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 The Texas Supreme Court harmonizes the contractual risk-allocation provisions in a contract in light of the due diligence specifications in the contract.

El Paso Field Services purchased a 68-mile pipeline that had been constructed in the 1940s and decided to remove it and construct a new pipeline to carry butane. El Paso invited bids to replace the section of the pipeline between Victoria and Nueces Bay. El Paso engaged a survey mapping company to survey the pipeline route, and the survey showed 280 “foreign crossings” along the right of way, including other pipelines, utilities, roads, rivers, canals, fences, wells, cables, and concrete structures. These were included in the bid package sent to potential contractors to assist in estimating the cost of construction.

MasTec, whose primary business was installing underground fiber optic cables and telephone lines and which had not installed a pipeline, submitted a bid that was substantially lower than the other bids. After MasTec was awarded the contract and commenced work, it discovered that El Paso had failed to locate hundreds of additional foreign crossings. Many required a special weld that more than doubled the cost of the work. MasTec then sued for breach of contract, quantum meruit, quantum valebant, and fraud.  Considering “whether El Paso exercised due diligence in locating foreign pipelines and/or utility line crossings,” the jury found that El Paso failed to comply with the contract and awarded MasTec damages. The district court, however, granted a take-nothing judgment to MasTec as the contract clearly allocated the risk of loss for additional cost because of foreign crossings to MasTec. After the court of appeals reinstated the jury verdict, the Texas Supreme Court granted El Paso’s petition for review.

El Paso relied on the risk-allocation provisions of the contract under which MasTec agreed to perform “everything necessary to complete, satisfy, and discharge all Work and obligations” imposed on it. This included all labor, equipment, and materials described in the Specifications for all Work necessary to  perform the Work shown on the Drawings, including “welding (including tie-in and transition welds.” The scope of work stated: “Just because an item of Work is not specifically identified, does not mean such Work is not included in [MasTec’s] scope of work. Any item of Work [MasTec] knows is required for completion of the installation but not specifically identified is to be included in [MasTec’s] Lump Sum Proposal.” The Construction Specifications provided that El Paso “will have utilized due diligence  in locating foreign pipelines and utility line crossings.” However, the contract provided that 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.” 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,” and “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.” 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.”

MasTec argued that the broad “all risks” provisions of the contract were limited by the specific due diligence exception.  Thus, MasTec asserted that it was not responsible for locating foreign crossings that could have been discovered by El Paso with the exercise of due diligence. Otherwise, the court would not give effect to the due diligence provisions in the contract in violation of the rule of interpretation that the court should give effect to all provisions of a contract so that none are rendered meaningless. The court answered that the contract contemplated a joint effort by the parties. El Paso had to exercise due diligence to locate the crossings, and MasTec had to confirm the location of them and notify the owner prior to activity. Ultimately, however, the risk of omissions and inaccuracies fell on MasTec.

Although three Justices dissented on the ground that El Paso’s due diligence did not meet the industry standard because it did not locate and disclose 85-90% of the foreign crossings, the majority countered that the dissenters disregarded the intent of the parties in the contract  “that MasTec, which was given the complete alignment sheets and blank contract before it submitted a bid, acknowledged and assumed the risk of unknown foreign crossings, ‘notwithstanding’ any other provision in the contract or any information furnished by El Paso.” In essence, El Paso’s obligation to exercise due diligence did “not limit the risk allocated to MasTec for omissions and inaccuracies in El Paso’s foreign crossings information.” As the court concluded that the contract allocated risk for undiscovered foreign crossings to MasTec, it reinstated the judgment of the district court in favor of El Paso.

El Paso Field Services, L.P. v. MasTec N.A., Inc., No. 10-0648 (Tex. Dec. 12, 2012)

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First Investment Corp. of the Marshall Islands v. Fujian Mawei Shipbuilding, Ltd., No. 12-30377 (5^th Cir. Dec. 21, 2012).

Covington Marine Corp. v. Xiamen Shipbuilding Industry Co., No. 12-30383 (5^th Cir. Dec. 21, 2012).

These cases presented the issue of first impression in the Fifth Circuit: whether a court may dismiss a petition to confirm a foreign arbitration award based on lack of personal jurisdiction.

Both cases involved shipbuilding contracts with Chinese shipbuilders. Contractual disputes were referred to London arbitration, which ultimately resulted in awards against the shipbuilders. The shipping interests filed suits in China to confirm the awards, and the Chinese courts declined to enforce one award on the ground that it was not in accordance with the agreement signed by the parties while the other action remained unresolved. The shipping interests then filed actions in federal court in New Orleans to confirm the awards under the authority of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). The district court in New Orleans dismissed both actions.

In First Investment, the Fifth Circuit addressed the arguments that the foreign entities with no contacts to the United States were not entitled to the protections of the Fifth Amendment’s Due Process Clause and that personal jurisdiction was not a valid defense under the New York Convention. While the Fifth Circuit acknowledged that there have been statements in prior decisions to the effect that due process protections are not available to foreign entities without property or presence in the United States, the court noted that these cases were decided before the opinion of the Supreme Court in Goodyear Dunlop Tires Operations, S.A. v. Brown, 131 S.Ct. 2846 (2011), which indicated that foreign corporations could avail themselves of the Due Process Clause. Therefore, the Fifth Circuit found no basis for a court to exercise personal jurisdiction “without first establishing sufficient contacts between the defendant and the forum state.”

In support of its argument that a party against whom confirmation is sought under the New York Convention cannot raise personal jurisdiction as a defense, the shipping interests argued that personal jurisdiction is not one of the seven grounds enumerated in the Convention on which confirmation may be denied. While the Convention does not specify personal jurisdiction as a defense, the doctrine of personal jurisdiction is a Constitutional restriction on the exercise of judicial power. The Convention is an exercise of presidential and Congressional power, but constitutional due process takes precedence. The Treaty cannot “authorize what the [C]onstitution forbids.” Thus, the court is not “relieved of its responsibility to enforce those constitutional protections that guard a party from appearing in a forum with which it has no contacts,” and the foreign entities were permitted to raise a personal jurisdiction defense under the New York Convention as a matter of constitutional due process. Consequently, the Fifth Circuit affirmed the dismissal of the confirmation proceeding.

Based on its decision in First Investment, the Fifth Circuit similarly affirmed the dismissal of the action brought by the shipping interests in Covington Marine.

First Investment Corp. of the Marshall Islands v. Fujian Mawei Shipbuilding, Ltd.wpd

Covington Marine Corp. v. Xiamen Shipbuilding Industry Co.wpd

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Is corrosion “property damage” caused by an “occurrence?”

The CGL policies in issue provided coverage for “property damage” caused by an “occurrence.” The parties did not dispute that the defective fabrication and installation of the railings  constituted an occurrence. The sole dispute is whether the damage caused by the defective coating applied to the railings constitutes “property damage.”

Citing the Florida Supreme Court’s decisions in Auto-Owners Insurance Co. v. Pozzi Window Co., 984 So. 2d 1241 (Fla. 2008) and U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871, (Fla. 2007), the district court highlighted the following distinction drawn by the Florida Supreme Court:

[F]aulty workmanship or defective work that has damaged the otherwise nondefective completed project has caused “physical injury to tangible property” within the plain meaning of the definition of the policy. If there is no damage beyond the faulty workmanship or defective work, then there may be no resulting “property damage.”

The district court further highlighted this explanation from the Florida Supreme Court:

[T]here is a difference between a claim for the costs of repairing or removing defective work, which is not a claim for ‘property damage,’ and a claim for the costs of repairing damage caused by the defective work, which is a claim for “property damage.”

Where A Contractor’s Claim Is for the Cost of Repairing the Subcontractor’s Defective Work, It Is Not Covered by the CGL Policy.

The district court concluded:

Thus, where a contractor’s claim is for the cost of repairing the subcontractor’s defective work, it is not covered under a CGL policy. Where a contractor’s claim is for the cost of repairing damage to property outside of the subcontractor’s defective work (caused by the subcontractor’s work), it is covered under a CGL policy.

11-CV-81339-Structural Group, Inc. v. FCCI Comm. Ins. Co., et al (S.D. Fla. Dec. 11, 2012)

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This case involves a coverage dispute with respect to injuries to workers at underground storage tanks at the insureds’ gas station. Employees of a contractor hired to upgrade the underground storage tanks were injured in an explosion that resulted from fumes from a spillage of acetone. The employees brought suit against the owners of the gas station, which were insured on Century Surety’s CGL policy. Century Surety contended that it had no duty to defend or indemnify its insureds because of the Mold, Fungi, Virus, Bacteria, Air Quality, Contaminants or Other Harmful Materials Exclusion and the Total Pollution Exclusion.

The Harmful Materials Exclusion applied to:

‘Bodily injury’ … arising out of, caused by, or alleging to be contributed to in any way by toxic or hazardous properties of minerals or other substances.

Concluding that the injuries were contributed to “by a hazardous property (combustibility) of acetone (a substance),” the court held that the unambiguous exclusion applied and Century Surety had no duty to defend or indemnify its insureds. As coverage was excluded by the Harmful Materials Exclusion, the Eleventh Circuit did not address the application of the Total Pollution Exclusion.

Century Surety Co. v. Hallandale Beach Service Station, LLC, 2012 U.S. App. LEXIS 19648 (11th Cir. Sept. 19, 2012) (Florida Law).

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After the lawsuit naming Harvest, Zurich sent a reservation letter that cited the Steadfast policy, quoted the watercraft exclusion, and said it might apply. The letter said that Zurich would investigate the case subject to a reservation of rights. Harvest filed for bankruptcy, and Steadfast appointed counsel to represent Harvest. A subsequent suit named Steadfast, but not Harvest (because of the bankruptcy), and Steadfast appointed the same counsel to represent Steadfast. Steadfast did not assert a defense based on the watercraft exclusion at that time. Three adjusters for Steadfast did not realize the watercraft was a defense. Later, when an adjuster discovered the watercraft exclusion, new counsel was appointed for Steadfast in the subsequent suit. The district court then granted summary judgment to the plaintiff that Steadfast had waived its right to assert the watercraft exclusion as a defense.

Did Steadfast Ins. Co. Properly Reserve Its Rights under Louisiana Law?

The first question is whether Steadfast reserved its rights because under Louisiana law, because the waiver of noncoverage defenses is automatic without any necessity of establishing prejudice if the insurer assumes the defense of the insured without first issuing a reservation letter. Although the reservation letter did not state that Steadfast reserved its rights, it did quote the provision of the Steadfast policy. As Louisiana follows a functional approach, technical language is not necessary, and the letter was sufficient.

Did Steadfast Ins. Co. Waive Its Right to Assert the Watercraft Exclusion As a Defense?

The second question is whether Steadfast waived its right to assert the watercraft exclusion as a defense. The court first discusses the effect of the bankruptcy on the direct action proceeding. As the proceeds of the policy are not the property of the insured’s bankruptcy estate, the automatic stay did not apply to the direct action. The court adds that collateral estoppels, claim preclusion, and issue preclusion will not prevent the insured from relitigating any issues decided in the suit against Steadfast in the first action against the insured that was still stayed because of the insured’s bankruptcy.

Turning to waiver, the court concludes that Steadfast did not waive its coverage defense by its delay in asserting the defense in the direct action suit. There are two components to waiver: (1) misleading conduct on the part of the insurer and (2) prejudice to the insured. In its Steptore decision, the Louisiana Supreme Court held that the insurer must either have “an actual intention to relinquish the right” or the conduct must be “so inconsistent with the intent to enforce the right so as to induce a reasonable belief that the right has been relinquished.” The court does not resolve the “close question” whether Steadfast’s actions are sufficiently inconsistent with asserting the defense to satisfy the objective test because there was no subjective intent of waiver. It was just careless reading of the policy, and the court finds no evidence of prejudice to Harvest (depriving the insured of the opportunity to assume and manage its own defense or actual harm to the insured from the insurer’s inconsistent conduct).

Tim Sosebee, et al. v. Steadfast Ins. Co. (5th Cir. [Louisiana] Nov. 27, 2012)

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Where a Contract Contains an Arbitration Clause, Attacks on the Validity of a Contract Are Determined by the Arbitrator, Not the Court.

The Court noted the distinction between attacks on the contract compared to attacks on the arbitration clause. The court must determine in the first instance if an attack on the arbitration clause itself is valid; however, an attack on the validity of the contract must be determined by the arbitrator. As the challenge in this case is to the validity of the noncompetition agreement, the issue had to be submitted to the arbitrator to decide.

Where a Contract Subject to the Federal Arbitration Act (“FAA”) Contains Provisions Which May Be Invalid under State Law, the Arbitrator Decides the Validity of the Provision, Not the State Court.

The Supreme Court then addressed the argument that the Oklahoma statute, which specifically addressed covenants not to compete, should govern over the more general federal statute with its national policy in favor of arbitration. The Court again rejected the analysis of the Oklahoma Supreme Court and stated that the rule that “the specific governs the general” is only applicable to laws of equivalent dignity. That is not the case between federal law and state law because of the Supremacy Clause in the Constitution. The Court again lectured the Oklahoma court: “There is no general-specific exception to the Supremacy Clause.” The Court reasoned: “[W]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the [Federal Arbitration Act].” Consequently, it is for the arbitrator, not the court “to decide in the first instance whether the covenants not to compete are valid as a matter of applicable state law.”

Nitro-Lift Technologies, LLC v. Eddie Lee Howard, et al., 586 U.S. _____ (2012).

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Proposed TRCP 91a – Dismissal of Baseless Causes of Action

Proposed TRCP 91a would allow a party to move to dismiss a cause of action on the grounds that it has no basis in law or fact. The proposed rule explains that a cause of action has no basis in law if the allegations, taken as true, together with inferences reasonably drawn from them, do not entitle the claimant to the relief sought. The proposed rule further states a cause of action has no basis in fact if no reasonable person could believe the facts pleaded.

The motion to dismiss must be filed within 60 days after the first pleading containing the challenged cause of action is served on the movant and at least 21 days before the hearing on the motion. Any response to the motion to dismiss must be filed at least 7 days before the date of the hearing. While a party may nonsuit or amend the challenged cause of action in order to avoid the court ruling on the motion to dismiss, it must do so at least 7 days before the date of the hearing. Otherwise, the court must rule on the motion. If the respondent amends the challenged cause of action at least 7 days before the hearing, the movant may, before the hearing, file a withdrawal of the motion or an amended motion to address the amended cause of action.

The court must grant or deny the motion within 45 days if it being filed. The court must award costs and reasonable and necessary attorney fees to the prevailing party, except in actions by or against a governmental entity or a public official acting in his or her official capacity or under color of law.

In many ways, proposed TRCP 91a offers defendants facing suit in Texas state court a tool for the early disposal of cases much like a Rule 12(b)(6) motion to dismiss–something that the Texas Rules presently do not allow for. However, there are some appreciable differences. Perhaps the most significant difference is the possibility that a defendant could be on the hook for the plaintiff’s attorney’s fees in responding to the motion if the court denies the motion to dismiss. Additionally, while a federal court ruling on a Rule 12(b)(6) motion is required to disregard conclusory allegations in the complaint, proposed Rule 91a contains no such requirement.

Proposed TRCP 169 - Expedited Actions

Proposed TRCP 169 establishes an expedited path for cases where the total recovery being sought does not exceed $100,000, including damages of any kind, penalties, costs, expenses, pre-judgment interest, and attorney fees. The rule does not apply to claims governed by the Family Code, the Property Code, the Tax Code, or Chapter 74 of the Civil Practice & Remedies Code (medical liability).

In connection with this rule, the Supreme Court has also proposed to modify TRCP 47 to require a claimant to include in its original pleading a somewhat-specific statment regarding the relief sought by the party. The original pleading must specify whether that party seeks (1) only monetary relief of $100,000 or less, (2) monetary relief of $100,000 or less and non-monetary relief, (3) monetary relief over $100,000 but not more than $500,000, (4) monetary relief over $500,000 but more more than $1,000,000, or (5) monetary relief over $1,000,000. This allows a party to plead into the expedited trial process by claiming monetary relief of $100,000 or less.

When a case qualifies for expedited treatment, the following apply:

• The discovery period begins when the suit is filed and ends 180 days after the first request for discovery of any kind is served on a party.
• Each party is limited to a total of six hours to examine all witnesses in oral depositions. The parties may agree to expand this to 10 hours in total, but not more without a court order. The court may modify the deposition hours so that no party is given an undue advantage.
• Each party is limited to 15 interrogatories to another party.
• Each party is limited to 15 requests for production to another party.
• Each party is limited to 15 requests for admission to another party.
• A party may request, as part of a Rule 194.2 Request for Disclosure, another party to disclose all documents, electronic information, and tangible items that the disclosing party has in its possession, custody, or control and may use to support its claims or defenses.

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Following up on its own recent precedents, Lindo v. NCL (Bahamas) Ltd., 652 F.3d 1257 (11th Cir. 2011) and Bautista v. Star Cruises, 396 F.3d 1289 (11th Cir. 2005), the Eleventh Circuit U.S. Court of Appeals affirms a district court’s order compelling a Jones Act seaman to arbitrate in accordance with a seamen’s arbitration agreement.

Relying on Thomas v. Carnival Corp., 573 F.3d 1113 (11th Cir. 2009), Plaintiff argued that public policy prohibits the enforcement of the arbitration agreement. The court held that to the extent that Thomas allowed a plaintiff seaman to prevail on a new public policy defense under the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Thomas violated Bautista and Lindo. The court also held that public policy was no defense to enforcement of plaintiff’s arbitration agreement.

Kenneth Fernandes v. Carnival Corp., 09-15675 (11th Cir. Jul. 12, 2012)

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In re: Katrina Canal Breaches Litigation, No. 10-30249 (5th Cir. Sept. 24, 2012). 10-30249-CV1.wpd

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