Interstate Contracting Corp. v. City of Dallas
407 F.3d 708, 2005 U.S. App. LEXIS 6981, 2005 WL 928593 (2005)
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Rule of Law:
An unambiguous construction contract that explicitly disclaims warranties for owner-provided information and places the risk of differing subsurface conditions on the contractor will be enforced as written, barring the contractor's claims for breach of contract and breach of implied warranty arising from such conditions.
Facts:
- On September 14, 1994, the City of Dallas entered into a fixed-sum contract with Interstate Contracting Corporation (ICC) for a levee construction project.
- The contract specified that material excavated from two designated 'borrow' sites was to be used as fill for the levees.
- ICC subcontracted the excavation and construction work to Mine Services, Inc. (MSI).
- Shortly after beginning work in October 1994, MSI discovered that the materials in the designated Interior Borrow Lake were not suitable for use as levee fill.
- To create suitable fill, MSI was forced to manufacture it by mixing sand with the limited available clay, a process not addressed in the contract which substantially increased its costs.
- The contract contained multiple provisions stating that ICC was responsible for investigating the site, that any information provided by the City was not warranted, and that 'All risks of differing subsurface conditions shall be borne solely by the Contractor.'
- ICC notified the City of the increased costs due to the unsuitable soil and other issues, but the City indicated it would deny the claims.
Procedural Posture:
- Interstate Contracting Corporation (ICC), on behalf of its subcontractor, sued the City of Dallas in federal district court (trial court).
- The claims for breach of contract and breach of implied warranty were tried before a jury.
- The jury found in favor of ICC and awarded it $3,046,964 in damages.
- The City of Dallas (appellant) appealed the trial court's judgment to the U.S. Court of Appeals for the Fifth Circuit.
- The Fifth Circuit certified questions to the Supreme Court of Texas regarding the validity of 'pass-through' claims, which the Texas court answered in the affirmative.
- The case then returned to the Fifth Circuit for a decision on the merits of the City's appeal.
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Issue:
Does a construction contract that unambiguously places the risk of differing subsurface conditions on the contractor and disclaims any warranty as to the accuracy of owner-provided plans bar the contractor's claims for breach of contract and breach of implied warranty when the site conditions differ from those anticipated?
Opinions:
Majority - Davis, District Judge
Yes. A contract that unambiguously allocates the risk of differing subsurface conditions to the contractor bars the contractor's subsequent claims for increased costs arising from those conditions. Under Texas law, for an owner to be liable for defective plans, the contract must evidence an intent to shift the risk to the owner; this contract did the opposite by explicitly placing all such risks on ICC. The contract's multiple, clear disclaimers made any reliance by ICC on the City's plans unjustifiable, thereby defeating its breach of implied warranty claim. The court reasoned that sophisticated parties are free to allocate risks as they see fit, and unambiguous contractual provisions will be enforced as written. Furthermore, ICC's remaining claims for other costs were barred because it failed to strictly comply with the contract's claims procedures, which were an express condition precedent to payment.
Analysis:
This decision strongly reinforces the principle of freedom of contract and the enforceability of unambiguous risk-allocation clauses in construction agreements. It serves as a significant precedent in Texas law, clarifying that general disclaimers and site investigation clauses are effective in shifting the entire risk of unforeseen subsurface conditions to the contractor. The ruling puts contractors on notice that they cannot rely on owner-provided data in the face of such disclaimers and must conduct their own thorough due diligence or price the risk of uncertainty into their bids. This case limits the applicability of the implied warranty for owner-provided plans (the Spearin doctrine in federal law) where a contract expressly assigns the risk elsewhere.
