Warren Buffett opines that “risk comes from not knowing what you’re doing.’’ This applies to our industry, as owners ask contractors to assume the risk of inaccurate contract documents and unknown or differing site conditions that may be encountered after construction begins. Texas law allows “freedom of contract’—owners can shift these risks to contractors. What happens if the contract contains unclear or contradictory language as to who is responsible for these risks? A judge or jury may decide the parties’ intent. This all-too familiar fact pattern is illustrated by MasTec North America Inc. v. El Paso Field Services LP, a recent appellate decision out of Houston.
El Paso hired MasTec to replace a pipeline near Victoria. El Paso thought it had shifted the risk of unknown “foreign crossings” (other pipelines) to MasTec. When MasTec accepted El Paso’s contract, MasTec represented in the contract that it visit the site, be familiar with the site conditions and correlate its observations with requirements of the contract, including subsurface conditions and obstructions.
However, at trial MasTec disputed this responsibility. Despite attempts to understand the site (including flying over the 68-mile route), MasTec was unaware that it would encounter 794 foreign crossings instead of the 280 were shown on the contract drawings.
What did the parties intend? El Paso argued that it shifted these risks to MasTec. MasTec argued that it relied on contract language that El Paso had used “due diligence.’’
After hearing the evidence, a jury found that El Paso breached the due diligence provision in the specifications and awarded $4.76 million to MasTec. The judge disagreed, entering her own judgment in favor of El Paso, ruling that the contract legally shifted the risk to MasTec.
MasTec appealed. The three-judge appellate court ruled that the contract was ambiguous. In a dispute involving an ambiguous contract, the court determined the parties’ intent using evidence outside the contract. The appellate court disagreed with El Paso that MasTec should have performed more investigation when El Paso already stated it used due diligence in providing locations of 280 crossings. The court interpreted MasTec’s duty as a limited duty to visually observe the site and correlate that with El Paso’s information. The appellate court concluded that MasTec did not assume all the risk, and it reinstated the jury’s award.
Contractors may like this appellate decision. Many contractors feel forced to accept contractual risk transfer that does not reflect reality. Don’t celebrate too quickly, though. Cases such as MasTec are unpredictable. This was a narrow victory. Consider that of the four judges hearing the case only two appellate judges (a majority of the appellate court) agreed with the jury. The litigation adds another layer of risk on top of an already risky contract.
So how do a contractor and an owner avoid having four judges and one jury determine the terms of their bargain? It takes time, effort and coordination among those involved in drafting or reviewing the component parts of the contract. In the MasTec contract, as in many contracts, the general terms and conditions (or “boiler plate’’) contradicted the specifications. Discrepancies can just as easily occur between boiler plate, general notes on plans or scope of work. It appears that El Paso didn’t coordinate language in different parts of the contract.
If contractors have different individuals reviewing the components of the contract without a coordinated effort the contract in its entirety, ambiguities in the form of gaps, discrepancies and contradictions may go unnoticed and form the basis of a later dispute. If a contractor finds a discrepancy early in the bid process, it can ask the owner for clarification or an addendum prior to bid or contract signing.
Another option is to outline the key points or risks that may affect contractor performance or profit. A checklist (“What could go wrong?’’) allows the contractor to evaluate the contract in all parts of the documents. If a questionable provision is found, negotiate a revision. Do not leave interpretation of questionable contract provisions to chance. Be extra careful with language passing risk of differing site conditions or adequacy of design to the contractor.
The parties to a contract know best what is intended when entering into a contract. Making sure that the contract clearly mirrors this isn’t easy. Careful consideration and cooperation among those drafting, reviewing and negotiating contract documents can lead to a clear agreement that is understood without help from the courts. Clarity in contracts reduces risk of disputes and litigation.