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Where a contract contained both a differing site condition clause as well as language stating that bidders may not rely upon data (such as soil information) provided by the owner with the invitation for bid (IFB) but should perform its own site investigation instead, the Supreme Court of Texas found the contractor had no contractual right to a make a differing site condition claim for soil conditions that differed from those shown in geotechnical and other site condition reports provided to bidders by the owner with the IFB. The data provided by the owner in its survey failed to provide accurate information to the contractor regarding the location of “foreign crossings” along the pipeline’s right of way in which the contractor would be installing a petroleum pipeline. The alignment sheets were included in the bid package showing only 280 such foreign crossings when in reality the contractor encountered an additional 794 foreign crossings, 200 of which were metal pipelines. The court found that “the contract allocated all risk to the contractor of unknown obstacles discovered during the construction process.” El Paso Field Services v. Mastec North America, 2012 WL 6634023 (Tex. 2012).

Comment:  This decision quotes extensively from the contract to show how clearly, in the court’s opinion, the owner placed the site conditions risk on the bidder. And this was regardless of how different the conditions may be from what was erroneously shown in the reports provided to the bidders by the owner. In contrast, under Federal contracts, courts generally find it contrary to the intention of the mandatory differing site conditions clause to allow the government to attempt to shift the risk to bidders through general disclaimers and requirements that the bidder perform its own site investigation before bidding.

Mastec, the successful bidder, was awarded the contract for $3,690,960, substantially lower than the average bid for the project that was $8.1 million. It is apparent that other bidders included large contingencies in their bids in anticipation of being unable to make a DSC claim. Mastec, although an experienced contractor, was new to pipeline construction and apparently was unfamiliar with the way site conditions were handled under pipeline contracts for this owner.

Lessons learned from this case include (1) Carefully read the contract and know what limitations will be applied to the ability to make differing site conditions claims or any other requests for change orders, (2) Either have prior experience performing the particular type of work and contract – or hire managers that have requisite prior experience, and (3) Be prepared for Courts to enforce the contract as written and not to reform the contract to be fair or reasonable.

Contract provisions that were quoted by the court include the following:

“7.1 REPRESENTATIONS AND WARRANTIES

[MasTec] represents and warrants to [El Paso]:

 (e) That its duly authorized representative has visited the site of the Work, is familiar with the local and special conditions under which the Work is to be performed and has correlated the on site observations with the requirements of the Contract and has fully acquainted itself with the site, including without limitation, the general topography, accessibility, soil structure, subsurface conditions, obstructions and all other conditions pertaining to the Work and has made all investigations essential to a full understanding of the difficulties which may be encountered in performing the Work, and that anything in this Contract or in any representations, statements or information made or furnished by [El Paso] or any of its representatives notwithstanding, [MasTec] assumes full and complete responsibility for any such conditions pertaining to the Work, the site of the Work or its surroundings and all risks in connection therewith.”

 ***

“8.1 CONTRACTOR’S CONTROL OF THE WORK

(a)(7) [MasTec] represents that it has had an opportunity to examine, and has carefully examined, all of the Contract documents and has fully acquainted itself with the Scope of Work, design, availability of materials, existing facilities, the general topography, soil structure, substructure conditions, obstructions, and all other conditions pertaining to the Work, the site of the Work and its surrounding; that it has made all investigations essential to a full understanding of the difficulties which may be encountered in performing the Work; and that anything in any of the Contract documents or in any representations, statements or information made or furnished by [El Paso] or its representatives notwithstanding, [MasTec] will regardless of any such conditions pertaining to the Work, the site of the Work or its surrounding, complete the Work for the compensation stated in this Contract, and pursuant to the extent of [MasTec’s] liability under this Contract, assume full and complete responsibility for any such conditions pertaining to the Work, the site of the Work or its surroundings, and all risks in connection therewith.”

***

The court also stated:

 “Exhibit C to the contract contains a lengthy collection of “Construction Specifications” for the project, which include the due diligence language on which MasTec relies. Specification LP–5, titled “Ditching,” states under the heading “Company Foreign Line and Utility Crossings” that “[El Paso] will have exercised due diligence in locating foreign pipelines and utility line crossings. However, [MasTec] shall confirm the location of all such crossings and notify the owner prior to any ditching activity in the vicinity of the crossings.” Near the end of Exhibit C, Specification LP–17, titled “Horizontal Directional Drilling,” states under the heading “Foreign Line and Utility Crossings” that “[El Paso] will have exercised due diligence in locating foreign pipelines and/or utility line crossings. However, [MasTec] shall confirm the location of all such crossings and notify the owner prior to any [horizontal directional drilling] activity in the vicinity of the crossings.”

In explaining why it found the contractor had willfully accepted the risk, the court stated:

 “Here, neither party contends that the terms of the contract are ambiguous. Indeed, the contract’s plain terms are clear. MasTec agreed that it had “fully acquainted itself with the site, including without limitation … subsurface conditions, obstructions and all other conditions pertaining to the Work.” It also agreed that it had “made all investigations essential to a full understanding of the difficulties which may be encountered in performing the Work.” In regard to potential work site conditions, MasTec “assume[d] full and complete responsibility for any such conditions pertaining to the Work, the site of the Work or its surroundings and all risks in connection therewith.” All of this was agreed to “notwithstanding” “anything in any of the Contract documents or in any representations, statements or information made or furnished by [El Paso] or its representatives.” These terms, in both Article 7.1(e) and Article 8.1(a)(7), clearly place the risk of undiscovered foreign crossings on MasTec. And they expressly resolve any tension between the due diligence specifications and the risk allocation provisions.

“…  MasTec is bound by the terms of this contract, regardless of whether it thought it contained different terms.”

 Regardless of language in the contract stating that the owner exercised due diligence in locating the foreign crossings, the court concluded:

 “MasTec assumes “all risks in connection with” “soil structure, subsurface conditions, obstructions and all other conditions pertaining to the Work,” “notwithstanding” anything else in the contract. The specified conditions relate to the physical environment of the pipeline’s path, precisely the risk involved with unknown underground foreign crossings. MasTec seems to have understood as much; its senior vice president testified at trial that foreign crossings were included in the risks covered by Article 7.1(e). Just as we have held in the insurance policy context that “ ‘all losses’ means all losses,” “all risks” in connection with the physical conditions of the pipeline’s path must mean all risks.”

 As further explained by the court:

 “The problem arises in this case because although MasTec understood the risk of underground surprises and knew it assumed the risk for such surprises, even including a contingency markup in its bid, MasTec, which was new to pipeline construction, underestimated the amount of that risk and submitted a very low bid. The role of the courts is not to protect parties from their own agreements, but to enforce contracts that parties enter into freely and voluntarily.”

 “Someone has to bear the loss of the additional costs of constructing the pipeline around the undiscovered foreign crossings. As in Lonergan, “the parties were each competent to contract, and there is no circumstance indicating the slightest unfairness in the transaction.” While MasTec was new to this type of construction project, it is a sophisticated party and presumably had experienced attorneys review the contract. (Citations omitted). And there is nothing to suggest that the contractual provisions at issue here are unique or novel. Sophisticated parties, like all parties to a contract, have “an obligation to protect themselves by reading what they sign.” (Citation omitted). Ultimately, this contract “constitute[s] the allocation by market participants of risks and benefits” regarding the pipeline’s construction. (Citation omitted). “The Court’s role is not to redistribute these risks and benefits but to enforce the allocation that the parties previously agreed upon.” (citing 11 RICHARD A. LORD, WILLISTON ON CONTRACTS § 31.5 (4th ed.2003)).”

 “We have an obligation to construe a contract by the language contained in the document. We have “long recognized Texas’ strong public policy in favor of preserving the freedom of contract.” (Citation omitted). “Freedom of contract allows parties to … allocate risk as they see fit.” (Citation omitted). Contract enforcement is an “indispensable partner” to the freedom of contract (citation omitted). Were we to hold in MasTec’s favor, and conclude that El Paso must bear the risk of unknown underground obstacles under this contract, we would render meaningless the parties’ risk-allocation agreement and ultimately prohibit sophisticated parties from agreeing to allocate risk in construction contracts. (Citation omitted). That result would undermine the longstanding policy of this state.”

 For all these reasons, the court held that the contractor was not entitled to recover on its differing site condition claim.

 

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 15, No. 4 (April 2013).

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