Inside this Issue
- A1 - Differing Site Condition Claim Barred by Contract Disclaimers
- A2 - Economic Loss Doctrine Did Not Bar Contractor Claim against Architect for Defective Specifications
- A3 - Contractor Permitted to Pursue Tort Claim against Engineer for Allegedly Defective Specs and Failure to Approve Payment Requests
- A4 - No-Damage-For-Delay Clause Enforced Even If Delay Caused by Owner’s Breach of Contract and Arbitrary Actions
Article 1
Differing Site Condition Claim Barred by Contract Disclaimers
See similar articles: Differing Site Conditions | Disclaimers | Site Investigation
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.”
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“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.”
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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).
Copyright 2013, ConstructionRisk, LLC
Article 2
Economic Loss Doctrine Did Not Bar Contractor Claim against Architect for Defective Specifications
See similar articles: Contractor claims against designer | Defective Specifications | Economic Loss | Third Party Beneficiaries | Third Party Claims
Where a structural steel subcontractor filed suit against the project owner’s architect, alleging that the architect’s plans and specifications were defective and caused delays that economically damaged the contractor, a trial court applied the economic loss doctrine to dismiss the suit, but that was reversed on appeal, with the court holding the contractor can amend its complaint to include factual allegations addressing nine factors that are used to determine whether, in the absence of privity, a defendant owes a plaintiff a duty of care to prevent economic loss. Olson & Co. Steel v. Nestor + Gaffney Architecture, 2012 WL 5332041 (Cal.App. 2012).
This case involves a subcontractor negligence claim against the architect. The prime contractor had already settled its own claim against the project owner (not the architect) for additional time and extra work due to conflicting plans and specifications.
In analyzing the facts and law, the appellate court stated its decision by explaining that the California Supreme Court has recognized exceptions to the economic loss rule and set forth guidance for courts making the policy determinations as to whether a duty of care exists in a particular case and provided the following guidance:
“The determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are [1] the extent to which the transaction was intended to affect the plaintiff, [2] the foreseeability of harm to him, [3] the degree of certainty that the plaintiff suffered injury, [4] the closeness of the connection between the defendant's conduct and the injury suffered, [5] the moral blame attached to the defendant's conduct, and [6] the policy of preventing future harm.”
The appellate court quotes another Supreme Court decision that added three additional factors to be considered:
“(7) the degree to which there might be a potential liability out of proportion to fault, (8) the level of sophistication of the plaintiff in the context of the transaction (including the potential for what the court called “ ‘private ordering’ ” to contractually protect against the risk), and (9) the balance between, on the one hand, efficient loss spreading, and, on the other hand, and the potential for dislocation of resources.”
The court was apparently satisfied that the subcontractor had pleaded sufficient facts to suggest that there could be a duty of care owed to it by the architect. For example, the court stated the following:
“For instance, the SAC and the attached portions of the Agreement show that N+G was aware that the plans and specifications would be part of the bid package and, thus, would be used by bidders in submitting bids on the Project. In addition, the SAC alleged that N+G knew or should have known that the plans and specifications also would be used in the construction of the Project. Thus, it is reasonable to infer that County and N+G intended the plans and specifications to be relied upon by (1) the various contractors and subcontractors bidding on the Project and (2) the successful bidders in building the Project.”
After reviewing the allegations contained in the complaint, the court concluded they did not provide enough information to properly evaluate the nine factors set forth above to reach a conclusion as to whether the architect owed a duty of care to the subcontractor. Because there was a chance under California law, that notwithstanding the normal application of the economic loss doctrine, a subcontractor could present sufficient facts to prevail against the architect for breach of a duty of care, the court stated: “We are reluctant to reach a conclusion based on matters that are not set forth in the pleadings …[and] we direct the trial court to grant Olson leave to amend to include allegations directed at the [nine factors].”
Comment: This decision and others like it in California are unfortunate because they throw the door wide open to suits against design firms by any project participant at any tier, and circumvent the normal contractual requirements and expectations that the proper recourse for recovering economic losses is from the party with whom one has a contractual relationship. Where the economic loss rule is accepted as a general rule, but exceptions are permitted, there is a tendency for the exceptions to swallow the rule. That is particularly problematic on construction projects where parties should reasonably be expected to recover for breach of contract rather than under creative tort (i.e., negligence) theories.
Historically, if a contractor sustains damages as a result of defective specifications, it makes a claim against the project owner with whom it contracted. The owner generally is held responsible for the defective specifications, pursuant to the Spearin doctrine, whereby courts hold that owner’s grant an implied warranty of specifications when they provide an architect’s plans and specifications to contractors to construct. Through the contract it is possible for parties to allocate and limit their risk. When courts allow contractors and their subcontractors to do an end-run around the contract risk allocation, this dishonors the intent of the parties and the contract and does harm to the design and construction process.
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).
Copyright 2013, ConstructionRisk, LLC
Article 3
Contractor Permitted to Pursue Tort Claim against Engineer for Allegedly Defective Specs and Failure to Approve Payment Requests
See similar articles: Contractor claims against designer | Defective Specifications | Economic Loss | Third Party Beneficiaries | Third Party Claims
Under Louisiana law, a federal district court held that the general contractor, on a public contract to build a warehouse, could sue the owner’s project engineer for negligence based on allegations that the contractor’s ability to perform its obligations to the Owner was delayed and rendered more difficult by the engineer’s actions, including alleged “failure to develop good-quality specifications, insistence on performance of unnecessary work that delayed the construction project, and failure to approve certain payments by the Owner.”
The court explained that “The gist of the complaint is that [Engineer’s] duties as a construction manager included the obligation to manage the construction project in a way that would allow [Contractor] to perform its own contractual duties owed to the Owner.” The court found that Louisiana recognizes an action for negligent professional undertaking, the essential elements of which are established based upon the facts alleged. Harris Builders, LLC v. URS Corporation, 861 F.Supp. 746 (E.D. Louisiana 2012).
In denying the Engineer’s motion to dismiss the contractor’s complaint, the court looked at what it called a balancing test that courts in Louisiana had previously established for determining whether third parties not in privity of contract may sue an architect. In doing so, the court noted that previous cases had dealt with architects and the present case concerns an engineer, but that for purposes of the law, engineers would be considered the same as architects. The balancing test is as follows:
“[T]he extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant's conduct and the injury suffered, the moral blame attached to defendant's conduct, and the policy of preventing future harm.”
The court concluded that the contractor's complaint passes muster under the balancing test for the following reasons:
“URS's construction plan preparations and instructions to Harris to redo certain work were acts that URS had to have known would directly affect Harris. It was foreseeable and fairly certain that Harris would suffer economic harm if URS managed the project poorly, and URS's development of project specifications directly affected the work Harris performed. In short, Harris asserts a high degree of economic control by URS that was the purpose recognized in Colbert as supporting a cause of action.”
An unjust enrichment claim by the contractor against the Engineer was dismissed, however, because the court found that so long as there was a viable way to recover under the negligence count of the complaint there was no basis for recovery under an unjust enrichment theory. Unjust enrichment is only applicable to fill a gap in the law where no other remedy is provided for by law.
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).
Copyright 2013, ConstructionRisk, LLC
Article 4
No-Damage-For-Delay Clause Enforced Even If Delay Caused by Owner’s Breach of Contract and Arbitrary Actions
See similar articles: Attorneys Fees | Contract Procedural Requirements | Damages | No-Damage-for-Delay | Prevailing Party Attorneys Fees
Where a jury awarded a contractor approximately $19 million for delay and impact costs caused by actions of the project owner (including breach of contract), the judgment was reversed on appeal. Also, an award of $10.5 Million attorneys fees was granted to the Owner as Prevailing Party.
Following a three-month trial, a jury awarded a contractor judgment of approximately $19 million for breach of contract by the Port of Houston. These damages represented the contractor’s increased costs of switching from its proposed frozen wall cutoff design due to the Owner having rejected its shop drawing submittal. The basis for the award was stated by the jury as “delay and hindrance” to the contractor’s work by the Port. Although the contract contained a very tough no-damages-for-delay clause, the trial court declined to enforce it. This was because the court determined, as a matter of law, the Port could not enforce it to preclude delay or hindrance damages resulting from any action by the Port that constituted arbitrary or capricious conduct, active interference, bad faith, or fraud. On appeal, the judgment was reversed on the basis that the exceptions to a no-damages-for-delay clause should not have been applied. Port of Houston v. Zachry Construction, 377 S.W. 841 (Tex. 2012).
The appellate court acknowledged that courts in many other jurisdictions give only a “restrained approval” of such provisions because of their harshness, but the court concluded that where a contract in Texas clearly contemplates that the clause will be applied to deny damages regardless of what the Owner might have done, the clause will be enforced. As stated by the court,
“However, the parties are free to negotiate and agree upon the conditions under which (1) the contractor will recover damages for delay, and (2) another remedy is available to the contractor for any such delay. In June 2004, Zachry unambiguously agreed that it would perform the contract without the benefit of delay damages, even if the delay was caused by the Port's breach of contract, negligence, or other fault. Zachry faced significant delays; delays it alleged—and the jury agreed—were caused by the Port's breach of contract. In November 2005, Zachry proceeded with construction “in the wet,” knowing the contract afforded no damages for delay. We cannot rewrite the provision without depriving the Port of the benefit of the bargain the parties reached in June 2004.”
The contract clause in question provided:
“The Contractor shall receive no financial compensation for delay or hindrance of the Work. In no event shall the Port Authority be liable to the Contractor or any Subcontractor or Supplier, any other person or any surety for or any employee or agent of any of them, for any damages arising out of or associated with any delay or hindrance to the Work, regardless of the source of the delay or hindrance, including events of Force Majeure, AND EVEN IF SUCH DELAY OR HINDRANCE RESULTS FROM, ARISES OUT OF OR IS DUE, IN WHOLE OR IN PART, TO THE NEGLIGENCE, BREACH OF CONTRACT OR OTHER FAULT OF THE PORT AUTHORITY. The Contractor's sole remedy in any such case shall be an extension of time.”
In reviewing this contract language the court stated that although the parties had already stated the source of the delay was immaterial, “they gave special emphasis to their intent that delay due even in part to conduct by the Port was something they were specially contemplating.” Moreover, said the court, the clause used all capital letters for the matters regarding the Port’s conduct to set it off from the rest of the paragraph. And, “Finally, to give utmost emphasis, the parties described three categories of fault: (1) negligence, (2) breach of contract; or (3) other fault.” All of this was enough for the court to conclude that the parties intended that the waiver of damages was to apply to situations including that at issue in this case.
The appellate court also allowed recovery of $10.5 Million in attorneys fees by the Port as the “prevailing party.” Almost $15 million was claimed in legal fees and the court noted that although this was almost half the amount of the entire claims in the case, it did not render the fees unreasonable per se. In fact, the court noted that other cases had allowed prevailing parties’ attorneys fees that exceeded the dollar amounts of the underlying claims in dispute.
Comment: Courts in most states apply a common law standard like that used by the trial judge in this case to limit enforcement of a no-damages-for-delay clause. In Texas, however, as demonstrated by the appellate decision here, the courts generally favor enforcing contracts just the way they are written (with a few exceptions) so long as the language is clear and unambiguous, and not otherwise contrary to law or public policy. This decision really demonstrates the importance of negotiating contract terms and conditions that reasonably allocate risk.
With regard to the prevailing attorneys fees that were awarded, this case may cause contract drafters to think twice before including such a clause in the contract. Although they can be great when you are the prevailing party, they can also greatly increase the risk of loss for the non-prevailing party. This clause could impact decisions on whether to push all the way through to a litigated decision versus settling for less than one believes is due in order to avoid paying the other party’s attorneys fees.
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).
Copyright 2013, ConstructionRisk, LLC
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