Senator Bryan Hughes (R-Mineola) and Rep. Jeff Leach (R-Plano) have filed companion legislation to reverse in part a 2012 Texas Supreme Court decision that enforced a contractor’s obligation under a construction contract to assume full responsibility for work performed in accordance with plans provided by the owner. The legislation, SB 219 and HB 1418, relieves a contractor of responsibility for the consequences of defects in plans, specifications, or other design or bid documents provided to the contractor by the person with whom the contractor entered into the contract. The bill specifies further that the contractor does not warranty the accuracy, sufficiency, or suitability of such plans. The bill requires the contractor to disclose in writing the existence of any known defect discovered by the contractor before or during the construction or lose the liability protection for the consequence of known, undisclosed defects. This protection cannot be waived by contract.
Similar legislation failed to pass in 2017 and 2019 over opposition from owners, designers, and architects. TCJL helped to coordinate negotiations with the contractor groups in an effort to resolve the very significant issues involved in reallocating risk in complex construction projects. In 2019 TCJL floated the concept of a carve-out for critical infrastructure facilities, which is reflected in the filed versions of SB 219 and HB 1418. We also proposed exempting design-build contracts from the bill, since in those cases the contractor plays a major role in the design of the project. That language did not make its way into the bills.
It might be helpful to refresh everyone’s memory about the origin of this issue.
Spearin and MasTec
In 2012 the Texas Supreme Court decided El Paso Field Services, L.P. v. MasTec North America. The case involved the risk allocation provisions of a pipeline construction contract in which the pipeline owner failed to provide accurate information to the contractor regarding the location of foreign crossings, the existence of which raised the costs of constructing the pipeline. The contractor sued the owner for breach of contract based on the owner’s failure to compensate the contractor for the increased construction costs. The owner responded that the due diligence provisions of the contract did not relieve the contractor from the obligation to confirm the location of the crossings and that the contract required the contractor to assume full responsibility for the work and the site of the work.
The Court, following its precedent, held that the contract assigned the risk of the undiscovered crossings to the contractor, and that the owner’s due diligence obligation did not limit this risk. In this respect, Texas law runs counter to the federal rule enunciated in United States v. Spearin (1918), which places the risk of defective plans and specifications on the party that provides the plans, not on the contractor hired to build according to those plans. Subsequent cases and numerous decisions in other states have ruled that owners impliedly warrant both the accuracy of the specifications in the contract documents and the suitability of the specifications, i.e., that if the contractor follows the specifications it will build a structure suitable for its intended purpose.
It is obvious that owners prefer the MasTec rule, but not for the reasons one might think. Risk allocation, especially between sophisticated parties, is a fundamental feature of construction contracts. The objective of risk allocation is to provide insurance for the owner for liability arising from the work of independent contractors over whom the owner does not exercise control. The cost of this insurance is reflected in the contract bid and is ultimately paid by the owner. In other words, MasTec does not take an owner off the hook. It merely recognizes that an owner pays the contractor both to insure the contractor’s work and to defend the owner in the event of a construction defect claim. In construction liability litigation involving multiple parties (owners, general contractors, subcontractors, engineers, designers, architects), the MasTec thus rule simplifies the litigation by aligning the owner with the general contractor.
The Spearin rule, by contrast, breaks this unity and sets up the potential, if not likelihood, for litigation between the owner and general contractor in every construction defect case, not just those arising from defective plans. How the defect occurred—whether as a consequence of defective plans or a contractor error—is a hotly contested fact issue in every case. Spearin creates a lawsuit within a lawsuit between the owner and the independent contractor over the cause of the defect. But while MasTec consolidates the defense of the claim, which the owner has already paid for, Spearin defeats the purpose of contractual risk allocation by pulling the owner into the litigation and compelling it to sue any and all parties that had some part of the work on the project and might have caused the defect. If the Spearin rule were adopted in Texas, it would likely have the effect of increasing the cost of construction (by shifting liability back to the owner, eliminating the common defense of the claim, and increasing the potential for additional litigation costs). It might also result in smaller contractors from getting work on major projects, leaving the field to the big ones that can afford the freight that Spearin could add to project costs.
This is especially the case for the kinds of large-scale, complex industrial and infrastructural projects going on all across Texas. The fact that Texas follows the MasTec rule has not slowed down construction and development, nor has it, to our knowledge, put any contractors out of business. In fact (at least prior to the pandemic), the sheer demand for construction has produced a seller’s market that favors experienced contractors with the wherewithal to do the work. Texas has a long and proud tradition of respecting the freedom of private parties to contract, and there is no policy reason that parties to a construction contract, especially those that are sophisticated and accustomed to working on complex projects, should be prohibited by the state from allocating risk to their mutual benefit.
For these reasons, TCJL has opposed efforts to overturn the MasTec rule. At the very least, however, critical infrastructure projects should excepted from Spearin because the parties simply do not need the state to intervene in the deals they have been making for decades. TCJL very much appreciates Senator Hughes and Representative Leach including this language in the filed version of their legislation, and we look forward to working with them this session.