agreements are not a loan but a cash advance against unpaid invoices. However, contractors should tread carefully when deciding to factor invoices.

Factoring agreements often contain onerous terms, excessive fees, long-term obligations and recourse against other assets, projects and parties which may conflict with Texas laws that seek to protect contractors’ rights to payment (e.g., Texas Construction Trust Fund Act and Mechanic’s Lien statute).

The following cases serve as cautionary tales which illustrate the hidden risks factoring agreements pose to contractors.

Dakota Util. Contractors, Inc. v. Sterling Com. Credit, LLC, 583 S.W.3d 199, 201 (Tex. App.—Corpus Christi 2018, pet. denied): 

• A general contractor (“GC”) entered into a construction contract on several Texas pipeline projects. To get short-term cash flow, the GC entered into a factoring agreement. The GC defaulted and filed for bankruptcy. The bankruptcy court approved 1) the GC’s payment to the factor for $400,000, and 2) the owner’s payment to the GC for $900,000. The GC issued a partial payment to its subcontractor.
• The sub sued the factor claiming it misapplied construction trust funds in violation of the Texas Trust Fund Act. The Texas appellate court held in favor of the factor, finding the factor was not the GC’s “agent” and could not be held liable under the Texas Trust Fund Act. Thus, the factor did not have to pay the sub for its work.
• The Court acknowledged “that the presence of factoring agreements in construction cases may frustrate the intent of the [Texas Trust Fund Act] to protect subcontractors and materialmen from the risk of nonpayment.” The Court concluded that “[t]his is not a case where our interpretation of the statutory language creates an absurd result, but rather . . . at most demonstrates ‘a gap or oversight in the statute that, if true, must be corrected by the legislature, not the courts.’”

Sterling Com. Credit–Michigan, LLC v. Hammert’s Iron Works, Inc., 998 N.E.2d 752 (Ind. Ct. App. 2013, no pet.):

• A steel erector entered into a subcontract requiring its subcontractor to submit lien waivers with payment requests. To bridge cash flow gaps, the sub contracted with a factor. The factoring agreement required the steel erector to verify the sub’s invoice amounts. The factor paid subcontractor 85% of the invoice amounts up-front for three verified payment requests. The project experienced financial troubles. When the steel erector paid the second invoice to the factor, it attempted to condition the payment on the factor paying the subcontractor’s unpaid workers. The factor ignored the request and deposited the check. The steel erector did not pay the third invoice to the factor. When the steel erector’s sub went out of business, the steel erector incurred the costs to complete its sub’s work.
• The factor sued the steel erector for the third payment claiming the steel erector breached its subcontract by not paying the factor on the subcontractor’s behalf.
• The Court of Appeals held for the factor. Because the factor paid the subcontractor up-front in reliance on the steel erector’s verifications, the third invoice was not subject to back charges or offsets.

To protect against unwittingly being exposed to contractors who may engage in factoring, some of the risk may be avoided or mitigated by including specific contract language that requires immediate notification of executed factoring agreements or prohibits contractual assignment of receivables or other interests in the contract. Notices from factoring companies should be reviewed carefully with legal counsel.

Shelly Masters is a Principal in the Austin office of Cokinos Young.  She represents clients in the areas of construction, labor and employment, commercial and products liability law. Cokinos Young has been representing the construction industry for over 30 years. She can be reached by e-mail at smasters@cokinoslaw.com or by phone at (512) 615-1139.

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.

Houston Principal Laura Napoli-Janitens recently wrote the following article for the April edition of Construction News magazine. Laura reviews a few items that can affect contractors in the wake of a recent Texas Supreme Court Decision.

Texas justly prides itself on being a freedom-of-contract state. Yet despite respected and long-standing jurisprudence on that point, James Construction Group, LLC had to spend nearly 8 years defending what should have been, a remarkably simple concept—that written notice requirements in a construction contract do, in fact, require that notices be sent in writing. As the James Construction Group, LLC v. Westlake Chemicals Corporation, 650 S.W. 3d 392, 396 (Tex. 2022), reh’g denied (Sept. 2, 2022) case has recently come to a final conclusion, a brief note on its background and practical application of its holdings seems timely.

In James the Texas Supreme Court overturned the lower court’s key holdings and resolved an important and unanswered question regarding written notice: how Texas’s substantial compliance doctrine intersects freedom of contract principles generally, and written notice requirements specifically. After 8 years of litigation regarding the written notice provision in the Westlake-James contract, the Texas Supreme Court finally held that “When a contract mandates written notice, a writing is a necessary part of complying with that condition, substantially or otherwise. A contrary holding would allow parties to elude the bargain they freely made and would open the door to a host of factual disputes about whether proper contractual notice was given – the very kinds of disputes that the writing requirement is intended to foreclose.”

For a bit a background on how we finally arrived at this definitive stance from the Texas Supreme Court, you must understand that in simplest terms, James v. Westlake is a breach of contract case. It arose out of a construction Contract between an owner, Westlake Chemical Corporation (“Westlake Chemical”), and one of the owner’s general contractors, James Construction Group, LLC (“James”).

In simplified terms, Westlake Chemical claimed that James breached certain contract provisions requiring James to safely perform its work, that James was terminated for cause, and therefore Westlake Chemical was entitled to damages for costs associated with a replacement contractor to complete James’s scope of work. Westlake Chemical’s position avoided the Contract’s notice provisions, which required 3 written notices in order to terminate a contractor for cause, and thus made written notice an express condition precedent to Westlake Chemical’s recovery of the damages it sought. Notably, Westlake Chemical did not provide the required written notice(s) and thus, at least according to James, failed to comply, substantially or otherwise, with the contract’s written notice provisions. In fact, prior to being sued, James believed that it had been terminated for convenience, not cause. After a jury verdict, which both parties appealed, and intermediate appellate court largely agreed with Westlake’s position that oral notice at a meeting could substantially comply with the written notice requirements of the contract.

Upon its review of the case, the Texas Supreme Court announced a substantial compliance standard, but with an extremely important and outcome-determinative qualification: “Substantial compliance is the appropriate standard when evaluating whether a party complied with a contractual notice condition. However, we also hold that substantial compliance with a condition precedent requiring written notice may not be achieved without a writing in some form. Here, Westlake provided no writing at all with respect to at least two of Section 21.3’s required written notices and thus failed to substantially comply with the provision’s conditions as a matter of law.”

In arriving at its ultimate holding, the James Court acknowledged that the prior jurisprudence may cause confusion to contracting parties attempting to provide contractually compliant notice. Thus the Court placed an unequivocal caveat upon the application of the substantial compliance doctrine to written notice provisions: a party’s provision of oral notice does not comply, substantially or otherwise, with a requirement of written notice.

Of particular note, the Texas Supreme Court largely adopted the view that providing a contractor actual notice is insufficient in the face of a contractual requirement that notice be provided in writing.

The two primary takeaways from James v. Westlake are (1) the doctrine of substantial compliance still applies to conditions precedent such that minor deviations from a contractual notice provision that do not severely impair the underlying purpose and cause no prejudice will not deprive a party of the benefit of its bargain; but (2) mere oral or actual notice cannot satisfy a contractual provision requiring written notice.

In practical terms, this goes deeper than the simple notion that we started with—that a contractual written notice requirement means a writing is required. The Texas Supreme Court’s exploration of facts is instructive. Its analysis included a deep dive into the specific facts surrounding Westlake’s purported notices and focused on the specific language used in the alleged written notices and what that language could have or should have conveyed to James.

Thus the Court made clear that effective written notices should be very specific, contain detail of incidents or events preceding the written notices, and rely heavily on contractual language. In conclusion, I offer some quick practice points for both owners and contractors in light of the James decision:

• Check your contracts for written notice requirements, and understand them, these include: Notice to Proceed; Notice of Force Majeure; Notice of Increases to Project Time or Project Cost; Notice of Claims; Notice of Disputes; Notice of Termination
• When drafting any notices, use triggering words from specific contract provisions
• Be specific in your notices: Specify the contract provision to which notice relates; Specify cure periods and timelines where applicable; Detail event(s) giving rise to notice where applicable; Document failure to adequately respond to first notice (i.e., failure to cure or dissatisfaction with party’s remediation effort); Document termination in writing, specifying the justification or reason for termination (convenience, cause, etc.)
• Even if written notice is not required under the contract, best practice (especially regarding termination) is to provide notice in writing
• If notice is given in a meeting, in the field, or on a job site, document it afterwards (at the very least in an email your counterparty)
• Be aware that where the contract is silent, the courts will not read in a written notice requirement.

Laura Napoli-Janitens is a principal in the Houston office of Cokinos | Young. Her practice focuses on counseling clients through all phases of dispute resolution involving complex commercial and construction disputes. She has experience representing businesses in a diverse range of commercial matters in state, federal, and appellate courts, including litigation involving real estate disputes, industrial construction, pipelines, water supply distribution systems, municipal utility districts, developer disputes, and tort defense.

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.

Dallas Attorney Jared Norton recently wrote the following article for the March edition of Construction News magazine. Jared discusses the application of AI-Controlled Water Management System.

Construction projects are anything but benign: inherent dangers in the physical construction, safety risks to the enormous labor pool, and seemingly ever-increasing financial burdens and obstacles to continuously overcome in advance of fast-approaching deadlines should be more than enough for anyone to stress over. Naturally, insurance companies across the board, especially in this post-2020 COVID-affected economy, are more than comfortable charging hefty premiums and deductibles to their insurers for the “privilege” of coverage should something go awry during or post-construction.

One such problem is water damage; a good portion (30%) of all Builders Risk claims[1] come from moisture intrusion or water-related damage. However, recent developments in technologies, powered by the ostensibly all-encompassing “AI,” along with partnerships with insurance companies, promises to reduce strain on contractors, developers, owners, etc. as well as mitigate impact to those same insurance companies.

The Nightmare Hypothetical[2]

Saturday 1:34 am: The leak is deep inside a wall of your new 20-story commercial structure. It starts slowly. Just a few drips from a joint in a copper supply line.

Saturday 2:40 am: The dripping continues for about an hour. Then the copper press fitting fails, sending thousands of gallons of water an hour spraying inside the walls and at this point leaking outside the walls. Located near a major highway, the on-site security guards are unable to detect the sound of the water.

Monday 7:52 am: Hidden from view, the flow continues unabated until Monday morning when crews arrive to continue fitting out the lower level and discover massive amounts of water has submerged sheetrock, rolls of carpet, multiple generators and other equipment. Water, finding the lowest point as it does, also flooded four elevator pits and four escalator pits.

Monday 8:02 am: The water main is finally shut off. But millions of dollars of damage has already been done. And if the project has good insurance coverage, the contractor is still on the hook for sub-deductible losses. And in the case of water damage, there can be many such losses that add up to a lot of money.

AI, IoT, WINT & HSB

Enter WINT Water Intelligence, a “water management system that detects and stops leaks at the source using Artificial Intelligence”[3] via the utilization of IoT (Internet of Things) sensors, in conjunction with HSB / Munich Re.

WINT serves to “equip contractors, developers, owners and facility management teams with a cutting-edge solution for managing water throughout the lifecycle of a building, from construction to operation.” IoT sensors are placed in areas where certain construction is underway that will anticipate waterflow or is otherwise plausibly at risk for water damage.

The sensors monitor the environment in at least two ways: (1) if connected to a water source or “checkpoint,” observe and monitor the flow of water in accordance with its coded parameters; (2) if connected to a non-water source, observe and monitor for whether water/moisture is detected at all. Those devices connected to water sources can communicate among each other via Wi-Fi, Ethernet connections, or even cellular networks (dependent upon the stage of construction and whether electrical infrastructure has been installed) as well as central hub(s) on- or off-site. If a water leak, or if a recording above a pre-specified threshold, is detected, commands previously designated in the central hub(s) can automatically shut off the source of water local to the affected area. Separately, if a device that is monitoring an area where water/moisture is not normally expected detects an anomaly, an alert can be signaled to the human elements on call for further investigation and confirmation.

HSB has taken the unique step of providing a “water damage warranty,” covering up to $250,000 for water damage on a construction site under the condition that the WINT system failed to prevent or otherwise mitigate the water-related issue. This is a relatively nascent act from an insurance company that is likely to be seen by others as “AI-adjacent” systems like WINT are adopted for other areas/phases of construction projects.

The possibilities for systems like this to aid contractors, owners, and design professionals is certainly welcome in a time where “an ounce of prevention is worth a pound of cure” rings loudly in the face of elevated premiums and deductibles. By integrating AI-driven solutions and developing partnerships with forward-thinking insurers like HSB, stakeholders can safeguard their investments, streamline operations, and ultimately enhance project outcomes for the benefit of all involved parties. Thorough analysis from legal counsel ensures contractual agreements align with the deployment and performance of these systems and, ideally, offer comprehensive protection and peace of mind to all involved parties. Investing in prevention today safeguards against the costly repercussions of tomorrow, charting a course towards resilience and success in the ever-developing construction industry.

[1] “Damage from water accounts for roughly 30% of Builders Risk claims.” https://axaxl.com/fast-fast-forward/articles/dont-go-with-the-flow_water-is-the-new-fire-in-construction-risk.

[2] Id.

[3] “WINT and HSB Help You Reduce Your Deductibles”.

Jared Norton is an Attorney in the Dallas office of Cokinos | Young. His practice primarily focuses on construction, insurance coverage, and commercial litigation. Prior to joining Cokinos | Young, Mr. Norton solely represented design and engineering professionals against malpractice, construction defect, breach of contract, and indemnity claims. Mr. Norton is experienced in all aspects of litigation in state courts from initial answer or petition, discovery, and case strategy to preparing and arguing motions, conducting depositions, and trial or arbitration preparation.

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.