The Texas Legislature recently passed a new law concerning owner-furnished designs for construction projects, thereby overturning more than 100 years of precedent in Texas previously holding that contractors bore the risk of deficient design when the contract was silent on the issue. The new law, passed last year, provides that contractors are not responsible for design defects and do not warrant design documents unless the contractor (or its subcontractors/consultants) provides the design, or fails to reasonably disclose to the owner a known defect discovered by the contractor (or that reasonably should have been discovered using reasonable diligence) before or during construction.

Background

In 1907, in Lonergan v. San Antonio Loan & Trust Co., the Texas Supreme Court held that a contractor bore the risk and liability of a building collapse that was the result of defective design documents developed by an architect hired by the owner. The Lonergan Court reasoned that the contractor was probably in a better position to judge whether the plans and specifications provided by the owner's architect were sufficient. Thus, if there was no express warranty from the owner to the contractor guaranteeing the sufficiency of the specifications to the contractor, the Lonergan Court found that the contractor bore the risk of loss. This remained the law in Texas for more than 100 years despite the fact that a majority of courts in other states adopted a 1918 ruling from the U.S. Supreme Court in United States v. Spearin, holding that an owner impliedly warrants the sufficiency of plans and specifications when the contractor is contractually bound to build according to the plans and specifications prepared by the owner.

The New Chapter 59 of the Texas Business and Commerce Code

Effective Sept. 1, 2021, prime contracts entered into between owners and contractors are governed by the new Chapter 59 of the Texas Business and Commerce Code.

Under the new Chapter 59, contractors are not responsible for the consequences of design defects in design documents furnished by the owner or the owner's consultants. Further, contractors may not warrant the accuracy, adequacy, sufficiency or suitability of any plans, specifications or other design documents provided by anyone other than the contractor (or its own consultants/subcontractors).

Importantly, Chapter 59 expressly provides that it cannot be waived. Thus, any attempt by contractors and owners to contractually agree to waive the provisions of Chapter 59 will be void. (This creates a difference between the new law in Texas and the law in states that have adopted the Spearin doctrine, which can be waived by express contract terms.)

Key Exceptions in the Law

There are a few key exceptions to the new statute.

First, the statute does not apply to the construction or repair of "critical infrastructure." To determine if your project qualifies as "critical infrastructure," you will need to consult the statute because certain buildings that many would expect to qualify (e.g., hospitals), do not.

Second, the statute does not apply to design-build contracts nor to engineering, procurement and construction contracts to the extent that the contractor is responsible under the contract for the part alleged to be defective.

Third, the statute does not apply to the portion of the contract under which the contractor agrees to provide input and guidance on the plans, specifications or other design documents to the extent that two conditions are met: 1) the contractor's input and guidance are provided as signed and sealed work product by a licensed professional, and 2) the contractor's work product is incorporated into the design documents actually used in the construction.

For the three exceptions listed above, the statute limits the level of care that can be required of a contractor and design professional to "ordinary care," and any contractual provision requiring a higher level of care is void and unenforceable. (See the new statute Section 130.0021 under the Texas Civil Practice and Remedies Code limiting the standard of care for architects and engineers to "ordinary care," which is incorporated by reference into Chapter 59.)

Conclusion and Considerations

Although Chapter 59 makes sweeping changes in Texas law as to contractor liability for owner-furnished designs, it does not let contractors off the hook entirely. A contractor may still be liable to an owner for the consequences of any known defects discovered by the contractor before or during construction (or that reasonably should have been discovered by the contractor using reasonable diligence) that the contractor failed to disclose to the owner in writing.

The new law is not applied retroactively, and the effective date of Sept. 1, 2021, is intended to apply in a manner such that the entire project will either fall under the prior Lonergan case law or the new Chapter 59.