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"Texas Supreme Court Enforces 'All Risks' Clause on Contractor in Pipeline Construction Dispute"

What happens when a contractor encounters far greater obstacles to its construction project than either the contractor or the owner anticipated? That circumstance is a frequent source of disputes, and the December 21, 2012 Texas Supreme Court’s decision in El Paso Field Services, L.P. v. MasTec North America, Inc., continued a trend toward strictly enforcing allocations of risk in contracts according to their terms.

MasTec signed a $3.6 million lump sum contract to replace an El Paso pipeline. In the contract, El Paso promised it exercised “due diligence” in identifying foreign crossings to the pipeline, and identified 280 such crossings, and placed “all risks” of unanticipated problems on MasTec. However, during construction, MasTec encountered 794 foreign crossings.

A jury found that El Paso breached the due diligence provision and awarded $4.7 million to MasTec. The trial judge disagreed, saying the contract specifically allocated the risk of unidentified crossings to MasTec. The Court of Appeals reinstated the jury’s verdict in favor of MasTec based on its finding that the contract’s “all risk” provision did not preclude recovery due to El Paso’s alleged breach of the contract’s due diligence provision. However, the Texas Supreme Court disagreed, holding that “the contract allocated risk for undiscovered foreign crossings to MasTec, and MasTec therefore must bear the loss of additional costs associated with the unknown foreign crossings.”

Owners and contractors should carefully consider the risks of the unexpected in preparing their contracts. If they agree to a risk allocation that proves to be “unfair,” that won’t prevent its enforcement.

For the full opinion, see here.

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