Colorado Court of Appeals Holds Differing Site Condition, Mutual Mistake and Negligent Misrepresentation Claims Viable

URS Group, Inc. v. Tetra Tech FW, Inc. and Foster Wheeler Environmental Corporation
2008 Colo. App. LEXIS 159 (February 7, 2008)

The Court of Appeal of Colorado held that the plaintiff subcontractor did not assume the risk of differing site conditions and thus its claims for differing site conditions and mutual mistake were viable. Moreover, the Court held that the economic loss rule did not bar plaintiff’s negligent misrepresentation claim, because the alleged misrepresentation occurred during negotiations before the contract was formed.

Tetra Tech FW Inc. and Foster Wheeler Environmental Corporation (collectively (“TTFW”) was the program management contractor for the arsenal remediation project under a contract with the United States Army (the “Project”). TTFW issued a request for proposal (the “RFP”) seeking bids for a soil remediation project which included foundation demolition work. URS Group, Inc. (“URS”) submitted a bid of $10,857,570 and was awarded the subcontract (the “Subcontract”). URS commenced demolition and encountered problems removing the foundations. URS alleged that the concrete structures encountered during demolition did not conform with to the information provided in the RFP. Consequently, URS submitted a claim under the subcontract’s differing site condition clause to increase the contract price by $9,166,925. TTFW refused to pay the claimed amount and URS initiated the above captioned suit seeking, among other relief, relief for differing site conditions under theories of breach of contract, breach of the duty of good faith and fair dealing, mutual mistake, equitable adjustment and negligent misrepresentation. After a bench trial, the trial court found in favor of TTFW on all differing site condition claims finding that URS assumed the risk of differing site conditions and thus the URS’ theories of recovery which were premised on differing site conditions must fail. The Trial court failed to consider URS’ negligent misrepresentation claim. URS appealed the decision.

The gravamen of the trial court’s denial of the differing site condition claims was that URS assumed the risk of differing site conditions. The trial court found that by entering into a fixed price contract, URS had assumed the risk of encountering subsurface conditions. URS argued, and the Court agreed, that this holding ignored the risk allocation function of the subcontract’s differing site conditions clause. The Court noted that the relevant portions of the clause provided:
“(a) The Contractor shall promptly, and before conditions are disturbed, give written notice to the Contracting Officer of (1) subsurface or latent physical conditions at the site which differ materially from those indicated in the contract….
(b) …If the conditions do materially so differ and cause an increase or decrease in the Contractor’s cost of, or the time required for, performing any part of the work under this contract…an equitable adjustment shall be made under this clause and the contract modified in writing accordingly.”

The Court held that the trial court erred in concluding that URS could not recover additional compensation for differing subsurface conditions simply because it entered into a fixed price contract. The Court explained that the purpose of a differing site conditions clause is “to take at least some of the gamble on subsurface conditions out of bidding.” The clause thus encourages more accurate bidding. “Where a fixed price contract has a [differing site conditions] clause, the contractor may be entitled to an equitable adjustment if subsurface conditions are materially different from those indicated in the contract.”

Having recognized that URS did not assume the risk of differing site conditions and thus may be entitled to an equitable adjustment of the contract, the Court also addressed the trial court’s denial of URS’ mutual mistake claim. The trial court’s denial was premised on the finding that URS had assumed the risk of differing site conditions. Because this was not the case, the Court found the mutual mistake claim viable.

Finally, turning to URS’ negligent misrepresentation claim, URS argues that the trial court erred in failing to address its claim. TTFW argued that URS could not prevail on the claim because the economic loss rule would bar recovery for negligent misrepresentation as URS suffered only economic damages flowing from a contractual duty and not another duty under tort law. The Court found that URS alleged that the negligent misrepresentation occurred before the parties entered into the subcontract and thus the economic loss rule would not bar such a claim.

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