April 23, 2010

Owners commonly provide subsurface soil data and other site conditions reports as part of the bid documents provided to prospective bidders. Fearful of assuming liability for the accuracy of plans, borings, and other subsurface data provided to contractors, owners traditionally include exculpatory clauses that purport to shift the risk of inaccurate data away to the contractor.  These clauses typically state that the data is provided for information only, the owner makes no warranties as to the accuracy of the data, and the contractor expressly assumes all risk that the conditions encountered differ from the conditions described in the reports.

When the proffered reports contain misrepresentations or withhold critical information, the efficacy of such clauses and owners’ liability for the erroneous information are at issue. That is, may an owner escape liability for withholding pertinent information or for providing knowingly inaccurate information simply by disclaiming all responsibility for the data? Two recent cases, one set in Pennsylvania and the other in Texas, highlight the differences in the approaches taken by the courts.

Pennsylvania: Exculpatory Clause Doesn’t Excuse Fraud Representation of Balanced
Sitework
The first case, Dep’t of Gen. Servs. v. Pittsburgh Bldg. Co., 920 A.2d 973 (Pa. Commw. 2007), involved a contract to construct an armory building for the State of Pennsylvania. Pennsylvania’s Department of General Services (DGS) provided bid documents stating that the project consisted of a balanced site, where soils from higher elevations could be borrowed to fill lower elevations without the necessity of using outside fill materials. The bidding documents also contained a geotechnical soil report that demonstrated adequate soil conditions. The soil report notably lacked any mention of clayey soils or subsurface springs, which would create compaction problems and make the soils unsuitable to be used as fill.  When the winning bidder, Pittsburgh Building Company (PBC), later encountered large amounts of clayey soils and subsurface springs on the project site, it was unable to compact the soil and resorted to remedial measures that led to a lengthy project delay. PBC sued for the delay damages it suffered due to the unsuitable soils.

Key Information Withheld
PBC subsequently discovered that DGS employees had, prior to the release of the bid documents, identified a significant presence of clayey soils on the site. This information was contained in an internal report that concluded with an assessment that the site was unsuitable for earthwork when PBC was instructed to proceed. The existence of unsuitable soils effectively negated the concept that the site work would be “balanced,” meaning that soils would need to be imported from offsite locations.  As DGS withheld this information and the report from the bid documents, PBC argued that DGS had engaged in constructive fraud and active interference with PBC’s performance.

DGS relied on the broad exculpatory clause contained within PBC’s contract. The contract required PBC to “assume all risk in excavating for this project” and stated that PBC “shall not be entitled to rely on any subsurface information” obtained from DGS. Thus, DGS argued that it had no responsibility for either the disclosed soil report indicating the presence of suitable soils on the site or the undisclosed internal report indicating unsuitable soils.

The Commonwealth Court of Pennsylvania disagreed with DGS. First, the court found that DGS committed fraud by affirmatively misrepresenting the site’s soil conditions.  DGS knew of unsuitable soils on the site, yet it disclosed only bidding information that demonstrated adequate soil conditions. The court also found that these acts constituted active interference with PBC’s contractual duties as DGS directed PBC to commence work without disclosing the unsuitable conditions, thereby preventing PBC from timely completing its work.

As a result of its fraud and active interference, DGS was unable to rely upon the exculpatory contract provisions.  The court distinguished earlier cases in which broad exculpatory provisions were upheld, noting that in those cases, the party seeking exculpation lacked any prior knowledge of disfavorable conditions. As DGS had prior knowledge, the court would enforce the exculpatory provisions.

Texas: Exculpatory Clause Enforced Against Contractor
In a contrasting case, the U.S. Court of Appeals for the Fifth Circuit applied a series of broad exculpatory clauses to reverse a $3 million jury verdict in favor of the contractor.
Interstate Contracting Corp. v. City of Dallas, 407 F.3d 708 (5th Cir. 2005). This case arose out of a City of Dallas (“City”) contract with Interstate Contracting (“ICC”) to construct a levee around a water treatment facility. The contract also called for ICC to excavate two areas to create stormwater detention lakes. The excavated soil from the lakes, if suitable, could be used to create the levee, thereby reducing the costs of the work.

The City provided all bidders with contract documents that required all fill material for the levee to be excavated from the lakes with one section of the plans designating several onsite borrow locations. Another section of plans referenced soil and subsurface reports available for review; however, the City disclaimed the subsurface data and encouraged bidders to examine the data and make their own investigation of the site prior to bidding on the project.

The contract between the City and ICC contained numerous exculpatory provisions. “All risks of differing subsurface conditions shall be borne solely by the CONTRACTOR.” ICC “shall bear all losses . . . because the conditions under which the work must be done are different from what were estimated or anticipated . . . .”

The contract also stated that all bidders “shall rely exclusively upon their own estimates, investigations, tests and other data . . . .”

When the lake excavation failed to yield sufficient quantities of suitable soil for construction of the levee, ICC brought suit against the City and won a $3 million jury award at trial. ICC argued that the plans indicated that ICC would be able to extract sufficient levee fill material from onsite locations. This amounted to a misrepresentation by the City and stood as the basis for ICC’s recovery.

Upon appeal to the Fifth Circuit, the City argued that the exculpatory provisions of the contract relieved it of liability for ICC’s claims. The court agreed with the City, noting that the risks of the soil conditions had been clearly and expressly shifted to ICC. The court also found that the contract specifically disclaimed the adequacy of the plans and required ICC to rely exclusively upon its own site investigations. In the court’s view, ICC’s contract with the City relieved the City of liability for plan errors – it did not amount to a warranty of the plans by the City.

Practical Note
These two cases highlight the subtle differences in facts that can lead courts to reach different outcomes. In the Pennsylvania case, the owner possessed information that contradicted the reports it provided to bidders.  Providing knowingly inaccurate information was fraud, and this was a sufficient basis for disregarding the contract’s exculpatory provisions. In the Texas case, the owner-supplied information turned out to be incorrect, but there was no assertion that the City knew of the errors.  Thus, the exculpatory provisions prevailed.

Contractors must be aware of the risks of unexpected site conditions. Who has the responsibility to explore the site conditions? Who bears the risk that the ownerfurnished information might be inaccurate? Who bears the risk of unexpected site conditions? A contract that shifts the duty to investigate the site and all the risks of unexpected conditions onto the contractor should be carefully considered.

Mark S. Wierman
704/335-5017
[email protected]
Member of the State Bars of North Carolina and
Virginia