Texas Supreme Court Enforces “Differing Site Conditions” Clause

two metal pipes

In El Paso Field Services, LP v. MasTec North America, Inc., No. 10-0648, 2012 WL 6634023 (Tex. Dec. 21, 2012), MasTec entered into a lump sum contract with El Paso to construct a $ 3.6 million butane pipeline for El Paso.  The contract contained a “differing site conditions” clause, which shifted the risk for unanticipated conditions to MasTec. MasTec also assumed “full and complete responsibility for any such conditions pertaining to the Work, the site of the Work or its surroundings” notwithstanding “any representations, statements or information made or furnished by [El Paso].” However, the contract also provided that El Paso would exercise due diligence in locating foreign crossings in the pipeline route on the worksite premises.

During the bidding process, El Paso identified 280 pipeline crossings. During construction, however, MasTec encountered over 794 pipeline crossings. These additional crossings, which were not factored into MasTec’s bid, increased MasTec’s construction costs by approximately $ 5 million.

MasTec then sued El Paso for breach of contract, claiming that El Paso had failed to exercise the due diligence required by the contract in locating the pipeline crossings. The jury returned a verdict in favor of MasTec, but the trial court granted El Paso’s motion for judgment notwithstanding the verdict.

On appeal, the Houston Court of Appeals reversed, finding that MasTec’s commitments and representations under the contract did not preclude it from recovering against El Paso on the basis of El Paso’s failure to exercise due diligence. Specifically, the Houston Court of Appeals held that “[e]ven when the contract places the risk of differing or unexpected site conditions on the contractor, the contractor is not, as a matter of law, required to bear the risk ‘that the bid documents misrepresent the nature and amount of the work to be performed.’”

The Texas Supreme Court then reversed the Houston Court of Appeals. The Texas Supreme Court held that the terms of the contract between MasTec and El Paso were clear―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.” MasTec also agreed that it had “made all investigations essential to a full understanding of the difficulties which may be encountered in performing the Work.” Accordingly, the Texas Supreme Court found that because the contract allocated the risk for undiscovered foreign crossings to MasTec, MasTec had to bear the additional costs associated with the unknown foreign crossings.