Posts By: Chris Wielinski

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.

Cokinos | Young is pleased to announce eight attorneys have been promoted in 2024. Chris Burwell, Bianca Cedrone, Laura Napoli-Janitens, Katie Nash, Mitchell Powell, and Josh Woods have been promoted to Principal, and Cody Graham and Kevin Moczygemba have been promoted to Senior Counsel, in recognition of their commitment to their clients and the Firm, hard work, and dedication to providing best-in-class service.

“It is an honor to welcome our 2024 Principal and Senior Counsel class,” said founding partner Gregory Cokinos. “We are extremely proud of each of them for demonstrating an unwavering commitment to our clients and being leaders of the firm.”

“All eight attorneys are true leaders and have exemplified the core values of our C|Y family, ” said founding partner Marc Young. “We look forward to their continued contributions to the firm for years to come.”

Congratulations to all on reaching this significant career milestone!

Christopher Burwell is a principal at the San Antonio office of Cokinos | Young. Since 2009, Christopher has represented general contractors and subcontractors with respect to commercial private and public works, both at the state and federal level. Christopher’s practice particularly focuses on drafting, filing and defending construction claims against public entities as well as private commercial entities, and preparation of mechanic’s and materialmen’s liens on a public and private commercial project level. Christopher continually advises and educates clients as well as assists in filing and prosecuting claims against private and public payment and performance bonds at the state and federal level. Finally, a good portion of Christopher’s work focuses on review, comment and interpretation of public and private commercial contracts, pre- and post- procurement and commencement. Christopher has been board certified in Texas Construction law since 2016 and has held office for the Construction Law Section of the San Antonio Bar Association. As a son of a public school teacher and farmer, Christopher uses his experience and small town upbringing to provide a hardening, resilient, analytical, yet common sense approach to his practice and his clients’ everyday legal issues.

Bianca Cedrone focuses on defending personal injury claims including, catastrophic injury and wrongful death claims. She has extensive experience in defending: trucking and commercial motor vehicle accidents, product liability, premises liability, construction site injuries, construction defects, automobile accidents, and Texas Non-Subscriber claims. Bianca believes in taking an efficient approach to litigating cases, being responsive to clients, and putting forth an aggressive defense in a cost-efficient manner.

Cody Graham is a trial lawyer and senior counsel in the San Antonio office of Cokinos | Young.  Cody has extensive experience in defending against construction defect claims, trucking accident suits, workplace injury claims, and general business disputes.  Prior to joining Cokinos | Young, Cody focused his practice on the pursuit of subrogation claims on residential and commercial property losses involving millions of dollars in dispute.  In his subrogation practice, Cody was lead counsel on a multitude of suits asserting faulty construction, installation errors, and products defect liability.  Cody has tried over a dozen cases in state court and through arbitration, including first-chair jury trial experience.  In addition, Cody has appellate experience including the submission of briefings up to the Texas Supreme Court.

Kevin Moczygemba helps clients in commercial litigation and in the defense of serious personal injury cases.  He has extensive experience handling matters involving breach of contract, construction defect, fraud, and other business torts, mechanics liens, and personal injury. Kevin also has significant experience working with government contracts.  After law school, he served as a Presidential Management Fellow with the U.S. Air Force Space and Missile System Center where he gained invaluable insights into the government’s contracting process. Kevin also served as an Assistant Attorney General with the Texas Attorney General’s Office where he brought cases against government contractors for fraud, kickbacks, and other regulatory violations.

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.

Katie Nash is a principal in the Houston office of Cokinos | Young, where she is a member of the Corporate & Real Estate Transactions practice group. Katie’s practice primarily focuses on corporate governance, private equity matters, mergers and acquisitions, and the general representation of clients regarding businesses of all types, where she advises on all aspects of the corporate life cycle from formation to growth, reorganization, restructuring, and finally to winding up. Katie also represents clients in commercial and residential real estate transactions, debt and equity financing, employment issues, complex business contract negotiations, and related transactional matters.

Mitchell Powell is a principal in the Houston office of Cokinos | Young. Mitchell’s practice focuses primarily on complex commercial litigation matters and catastrophic claims for a wide range of clients in the construction, oil and gas, electrical, utility, manufacturing, and trucking industries. He develops close working relationships with clients and acquires an in-depth understanding of their businesses in order to best protect their interests through implementation of effective legal strategies.

Joshua Woods is a litigation attorney in the Houston office of Cokinos | Young, focusing primarily on complex commercial and industrial construction disputes. Joshua has handled construction disputes involving petrochemical plants, pipelines and compressor stations, multi-family residential construction, high-rise apartments and condominiums, large-scale network infrastructure, utility locating services, and healthcare facilities. Joshua also has substantial experience and expertise at managing clients’ electronic discovery needs as part of the litigation process.

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.