Texas Court Holds Contract Allocation of Risk of Underground Conditions Overridden by Owner’s Affirmative Assurances in Specifications

Mastec North America, Inc. v. El Paso Field Services, L.P.
2010 Tex. App. LEXIS 3436 (Tex. App. May 6, 2010)

The Court of Appeals of Texas recently held that when a contract places the risk of differing site conditions on the contractor, the contractor is not required to bear the risk “that the bid documents misrepresent the nature and amount of the work to be performed.”

The matter involved replacement of a pipeline that extended from Houston to Corpus Christi. Defendant El Paso contracted with Plaintiff MasTec, for the replacement work.

In part, MasTec based its bid on specifications in which El Paso expressly asserted that it had used due diligence in locating obstacles that crossed the pipeline right-of-way and stated the number of such crossings. Once MasTec was awarded the contract, and it began construction, it encountered a number pipeline crossings that were not identified by El Paso.

MasTec sued El Paso for breach of contract alleging that the parties contract required El Paso to employ due diligence in identifying all pipeline crossings, and that El Paso had failed to so. In defense of that claim, El Paso asserted that encountering more crossings than were indentified by El Paso was a risk that MasTec willingly and openly assumed.

A jury found that El Paso breached the due diligence provision of the parties contract specifications. But, on the motion of El Paso, the trial court granted judgment notwithstanding the verdict in favor of El Paso, concluding that the contract allocated the risk of unidentified pipeline crossings to MasTec and held that MasTec take nothing by its claim. MasTec appealed that decision.

On appeal, the Court reversed and remanded the trial court’s decision for entry of judgment consistent with the jury’s verdict.In reaching its decision, the Court of Appeals found that nothing in the parties contract suggested that the parties intended MasTec, at the time of contracting, to have actually ascertained, on its own, the number and location of crossings along the pipeline.

Citing a series of cases, including the United States Supreme Court case of Hollerbach v. United States, 233 U.S. 165 (1914), the Court determined that (1) El Paso was in a better position than MasTec to gather critical information concerning crossings on El Paso’s own pipeline and to judge the sufficiency of specifications provided as a basis of MasTec’s bid; and (2) El Paso made affirmative assurances in its specifications directly bearing on the nature and amount of work to be performed. According to the Court, a contractor is not precluded from recovering against an owner, under a breach of contract theory, for defective specifications, notwithstanding lump-sum and pre-bid investigation provisions in the contract, if the owner was in a better position to know whether its specifications were sufficient for its intended scope of work and the contract evidences that the owner made positive assurances concerning the reliability of those specifications.

Click here to view full text of decision courtesy of LexisNexis.

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