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Energy & the Law

In Texas Contract Dispute, Risk Allocation Trumps Due Diligence Duties

Posted in Construction, Contract Disputes

There are certain cases that litigants and their lawyers find difficult to resolve: Lots of money on the line, two reasonable interpretations of a complicated agreement and, I suspect, parties who seek vindication for their actions. El Paso Field Services, L.P.  v. MasTec North America, Inc. is one of those cases.

The Question:

In a pipeline construction contract, which language prevails: Explicit risk-allocation provisions or due diligence specifications? See my January 25, 2012, blog for the court of appeal ruling on the case (This one is from the Texas Supreme Court).

The Takeaways:

  • A promise in your contract to perform a certain job for a fixed sum will not be excused because of unforeseen difficulties. If you want it any other way, be sure your contract says it.
  • A court’s role is not to redistribute risks and benefits of a contract, but to enforce the allocation that the parties agree upon.
  • If the plaintiffs’ bar were going to write a song to the Supreme Court, it might go like this.

The Facts

El Paso purchased a 1940s-era pipeline and made plans to remove the old pipeline and construct a new one. MasTec bid on the project. Tellingly, Mastec’s $3.6M bid was less than half of any other bid.

The only as-builts El Paso had were from the 1940’s and did not show crossings installed after the pipeline was constructed. MasTec understood the risk of underground surprises, assumed the risk of such surprises, and included a contingency markup in its bid. The problem was that MasTec underestimated the amount of that risk.

A survey found 280 “foreign crossings” along the right-of-way. In reality, there were at least 794 foreign crossings.

The Contract

Among other things, MasTec represented that it (1) had fully acquainted itself with the site, including topography accessibility, sub-surface conditions, and obstructions, (2) had an opportunity to examine the contract documents, scope of work, and existing facilities, (3) would perform all the work for the compensation stated in the contract, and (4) assumed full and complete responsibility for “all risks”.

El Paso represented that it will have exercised due diligence in locating foreign pipelines and utility line crossings, but Mastec was to confirm the location of all such crossings.

The Litigation History

The jury said El Paso breached the contract and awarded MasTec $4.7MM; the trial court took it away (finding that the contract allocated to MasTec the risk of additional costs for foreign pipeline crossings); the court of appeal (2 to 1) reinstated the jury award; the Supreme Court (6 to 3) said the risk of undiscovered foreign crossings was on MasTec. Result: MasTec’s claim was rejected.

The court observed that MasTec could have protected itself by having the contract contain a term that would imply the owners “guarantee of the sufficiency of the specifications”. El Paso did not guarantee the accuracy of the alignment sheets and as-builts.

The Dissent

Three dissenting justices believed that El Paso did not exercise due diligence because it found only 35% of the foreign crossings and not the industry standard 85 to 95%, and that El Paso’s specific duty of due diligence prevailed over the more general risk allocation requirements in other parts of the contract.