- Takeaways from El Paso Field Services, L.P. v. MasTec North America, Inc.
- February 18, 2013 | Authors: James T. Kittrell; Everard A. Marseglia
- Law Firm: Liskow & Lewis A Professional Law Corporation - Houston Office
Construing a pipeline construction contract, the Supreme Court of Texas has held that the contractor, and not the owner, bore the risk of additional costs incurred as a result of previously undiscovered foreign crossings.
El Paso Field Services, L.P. (“El Paso”) purchased a propane pipeline that ran inland from Corpus Christi. After determining that the pipeline, which had been constructed as an emergency pipeline in the 1940s, was too shallow, El Paso solicited bids to remove the old line and construct a new one. Before opening the bidding process for replacing one segment of the pipeline, El Paso hired a third party to survey the pipeline route and create “alignment sheets” that listed 280 “foreign crossings” along the old line. El Paso Field Services, L.P. v. MasTec North America, Inc., No. 10-0648, 2012 Tex. LEXIS 1124 at *2 (Tex. Dec. 21, 2012). These alignment sheets were included in the bid package distributed to all potential contractors.
MasTec North America, Inc. (“MasTec”) submitted a bid of approximately $3.7 million, which was substantially less than the average bid of $8.1 million. Id. at *3-4. MasTec was awarded the contract, and the parties entered a construction contract. After starting work, MasTec discovered a substantial number of foreign crossings that were not identified on the alignment sheets, many of which required a special type of weld called a “tie-in,” substantially increasing construction time and expenses. Id. at *4.
MasTec sued El Paso for breach of contract, misrepresentation and fraud based on El Paso’s failure to locate nearly 800 unknown foreign crossings and its subsequent refusal to compensate MasTec for the associated cost increases. At trial, MasTec submitted its breach of contract claim, but did not pursue its fraud or misrepresentation claims. The Jury was asked whether El Paso failed to comply with the contract and was instructed to consider “whether El Paso exercised due diligence in locating foreign pipelines and/or utility line crossings.” Id. at *6. The Jury answered that El Paso failed to comply with the contract and awarded MasTec $4,763,890 in damages; the Jury also found that MasTec failed to comply with the contract by not completing the Work, awarding El Paso $104,687.09 in damages; but the trial court granted El Paso’s motion for judgment notwithstanding the verdict. The First Court of Appeals in Houston reversed and held that El Paso had failed to exercise due diligence in locating the foreign crossings. Id. at *8. After the court of appeals denied rehearing en banc, the Supreme Court of Texas granted El Paso’s petition for review.
The Court’s Opinion
Noting that neither party contended that the contract was ambiguous, and finding that “the contract’s plain terms are clear,” the Court observed that MasTec agreed it had “fully acquainted itself with the site, including without limitation . . . subsurface conditions, obstructions and all other conditions pertaining to the Work.” Id. at *13. The contract also provided that MasTec had “made all investigations essential to a full understanding of the difficulties which may be encountered in performing the Work.” Id. at *13-14. Finally, 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,” “notwithstanding . . . anything in any of the Contract documents or in any representations, statements or information made or furnished by [El Paso] or its representatives.” Id. at *14. The Court held that this language, contained in two provisions of the contract, explicitly allocated the risk of costs associated with undiscovered foreign crossings to MasTec.
MasTec took the position that the “all risks” language in the contract was limited by two provisions in an Exhibit that provided that (a) “[El Paso] will have exercised due diligence in locating foreign pipelines and/or utility line crossings,” and (b) “[MasTec] shall confirm the location of all such crossings . . . .” Id. at *12-13. MasTec argued that the quoted language made it El Paso’s burden to locate foreign crossings, and that any failure to exercise due diligence in doing so made El Paso liable for any cost overruns. Id. at *15. The Court rejected that argument, construing the phrase “all losses” to mean “all losses.” Id. at *16 (citing Enter. Leasing Co. v. Barrios, 156 S.W.3d 547, 549 (Tex. 2004) (per curiam)). In rejecting MasTec’s argument that such construction would render the due diligence provisions meaningless, the Court noted that the contract “contemplates a joint effort by the parties,” and that while the contract provided that El Paso “will have exercised, due diligence,” it also required MasTec to confirm the locations, and thus bear the risk of any omissions or inaccuracies. Id. at *20. After discussing certain factual difficulties related to detecting foreign crossings, the Court held that the contract did not require El Paso to perform any other due diligence obligation beyond what was demonstrated to have occurred.
Finally, the majority addressed the Dissent’s position that because El Paso had failed to identify up to 90% of the foreign crossings, the industry standard for due diligence had not been met. After noting that the Dissent’s arbitrary due diligence standard ignores the realities of searching for foreign crossings on very old pipelines, the Court reiterated that MasTec had assumed “all risks,” including the risk of unidentified foreign crossings, “notwithstanding” any other provision of the contract. Id. at *21-23. To hold otherwise, said the Court, would not allow the parties to allocate the risks associated with additional unknown crossings; would run contrary to the freedom to contract; and would “undermine the longstanding policy of this state.” Id. at *27-28.
The Dissent, written by Justice Guzman and joined by Justices Medina and Lehrmann, argued that to ensure that the entire contract was harmonized without any one provision being rendered meaningless, the Court should have treated the narrow due diligence provisions as exceptions to the general “all risks” provision, id. at *36, and that the Court’s decision effectively ignores that part of the contract. Under the Dissent’s reasoning, and reading the due diligence provisions as exceptions, resolution of the case should have depended on whether or not there was some evidence to support the Jury finding that El Paso failed to exercise due diligence. Justice Guzman concluded there was enough evidence, as the testimony at trial demonstrated it to be industry custom for contractors to allocate a 10-15% contingency for undisclosed foreign crossings in their bids, meaning that the industry standard is for pipeline owners to disclose 85-90% of such crossings. Id. at *40-41. The Dissent thus concludes that El Paso’s disclosure of only 35% of foreign crossings, combined with the disparity between the industry standard and El Paso’s performance, demonstrates that there was some evidence that El Paso failed to use due diligence, and thus the Jury verdict, and court of appeals decision, should have been upheld.
This case is significant for two reasons: First, the Court held that a provision generally allocating “all risks” controlled the more limited, specific clause dealing with due diligence; and second, the Court rejected any attempt judicially to create a numerical standard for quantifying what exactly constitutes due diligence in identifying foreign crossings, favoring instead a case-by-case basis approach.