Thanks to another overbroad, sweeping statutory amendment by legislators attempting to discourage "Wage Theft," owners, contractors and subcontractors who withhold funds on a construction project may find themselves defending against criminal and civil charges of theft under Texas Penal Code § 31.04 and Texas Civil Practice and Remedies Code §134.001-005 and (unbelievably) exposed to fines, jail time, courts costs and attorneys fees.  

The Statute

Texas Penal Code § 31.04 is a fraud statute originally targeting such criminal conduct as obtaining services by "deception," hiring people with no intent to pay, or walking out on a lease while rent is still due.

§ 31.04, as amended effective September 1, 2011, however, now unequivocally makes it a crime not to pay in full, upon demand, "compensation" for services:

§ 31.04.  Theft of Service 

 
   (a) A person commits theft of service if, with intent to avoid payment for service that the actor knows is provided only for compensation:

...(4) the actor intentionally or knowingly secures the performance of the service by agreeing to provide compensation and, after the service is rendered, fails to make full payment after receiving notice demanding payment.

Partial payment, historically a defense to an alleged violation, is now expressly excluded. [§31.04 (d-1)]

The statute does not define "compensation." The statute does not confine its reach to "wages" or to a class or category of "workers," and is so broadly written that it can arguably apply to all levels of the construction business, including any owner, general contractor or subcontractor of any tier. "Actor" or "person" can mean a person, corporation, or association. [§ 1.07 (38)]

§ 31.04 (e) declares that any unpaid amount over $ 1,500 constitutes a felony: a state jail felony for $1500 to $20,000; a felony of the third degree for $20,000 to $100,000; second degree for $100,000 to $200,000; and first degree for over $ 200,000.

No Defenses

In traditional construction disputes, faulty performance, such as defective work, falling behind schedule, and failing to pay suppliers, justifies the withholding of payments. The "Prompt Pay Act" (Texas Property Code § 28.001-009) codifies this concept by mandating payment only for work "properly performed" and by creating an exception to the prompt payment requirement in the case of a "good faith dispute."

§ 31.04 makes no provision for such defenses. It simply makes it a crime not to pay (after notice and proof of "intent not to pay").

Civil Action for Violation of §31.04

An unpaid person can "piggy back" a civil suit onto the criminal prosecution for a violation of § 31.04 under the Texas Theft Liability Act (Texas Civil Practice and Remedies Code § 134.001-005). TCPRC § 134.005 mandates award of costs and attorney fees to the prevailing party. This may discourage frivolous use of the Act to exert pressure in a civil lawsuit, but, if pled, increases the exposure of the person resisting payment.

Goal of Amendment

According to the "Author's / Sponsor's Statement of Intent," the stated goal of the new amendments was an admirable one --- to protect day laborers and other construction workers from "Wage Theft:"    

"Theft of wages occurs when employers fail to pay workers their promised wages. This is a frequent occurrence in Texas. In certain industries, such as construction, one in every five workers experiences wage theft. In addition, 50 percent of day laborers have experienced wage theft. The impact of this theft is widespread and has caused many workers to be unable to meet their family's basic needs." 2011 Legis. Bill Hist. TX S.B. 1024 

The legislators hoped to put teeth in the criminal statute for these workers who would not be able to afford a civil lawsuit but were being turned away by the prosecutor because they had been partially paid.

Unintended Effects

By failing to set limits on the scope of the statute and specify their true intent, however, the legislators have opened a whole new field of litigation which could result in such inequities as: an owner or general contractor being forced to litigate its construction defect dispute in the criminal courts; general contractor being threatened with criminal charges by a disgruntled subcontractor; or owners, contractors and subcontractors rolling the dice in a claim against them under TCPRC§ 134.002 with the added risk of attorneys fees.

While these extreme situations may or may not occur, ambiguous, broad-brush legislation makes for increased litigation and uncertain outcomes.   It is likely that claims of § 31.04 violations will routinely appear in civil suit pleadings as a threat, adding to the time and expense of litigation, and "upping the ante" in conventional construction disputes over non-payment.

Advice to Persons Responsible for Payment

• Be cautious about failing to pay day laborers, employees and other contract labor their agreed undisputed wages on time.
• Pay any undisputed funds as soon as possible.
• Retain disputed amounts (withholding disputed funds is currently allowed by the Prompt Pay Act).
• Send a certified letter stating in writing reasons for withholding funds.

In our April 2011 newsletter, we reported that the Texas Court of Appeals of Austin, Third District affirmed a jury finding of architect liability for a contractor's construction defect. This opinion is no longer good law as of August 5, 2011. On motion for reconsideration, the appeals court, in a split 3-2 decision, withdrew its opinion of December, 2010, reversed itself, reversed the trial court/jury finding of 10% negligence against the architects, and held that the ARCHITECTS OWED NO DUTY to the plaintiffs who were seriously injured when their friends' (the owners') balcony collapsed.  

Question

The case raises a narrowly framed legal question concerning liability arising out of an architect's contract administration duties:

Can an Architect who agrees "to endeavor to guard the owner against defects and deficiencies in the work" be liable for an injury to a visitor caused by a structural, construction defect that the Architect failed to discover?

The Austin Court of Appeals now answers NO. Black and Vernooy v. Smith, 2011 Tex. App. LEXIS 6118 (Tex. App. Austin Third District Aug. 5, 2011, pet. filed)  

Finding

The majority (3/5) of the Court found that:

1. The Architects' failure to discover a construction defect that was obvious in their own photographs does not give rise to a duty to non-parties to the contract.
2. The Architects' contract administration duties do not give rise to obligations to anyone other than the owner.
3. The contract in this case contained the same exculpatory language pertaining to an architect's contract administration duties as is contained in the AIA A201 General Conditions 1997 such as: "Architect shall not be required to make exhaustive or continuous on-site inspections to check the quality or quantity of the Work;" "Architect shall not be responsible for the Contractor's failure to perform the Work in accordance with the requirements of the Contract Documents;" and "Architect shall neither have control over or charge of, nor be responsible for, the construction means, methods, techniques, sequences or procedures..." The Court found that this language negated a finding of the "control" required for imposing a common law duty giving rise to negligence of the architects for failure to discover and report the construction defect.  
4. The social utility of architects, and the magnitude of the burden on architects caused by imposing a duty in this situation outweighs the foreseeability of a visitor being injured by defects in construction. 

Effect of Opinion

            It can be said that this opinion closes the door on any actions for negligence by injured third parties against an architect for negligent administration of the contract, i.e. failure to discover defects in construction in its administration of the contract -- when provisions such as those quoted above are contained, as here,  in the architect/owner contract. The architect's contract administration services admittedly include "periodic site visits to observe the progress of the work, endeavoring to protect the owner against defects and deficiencies, trying to make sure the home is generally built in compliance with construction documents, and checking shop drawings against the design intent." (Testimony of Architect)   It is a triumph of the AIA language distinguishing the architect's responsibilities from the work of the contractor (traditionally found in the architect's contract and in the A201-1997), that the Court interpreted such language to mean, in this case, that the architects were in no way responsible for failure of the contractor to build in accordance with the design.

The dissent argued that the majority's interpretation of these AIA provisions negates any responsibility for contract administration, and will allow an architect to "turn a blind eye to open and obvious structural defects and escape liability."   

Outstanding Questions Still Undecided 

• The Owner was not a plaintiff. Can an Architect be found negligent to an Owner for failing to discover a blatant construction defect as part of his contract administration duties?
• There were no allegations of design defects. Would a duty extend to third parties for injury resulting from negligent design?
• Injured party was not a third party beneficiary. Would the outcome be different if the contract contained language creating a benefit to third parties such as visitors to the property?
• There was no allegation of "negligent undertaking" against the architects. Would the outcome be different if "negligent undertaking" had been alleged?