Differing or Unexpected Site Conditions Clauses at Issue in El Paso Field Services v. Mastec North America, Inc.

In January, the Texas Supreme Court heard oral arguments in MasTec N. Am., Inc. v. El Paso Field Servs., L.P., 317 S.W.3d 431 (Tex. App.—Houston [1st Dist.] July 6, 2010, pet. granted), and may soon resolve an important risk-allocation issue applicable to construction projects throughout Texas.

The case concerns the enforceability of what is typically referred to in the industry as a “differing or unexpected site conditions clause.”  Members of construction projects often attempt to shift the risk of unanticipated site conditions—unexpected underground conditions that lead to higher construction costs, for instance—to others.  Owners therefore frequently require builders to investigate the site’s conditions, factor into their construction bids any potential unexpected costs, and assume all risks for accelerating construction costs.  Builders, for their part, will seek some assurances from the owner that reported site conditions (to the extent there are any) are accurate.

In MasTec, a builder and an owner—one of the largest energy companies in the world—entered into a lump-sum (sometimes referred to as a fixed price) contract for the construction of a $3.6 million butane pipeline.  The contract contained a differing site conditions clause attempting to shift the risk for unanticipated conditions to the builder.  For example, the builder represented in the contract that it had “visited the site of the Work, [was] familiar with the local and special conditions under which the Work [was] to be performed. . . and [had] fully acquainted itself with the site, including without limitation, the general topography, accessibility, soil structure, subsurface conditions, obstructions and all other conditions pertaining to the Work and [had] made all investigations essential to a full understanding of the difficulties which may be encountered in performing the Work[.]”  Id. at 436-37.  Further, the builder assumed “full and complete responsibility for any such conditions pertaining to the Work, the site of the Work or its surrounding” notwithstanding “any representations, statements or information made or furnished by the [owner.]”  Id.  However, the contract also stated that the owner “will have exercised due diligence in locating foreign pipelines and utility line crossings” on the site premises, though the builder remained responsible for confirming “the location of all such crossings[.]”  Id. at 438.

Although the owner had identified 280 pipeline right-of-way crossings prior to construction, the builder subsequently encountered over 794 of these crossings, which, according to the jury, increased the builder’s construction costs by nearly $5 million.  The trial court originally rendered judgment for the owner on the basis of the lump-sum contract.  The Houston Court of Appeals, First District, reversed, holding that the owner had breached its agreement to exercise due diligence in locating foreign pipelines and utility line crossings.

Importantly, after analyzing several Texas cases concerning the responsibility for differing site conditions, the Court held that a builder or contractor “is not precluded, as a matter of law, from recovering against an owner, under a breach of contract theory, for defective specifications, notwithstanding. . . pre-bid investigation provisions in the contract, if the owner was in a better position to know whether its specifications were sufficient for its intended scope of work and. . . the owner made positive assurances concerning the reliability of those specifications.”  Id. at 456.  The case therefore has important ramifications for owners and builders on construction projects, as it implicates the ability of owners to shift the risk of unexpected site conditions to builders.