Construction and the Law in Texas

Texas courts have issued a series of opinions recently that affirm Texas as a “freedom to contract” state. These opinions have enforced harsh results for claimants who might have fared better in the past when courts were seemingly more willing to put aside contract language barring recovery in favor of equitable doctrines or defenses to the application of core contract law.

The MasTec case is particularly important to the highway and heavy contracting industry because it involves the interpretation of a provision shifting the risk of encountering unknown underground conditions to the contractor. In the contract between El Paso and MasTec, MasTec agreed to the following: “That [MasTec] 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.”

1 See El Paso Field Servs. L.P. v. MasTec N. Am., Inc., 2012 LEXIS 1124, 56 Tex. Sup. J. 174 (2012); Cajun Constructors, Inc. v. Velasco Drainage Dist., 380 S.W.3d 819, (Tex. App. – Houston [14th Dist.] 2012); Port of Houston Auth. V. Zachry Constr. Corp., 377 S.W.3d 841 (Tex. App. – Houston [14th Dist.] 2012).

During the contract negotiation phase, El Paso represented to MasTec that it had identified approximately 280 foreign crossings of the pipeline project. During the performance of the work, MasTec encountered 794 crossings. MasTec incurred costs of $4.7 million associated with overcoming the obstacles and obstructions caused by the additional foreign crossings. MasTec’s bid on the project was $3.7 million. The average bid received by El Paso was about $8.1 million. Of interest to the court was the fact that the combined amount of MasTec’s bid and its damages roughly equaled the average bid amount from the other bidders on the project. It appears from the record and the opinion that the court viewed MasTec as having been careless in its bid and contract negotiations and therefore, the court was reluctant to reward MasTec for this behavior.

After a jury awarded MasTec $4.7 million in damages, the trial court disregarded the award based on arguments that the contract language assigned all-risks of these crossings to MasTec. The court of appeals reversed the trial court’s takenothing judgment. However, the Texas Supreme Court heard the case and sided with the trial court.

In order to avoid the harshness of the contractual language it had agreed to, MasTec argued that El Paso did not use due diligence in locating the foreign crossings and this failure to do so rendered the assumption of risk provision unenforceable. At trial, MasTec’s witnesses acknowledged the contract made MasTec responsible for all costs associated with the crossings and that it knew the risk associated with unidentified foreign crossings. The Supreme Court recognized that the parties to this contract were sophisticated and experienced. The court said its role was not to protect people from the contracts they sign, but to enforce them as written. The court further stated that freedom of contract allows parties to allocate risk as they see fit. Based on this opinion and the language in the court’s opinion, it appears that these and other risk-shifting clauses in contracts will be fully enforceable in the future.

The lesson to be learned from this case is more than just “read your contracts”. Contractors must be exceptionally diligent in both reading and negotiating their contracts before they sign an agreement containing similar risk-allocation language. Because the actual costs of accepting all-risks associated with underground or unforeseen conditions can be so high, contractors should attempt to negotiate away “all risk” provisions, particularly those that address site conditions that the contractor cannot independently verify with certainty.

If the other party insists that the contractor accept an “all-risk” provision, the contractor should try to obtain exceptions to broad all-risk shifting provisions. Accepted exceptions should be clearly stated and should appear in the same provision where the all-risk provision is found. These exceptions should be as expressly and clearly worded as the “all-risk” language and the exceptions should immediately follow the “all-risk” language in the clause.

Additionally, contractors should not sign a contract containing boilerplate representations that “the contractor has visited and is familiar with the site” if that has not occurred. If a contractor does undertake a preliminary investigation, it should be documented to show the contractor acted reasonably and diligently to investigate the site and verify the accuracy of the information provided by the owner.

Contractors should also be diligent and cautious when describing the manner in which investigations were conducted in the contract language. As the MasTec case indicates, courts are going to enforce contracts as written. Overstating the care or thoroughness of an inspection or investigation – and writing that language off as mere boilerplate that appears in all contracts – can create a strong burden that may prove hard to overcome if a dispute arises. Using general phrases such as “the contractor has become familiar with” or “acquainted itself with” the project site and its conditions may prove less risky than language describing a “careful” examination.

In the current state of Texas contract law, courts will enforce contracts as written and may be reluctant to allow contractors out of provisions that would otherwise bind them to accept certain risks or waiver certain claims. Knowing this, contractors should proceed with forethought and care in bidding projects and negotiating contracts that contain “all-risk” provisions. Failure to do so may result in the forced acceptance of risks that some contractors may not be prepared or able to accept.

– As seen in the May 2013 Issue of Texas Contractor.