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«Pass-Through Claims in Texas: the aftermath of Interstate Contracting Corp. vs. City of Dallas Houston Bar Association Construction Law Section April ...»

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Pass-Through Claims in Texas:

the aftermath of Interstate

Contracting Corp. vs. City of

Dallas

Houston Bar Association

Construction Law Section

April 20, 2006

Joe R. Basham

Allensworth & Porter, LLP

620 Congress Avenue, Suite 100

Austin, Texas 78701

www.aaplaw.com

Nearly two years ago, the Texas Supreme Court decided Interstate Contracting

Corp. v. City of Dallas, 135 S.W. 3d 605 (Tex. 2004), which formally recognized the

validity of pass-through claims in Texas. Interstate Contracting held that Texas would join the majority of other states, and over 100 years of federal jurisprudence, permitting contractors to pursue the claims of their subcontractors. This decision has not only paved the way for contractors to prosecute claims on behalf of subcontractors, but may have opened the door for other previously untenable claims, including a general contractor’s claim against the architect, an owner’s claim against the architect’s consultant, and claims against the geotechnical engineer, thus blurring the lines of contractual privity and traditional claims prosecution.

Factual Background of Interstate Contracting In Interstate Contracting, the City of Dallas entered into a lump sum contract with Interstate Contracting Corp. to build two storm water detention lakes and three levees around the Southside Waste Water Treatment Plant in Dallas, Texas. ICC entered into two separate subcontract agreements with Mine Services, Inc. (“MSI”) to perform the bulk of the site work.

The instructions to bidders said:

All material required to complete Phase I construction shall be excavated first from the Northeast Borrow Area. When this resource has been excavated to finish grades the remainder of the required material shall be excavated from the Interior Borrow Lake Area.... All material required to complete Phase 1A construction shall be excavated from the Interior Borrow Lake and the channel work adjacent to the levee.1 Interstate Contracting Corp. v. City of Dallas, 407 F.3d 708, 714 (5th Cir. 2005).

However, the drawings provided to bidders contained the following disclaimer:

Subsurface information shown on these drawings was obtained solely for use in establishing design controls for the project. The accuracy of this information is not guaranteed and it is not to be construed as part of the plans governing construction of the project. It is the bidder’s responsibility to inquire of the City of Dallas if additional information is available, to make arrangements to review same prior to bidding, and to make his own determinations as to all subsurface conditions. Refer to Section 00220—Soils Investigation Data for additional information.2 Specification Section 00220 listed several reports containing the results of soil, subsurface, and geotechnical investigations, and encouraged bidders to examine this data and make their own investigations. The soil borings were made available to bidders at the construction engineer’s office, and after executing the subcontracts, MSI contacted the City’s engineer—LAN—to obtain the subsurface soil information.3 During construction, MSI discovered that the soils at the site were not suitable for use in building the levees—as represented in the documents prepared by LAN.

Specifically, MSI discovered that the designated “borrow” site had been previously designated and used as a spoil dump for previous City projects and did not have the required PI. Instead of using the soils from the lake excavation, as originally intended, MSI was forced to manufacture suitable fill materials by mixing sand with the limited quantities of clay available at the site. Obviously, the process of manufacturing the fill material slowed construction, and substantially increased MSI’s costs.

Interstate Contracting Corp., 407 F.3d at 714.

Interstate Contracting Corp. v. City of Dallas, 2000 WL 1281198 (N.D. Tex.) (memorandum opinion).

ICC filed suit against the City, for itself and on behalf of MSI, alleging breach of contract, quantum meruit, breach of implied warranty, and fraudulent inducement.

The City, in turn, filed a third-party petition against LAN for breach of contract and breach of implied warranty.4 The trial court ultimately dismissed the City’s claims against LAN.5 Despite the City’s objections, the trial court allowed ICC to pursue the claims largely on behalf of MSI. After an 11-day jury trial, the jury found that the City had breached its contract with ICC and had breached the implied warranty to provide accurate and suitable plans and specifications. The City appealed.

The Fifth Circuit was unable to discern whether Texas recognized pass-through claims, and therefore, certified the question to the Texas Supreme Court. The Supreme Court, after reviewing the law in other jurisdictions, ultimately held that Texas would permit a contractor to pursue claims on behalf of its subcontractor, provided the contractor remains liable to the subcontractor.

Interstate Contracting Corp., 2000 WL 1281198 (N.D. Tex.). LAN argued that the City’s breach of contract claim was simply an indemnity claim masked as breach of contract. After a hearing, the district court dismissed the City’s indemnity claim against LAN finding no enforceable contractual indemnity and no common law right to indemnity under these circumstances.





2000 WL 1281198 (N.D. Tex.). The court ruled that the City did not have a valid indemnity claim, and could not seek contribution from LAN.

The City’s right to claim contribution is derivative of Interstate’s right to recover from LAN.

Because LAN was never a party to the contract between Interstate and the City, Interstate has no right to seek contribution from LAN under the contract between Interstate and the City.

Accordingly, the City has no right to seek contribution from LAN under a breach of contract cause of action.

Because ICC’s claims against the City “sounded in contract alone” (the alleged injury was purely economic loss to the subject of the contract itself), ICC’s claims against the City were purely contractual. Thus, the City had no right of contribution from LAN.

The case went back to the Fifth Circuit to determine whether the City was liable to ICC and MSI for the allegedly defective contract documents regarding the subsurface soil conditions. ICC argued that the plans and specifications provided by the City were defective because they represented that ICC could obtain sufficient levee-fill material from the on-site locations. Alternatively, ICC argued that the City breached the contract by failing to provide the soil information referenced in the specifications.

The City, on the other hand, argued that the contract placed the risk of subsurface conditions on ICC, and therefore, it had not duty to provide any soil information to ICC. After a lengthy opinion examining Lonergan v. San Antonio Loan & Trust Co., 104 S.W. 1061 (Tex. 1907) and its progeny, the Fifth Circuit held that the contract placed the risk of defective plans and specifications on ICC, and that ICC waived any right to claim that the City breached the contract by not providing the soil reports by bidding on the project without the soil reports.

The City prevailed because of the language in the instructions to bidders, which became part of the contract documents. The relevant portions relied upon by the court

included the following:

• [t]he CONTRACTOR represents that he has satisfied himself as to the subsurface conditions at the site of the work.... [the contract documents] including subsurface conditions, are for information purposes only and are not warranted or represented in any manner to accurately show the conditions at the site of the work... All risks of differing subsurface conditions shall be borne solely by the CONTRACTOR;

• [CONTRACTOR] shall bear all losses, if any, resulting on account of the amount and character of the work, or because the conditions under which the

–  –  –

• BIDDERS are required, prior to submitting any proposal, to review the plans and specifications, proposals, contract and bond forms carefully; to visit the site of the work; to examine carefully local conditions; to inform themselves by their independent research, tests and investigations of the difficulties to be encountered and judge for themselves the accessibility of the work and all attending circumstances affecting the cost of doing the work... BIDDERS shall rely exclusively upon their own estimates, investigations, tests and other data which are necessary for full and complete information....

Based on this language, the Fifth Circuit had no trouble finding that the contract unambiguously placed the risk of defective plans and specifications on ICC. Since ICC bore the risk of defective plans, the City did not breach the contract with ICC when it provided the defective plans. Moreover, the court held that ICC waived any right to claim the City breached the contract by not providing the soil reports when ICC chose to bid on the project without the reports. “ICC was not forced to bid on this project, but chose to do so, knowing it did not have all of the information it wanted. In doing so, it assumed the risk that the site’s conditions might differ from its expectations.”6 Pass-Through Claims

The Supreme Court provided a very simple definition for pass-through claims:

It is a claim (1) by a party who has suffered damages.. ; (2) against a responsible party with whom it has no contract.. ; and (3) presented through an intervening party.

.. who has a contractual relationship with both.7 The only requirement for a valid Interstate Contracting Corp., 407 F.3d at 724.

Interstate Contracting Corp. v. City of Dallas, 135 S.W.3d 605, 610 (Tex. 2004).

pass-through claim is that the general contractor must be liable to the subcontractor, even if that liability is contingent upon an eventual recovery from the owner.

The requirement that the contractor remain liable to the subcontractor is a wellestablished requirement of pass-through claims in federal courts, as noted by the court in Severin v. United States, 99 Ct. Cl. 435 (1943). In Severin, the contractor agreed to build a post office in accordance with the drawings and specifications. The architect hired by the Government was required to furnish models to the contractor for use in building the marble caps and ornamental work. The contractor and his subcontractor, who was hired to cut the marble, were delayed because the architect failed to deliver the models on time. The models were not delivered on time because “the contract for the models had not been awarded because of faulty designs” furnished to the architect.

The Government approved a change order extending the contract time, but refused to give the contractor, or his subcontractor, a change order for the additional costs associated with the delays.8 Severin held that the contractor was permitted to recover from the Government for its own damages, but was not permitted to recover on behalf of its subcontractor.

We have, then, a case in which plaintiffs are suing for damages sustained by themselves as a result of the Government’s breach of contract and also for damages sustained by another person, a subcontractor. Plaintiffs may, of course, recover for their own loss.... [However for the claims of the subcontractor] we think plaintiffs may not recover. The subcontractor could not sue the Government since it has not consented to be sued, so far as relevant to this case....9 Severin, 99 Ct. Cl. 435, *5. The general contractor requested $73.71 for additional overhead, and the subcontractor requested $702 for additional labor and rental costs, and $35.10 for overhead. The total claim was for $810.81.

More importantly, however, the court held that the contractor was not permitted to recover on behalf of its subcontract because the contractor did not remain liable to

its subcontractor. The subcontract stated:

The Contractor or Subcontractor shall not in any event be held responsible for any loss, [damages], detention or delay caused by the Owner or any other Subcontractor upon the building... or by any other cause beyond the control of Contractor or Subcontractor....10 Because the contractor was not liable to the subcontractor, the subcontractor’s claim was independent of the contractor’s, and court held that the subcontractor could not, independently, sue the government. This is essentially the holding in Interstate Contracting, however, Interstate Contracting is factually distinguishable from Severin because ICC remained liable to MSI, even though that liability was contingent on a recovery from the City. The agreement between ICC and MSI contained the following

provision:

In the event SUBCONTRACTOR has a claim for which the Owner may be responsible, the CONTRACTOR, in its sole discretion, may initiate with the Owner, at the SUBCONTRACTOR'S expense and which shall include attorney's fees, any dispute or claim procedures provided for in

the Contract Documents for the use and benefit of SUBCONTRACTOR:

otherwise SUBCONTRACTOR shall have full responsibility for the preparation of its claims and shall bear all expenses thereof, including attorney's fees.

*** CONTRACTOR shall be liable to SUBCONTRACTOR only to the extent of the amount, if any, actually awarded as a result of the disputes [sic] process: SUBCONTRACTOR shall be entitled only to

the amount, if any, actually awarded as a result of the disputes process:

Id.

Id. at *6 (emphasis added).

and such amount when received by CONTRACTOR from the Owner shall satisfy and discharge CONTRACTOR from any and all liability to SUBCONTRACTOR for or on account of the acts or omissions of the Owner or its Architect or Engineer.11 Here, ICC was liable to its subcontractor, but only for any amounts actually recovered from the City, which satisfied the Supreme Court’s requirements for passthrough claims.



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