Legal Issues

Facts
On September 14, 1994, Interstate Contracting Corporation (ICC), plaintiff-appellee, and the City of Dallas, Texas, defendant-appellant, entered a fixed contract for the excavation of two areas in Dallas, Texas to construct storm water detention lakes for the levee construction around the City water treatment plant and other various work including linear depth checking, surveying, and trash removal. The specifications of the agreement provided that the material excavated from other sites, such as the two areas intended for detention lakes, would be used as the fill materials to pack the levees. However, because the excavated materials did not produce sufficient amounts of appropriate filling materials, ICC manufactured fill material by mixing limited quantities of clay with sand through its subcontractor Mine Services, Inc. (MSI). Expectedly, this approach substantially increased the subcontractors operating costs as well as decreased its productivity.

On March 1, 1995, ICC consequently informed the City of Dallas of the aforesaid problem, but the latter denied the said claims of ICC. As a result, ICC filed in the district court of Texas a legal action against the City on behalf of MSI for fraudulent inducement, breach of implied warranty, quantum meruit, and breach of contract. Eventually, after almost two weeks of trial, the jury ruled that the City has breached its contract with ICC by failing to reimburse the additional expenses paid by the latter with regard to (1) delays caused by the City (2) survey costs (3) linear depth checking (4) trash removal and (5) unanticipated subsoil conditions. Furthermore, the jury held that the City has breached an implied warranty to provide suitable and accurate specifications and plans considering the project sites subsoil conditions. Because of these findings, the City appealed the judgment, by raising a number of evidentiary and legal issues.

Issues
Whether or not the Texas laws recognize pass-through claims and the requirements needed to be satisfied by a contractor to assert a claim on behalf of its subcontractor and
Whether or not the City of Dallas, Texas is liable for the alleged breach of plans and specifications in the contract with ICC.

Decision
With regard to the first issue, the appellate court held that since there is no existing precedent from either the Supreme Court of Texas and the Court of Appeals of Texas to resolve the right of a general contractor to assert claim on behalf of its subcontractor, the Court answered the issue by holding that a general contractor can bring claims on behalf of a subcontractor. The Court noted, however, that it is indispensable that the contractor remains liable to the subcontractor for damages sustained by the latter in order to bring a pass-through claim. The conditional liability as expressed in some claims-presentment arrangement, liquidating agreement, or subcontract agreement between ICC and MSI is, therefore, necessary to satisfy the requirement of ICCs representation to bring action against the City.

On the second issue, ICC claims that the specifications and plans provided by the City that describes the project were defective since they signify that ICC would be able to get hold of enough levee-fill material from two on-site locations. ICC contends that the designation of a number of onsite locations from which it could obtain fill materials in the specifications and plans has created an implied warranty that these sites indeed contain sufficient materials. However, the fill materials from the designated areas were not enough, which forced ICC to manufacture additional appropriate fill materials that the City eventually failed to reimburse. In resolving this issue, the Court based its assessment on a number of earlier significant cases, including Lonergan v. San Antonio Loan and Trust Co.,City of Dallas v. Shortall,and Millgard Corp. v. McKeeMay.

In accordance with the Lonergan case, the Court held that in order to find the City in breach of contract by providing defective specifications and plans, it is necessary that the contractual language between the City and ICC should have clearly indicated intent to shift the weight of risk to the City. In the given case, however, the bid documents that were eventually incorporated in the contract agreement between the City and ICC contained some provisions that specifically disclaimed the sufficiency of the specifications and plans, as well as placed the risk to ICC by stating that the conditions of the contract may differ from the latters expectations, to wit
That all risks of differing subsurface conditions shall be borne solely by ICC
That ICC shall suffer all losses ensuing from the character and amount of the work, or because the conditions under which the tasks must be accomplished are contradictory from what ICC anticipated or estimated

Instruct ICC to go to the site of work and to carefully examine the local conditions
Instruct ICC to examine for itself the convenience of the work and all existing conditions influencing the cost of performing the work, or to notify itself through independent investigation, tests and research of the difficulties it may encounter and

That ICC shall exclusively count on its own tests, investigations, estimates and other data in doing the work.

The aforesaid provisions clearly demonstrate that the parties planned to place the weight of risk for inadequate specifications and plans on ICC. Because the contract unambiguously and expressly placed the risk on ICC, the City therefore did not breach the contract. Apparently, the disclaimers of the contract and the language of the bid documents expressed that the ICC could not recover the costs it paid. The Court held that in order for ICC to recover under breach of warranty claim, it must demonstrate that the City made an affirmative representation, that ICC reasonably depended on this representation, and that it carried out no further investigation. Conversely, in the given case, the aforesaid disclaimers provided in the said contract precluded ICC such reimbursement.

With regard to ICCs other breach of contract claimsthe Citys failure to provide ICC of soil information and the Citys order to mix materials that allegedly changed the specifications and plans of the contractthe Court ruled in negative. The appellate court again based its decision on the disclaimers specifically written in the contract. The court held that the City did not breach the contract for failure to provide ICC with the information it demanded because ICC had all the same bid on the project and even guaranteed the City that it had satisfied itself as to the condition of the project site. Thus, these actions of ICC clearly run in contradiction to its claims of insufficiency of soil information.

On the other hand, regarding the Citys alleged order to ICC to mix materials in order to produce adequate fill materials, the Court likewise declared that the City did not breach the contract. The said order of the City did not materially change the general nature of ICCs work. The mixing of materials was basically part of the fundamental activity of ICC to complete the contract. Thus, it was not a modification in the general nature of the work or a material change to the specifications and plans.

Finally, with regard to ICCs claims for payment of the (1) delays caused by the City (2) survey costs (3) linear depth checking (4) trash removal (5) unanticipated subsoil conditions, the Court likewise found them to be without merit. The parties agreed that all claims brought under the contract must comply with the contractual claims and notice requirements as well as the provisions of items 1.38, 1.39, and 1.40 of the contract. However, as acknowledge by the district court, ICC only substantially complied with the claim procedure and did not entirely comply with requirements. Accordingly, this procedural insufficiency prohibited ICC from recovering its claims. In view of all the aforesaid findings, the appellate court reversed the judgment of the trial court and therefore delivered judgment that plaintiff-appellee ICC would obtain nothing.