Texas Supreme Court – Due Diligence Clause Does Not Override Shift of Risk to Contractor That Acknowledges Potential for Hidden Additional Work

January 14

El Paso Field Services, L.P. v. MasTec North America, Inc., No. 10-0648 (Tex. Dec. 21, 2012).

 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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