July 30, 2014
With all due respect to Willie Nelson, three Texas Supreme Courts decisions—one from way back in 1907, one from 2012, and a third fresh off the presses—in combination virtually guarantee financial ruin for Texas general contractors. In contrast with the rest of the country which generally provide relief to a contractor who suffers higher than anticipated costs of performance caused by an architect’s defective design, Texas contractors are more likely to be told “three strikes and you’re out!”
The Rest of the Country
Every large construction project requires a marriage of two talents: an architect’s design of how the completed project should look and implementation of that design by a general contractor. Traditionally, the owner separately hires the architect and general contractor; there is no privity between the designer and builder.
The contractor reviews the architect’s design when pricing a job. Suppose the contractor during performance of the work finds mistakes in the design? Maybe component parts don’t fit together, or an underground obstruction is not revealed, or necessary information is simply missing or ambiguous. These defects in the plans and specifications invariably mean the contractor spends more time and money on the project than he originally anticipated.
What relief is available to a contractor stuck with a defective design? The hornbook rule—adopted everywhere but in Texas—was established by Justice Brandeis in 1918. In United States v. Spearin he held that the owner impliedly warrants to the contractor that the design is buildable. Absent an agreement between the owner and contractor to the contrary, the risk of a defective design lies with the owner. Generalized disclaimers, such as requiring the contractor to acquaint himself with the site conditions, are insufficient to defeat the implied warranty.
A building nearing completion collapses and the contractor blames the accident on defects in the architect’s design. It is 1907, so the privity rule bars the contractor from suing the architect directly. Who between two innocent parties—the owner and the contractor—should bear the expense of rebuilding the structure? In Lonergan v. San Antonio Loan & Trust Co., the Texas Supreme Court placed the risk of a defective design on the contractor. The court ruled that, absent express contractual language, contractors accept a contract and its design at their peril. The specifications are not guaranteed by the owner.
The economic loss rule (ELR) bars the recovery of economic losses under a theory of nonintentional tort where the underlying claim did not involve personal injury or damage to other property. The States are divided as to whether the ELR applies to a contractor’s negligent design or negligent administration claim against the architect. How about Texas?
In LAN/STV v. Martin K. Eby Construction Co. Inc., the court in June of this year ruled that the ELR applies to contractor’s negligent misrepresentation claim against the architect alleging defects in the design. The court reasoned that the ELR should apply because this dispute is adequately resolved through application of contract law: the contractor may by contract shift the risk of defective design to the owner, and the owner in turn can sue the architect. One purpose of the ELR is to promote private ordering of risks. The risk of economic losses should be allocated by agreement of the parties, not by negligence or strict liability law.
In a 2012 decision, El Paso Field Services, L.P. v. MasTec North America, Inc., an energy company (El Paso) decided to replace a gas pipeline built in the 1940s that it had recently purchased. In preparation for seeking bids on the project, El Paso hired an engineering firm (Gullett) to identify “foreign crossings” that cross the pipeline’s right of way. Importantly, although Gullett’s report was given to the bidders, the contract also required contractors to acquaint themselves with actual site conditions prior to bidding.
MasTec, the successful bidder, sued El Paso for increased performance costs, asserting that it had encountered 794 foreign crossings not identified in the engineer’s report. MasTec pointed out that it did not have access to the entire pipeline’s easement and parts of the area had to be viewed from a helicopter. It should not have to bear the cost of the defective Gullett report, it contended.
The MasTec court was unmoved by the contractor’s arguments and instead ruled in favor of the owner based on the contract’s requirement that the contractor acquaint itself with the site conditions before submitting a bid. This ruling in favor of El Paso, the court stated, finds support in the Lonergan decision: “Here, as in Lonergan, El Paso did not guarantee the accuracy of Gullett’s alignment sheets. El Paso and MasTec both relied on what Gullett’s surveyors were able to locate, with the negotiated provision that MasTec would confirm the surveyor’s work and assume the risks of ‘subsurface conditions, obstructions, and other conditions pertaining to the Work.’”
These three decisions, taken together, make Texas a dangerous State for prime contractors who build using less than pristine plans and specifications. First, LAN/STV instructs contractors to look to the owner—not the architect—to recover increased performance and delay costs caused by defects in the design.
Second, under Lonergan, absent express contract language to the contrary, the risk of a defective design lies with the contractor, not the owner.
Third, the MasTec court’s willingness to enforce one-sided and harsh disclaimers in favor of the owner with regard to site conditions as a practical matter eviscerates the rationale of private ordering underlying the LAN/STV court’s adoption of the ELR. After all, any owner who by contract disclaims responsibility for the quality of the design can be confident this contract defense will be enforced by Texas courts.
In a nutshell: The ELR prevents the contractor from suing the architect in tort; under Lonergan the contractor seeking to recover the cost of economic losses caused by a defective design must obtain the consent of the owner; and under MasTec, one-sided contract provisions disclaiming the owner’s responsibility for the quality of the design will be enforced by the courts. The contractor is left with a financially ruinous project to build because of a negligent design, with no remedy against either the architect or owner. Whose mamma would want that of her son or daughter?
Counsel for general contractors are duly warned, although it is not clear what they (or their clients) can do about it other than not bid on the job.