Construction / 1 min read
Cross-Default Provisions in Texas Construction Contracts
When general contractors hire subcontractors, they frequently include contractual clauses that allow them to withhold payment under certain circumstances. These provisions operate in two distinct ways. First, if a subcontractor causes problems or losses on a specific project, the general contractor can withhold payment from that same project to cover those losses. Second, and more significantly, these clauses may allow contractors to withhold money from a subcontractor's payment on completely different, unrelated projects where the parties are working together. This second type is known as a "cross-default provision."
Cross-default provisions are generally enforceable under Texas law. However, subcontractors commonly raise defenses when contractors rely on these provisions to withhold payment. The two primary defenses involve Chapter 28 of the Texas Property Code (the Prompt Payment Act) and Chapter 162 of the Texas Property Code (the Trust Fund Statute). The applicability and scope of protection these statutes provide against cross-default provisions has been a subject of ongoing legal debate, prompting several legislative attempts to clarify their relationship.
During this year's Texas legislative session, Rep. Keith Bell and Sen. Nathan Johnson authored companion bills (SB 1614/HB 3289 and SB 1615/HB 3288) aimed at significantly restricting these cross-project offset clauses. The proposed amendments to the Trust Fund Statute would have made cross-project offsets a criminal offense of misapplication of trust funds. The proposed amendments to the Prompt Pay Act would have prevented contractors from claiming "good faith disputes" under the Prompt Pay Act when withholding funds based on separate contract disputes. Both amendments would have substantially increased legal risks for contractors attempting to enforce these provisions against subcontractors.
Ultimately, both sets of bills died in the House, and no amendments were made to either the Prompt Pay Act or the Trust Fund Statute on this issue. As such, cross-default clauses in subcontracts remain generally enforceable under existing Texas law.
While these specific legislative efforts were unsuccessful, both contractors and subcontractors should remain aware of the ongoing legal landscape surrounding cross-default provisions. These clauses continue to be subject to challenges, including allegations of trust fund violations and claims for prompt payment penalties. Cross-project offset provisions can serve as contractual tools, but they carry potential legal risks that require careful structuring and implementation. For questions about how this legislative outcome affects specific contractual arrangements, you should consult with your legal counsel to ensure the agreements are properly structured and legally sound.