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      January 2014
Newsletter                                      
In This Issue
History and the Law
The final signed document can be the $500M rotten egg!
Architect's Liability to GC for "negligent misrepresentation
Watch what you attach to a Purchase Order!
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History and the Law

 

What Kind of Wills did famous People in History Write?

 

The legendary British navigator and privateer Sir Francis Drake acted like a Robin Hood of the seas when he died in 1596, leaving his money to the poor.
 
Britain's most famous playwright William Shakespeare famously left money to his daughters, and only a "second best" bed to his wife. 
 
At his death in 1759 George Frederic Handel left �600, now about $147,000, to build a monument to himself in Westminster Abbey.
 

 

In this newsletter we look at some recent cases and how they can affect the standard agreements you sign, a recent case on purchase orders with attachments, and an architect's design liability to general contractors.  

 

As always, please feel free to give us your suggestions for current newsletter topics.        

 

We appreciate your comments and look forward to hearing from you soon.   

   

Sincerely,

 

Peter Martin

  

"Signer Beware" Is Alive and Well in Texas Construction Law

 

Contractors/Developers and Owners go through months of negotiations and preconstruction agreements before finalizing the "deal."  A recent Dallas Court of Appeals' opinion reminds us that, no matter what has transpired in the past, orally or in writing, in an arms-length transaction between businesses, the final written agreement will control. 

 

In the Miller v. Marriott, Trial Court Cause No. 219-03327-2009, opinion filed December 3, 2013, the investment developer/purchaser sued Owner Marriott for a $500 million plus cost overrun on the purchase, design, and completion of a hotel complex.  Miller claimed it signed the final contracts in reliance on misrepresentations made by Marriott to induce the purchase.  The trial court, affirmed by the Dallas Court of Appeals, dismissed all of Miller's claims (for fraudulent inducement, negligent misrepresentation, negligence and indemnity) even though there was evidence that Marriott had represented facts in a series of previous agreements and discussions that:

  • The plans were "essentially complete." (They were not.)
  • The construction drawings were "essentially complete."  (They were not.)
  • The probable cost of the project was $485 million, and could potentially be reduced by another $19 million.  (It was not.)
  • The budget was sufficient to construct, furnish, and equip the resort.  (It was not.)

However, the final agreement signed by Miller directly contradicted these "facts" and expressly stated:

 

  • Miller "acknowledges and agrees that Marriott [et al...] has not made, does not make, and specifically negates and disclaims any representations, warranties, promises, covenants, agreements or guarantees of any kind or character whatsoever, either express or implied, oral or written, past, present or future, or as to or concerning or with respect to the Property or the transactions contemplated by this Agreement." 
  • Miller agreed to build the resort "in accordance with the Approved Plans."
  • "The Agreement, together with any other writings signed by the parties, expressly states to be supplemental hereto and together with any instrument to be executed and delivered pursuant to this Agreement, constitutes the entire agreement between the parties and supersedes all prior understandings and writings." 
  • Miller shall be solely responsible for any cost over-runs arising from the design, construction, equipping or furnishing the Resort." 
  • Marriott disclaimed any responsibility regarding the "adequacy of any budgets." 

 

The Court found that Miller's claim failed for lack of justifiable reliance on the misrepresentations, which is a required element of such a claim.  There could be no reliance, the Court reasoned, because  Miller had, in the plain language of the agreement, disclaimed reliance on any representations, had agreed that any "prior understandings" were superseded, and had  expressly agreed to bear the responsibility for the damages he was now asserting.  

  

Even Miller's argument that the parties were not "similarly sophisticated" was rebutted by the contract language which expressly recited that Miller had "substantial experience" and "special expertise" in the development and management of hotel properties.  Nor could Miller claim that these provisions were "boilerplate" and not negotiated when the contract stated that Miller had "fully participated" in the negotiation and drafting of the Agreement.

 

This opinion reinforces and extends the recent movement of Texas courts to hold parties strictly to the words they have agreed to as in the "Buyer Beware" doctrine of old.  The Miller case holds:

 

A party to an arms-length transaction must exercise ordinary care and reasonable diligence for the protection of its own interest, and a failure to do so is not excused by mere confidence in the honesty and integrity of the other party. 


Where a party signs a contract that directly contradicts alleged misrepresentations and affirmatively disclaims any promises or representations other than those made in the contract, the party cannot justifiably rely on alleged extra-contractual misrepresentations as a matter of law. 

  

GC Recovers $2.25 Million Against Architect for Faulty Plans:Texas Supreme Court to Decide Whether GC has a Negligence Claim Against Architect for Design Defects

  

The Texas Supreme Court heard oral arguments in LAN/STV and STV, Inc. v. Martin K. Eby Construction Company, Inc., Case No. 11-0810, in October 2013.  The issue certified to the Texas Supreme Court is whether the economic loss rule bars claims for monetary damages between the general contractor and architect where they have no contract with each other.  "Economic losses" are contractual matters and there must be a contract between the litigants. 

 

In this case, the Jury found that millions of dollars of damages resulted from inaccuracies in the construction documents upon which Eby, the general contractor, based its original bid.  Eby settled with the Owner then successfully sued the architect for negligent misrepresentation.  The jury apportioned the negligence among the parties - 15% to the GC, 45% to the architect, and 40% to the Owner. The architect was liable for 45% of the total $5,000,000 judgment and requested to pay $2,250,000 to the GC. 

 

The economic loss rule has barred actions for negligence among parties to construction contracts based on the reasoning that, although couched in terms of negligence, these were actually claims for economic damages for breach of contract -- disguised as a tort.  The duty an owner owes to a general contractor and vice versa arises out of the written contract between them and the proper action is breach of contract. 

 

The architect and the general contractor, however, do not generally, and in this case did not, have a contract.  The general contractor based its bid on the architect's construction documents and had a contractual duty to build in accordance with such documents.  Does the architect then owe a duty to the general contractor not to provide inaccurate or faulty plans and specifications in the absence of a direct contract between them? 

 

The jury in the Eby case found that the architect had made negligent misrepresentations in its defective plans, upon which Eby, the general contractor, relied to its detriment, and the architect was liable. The jury found for the general contractor for resulting damages to the extent of such negligence by the architect.  The characterization of inaccuracies in plans and specifications as misrepresentations could open a new door for claims directly against the architect.  The architect has historically been protected from direct suit by the GC by the lack of a contract with the general contractor and its subcontractors.  The architect owes its duty to the owner with whom the architect has contracted, and the Owner's and GC's duties to one another as to the reliability of plans and specifications are set forth in the owner/general contractor contract.  Since this scenario often relieves the owner of liability, the general contractor is left with no recourse.

 

The Supreme Court's decision could clarify the duty owed by the project architect to the general contractor and whether an action lies directly for breach of such duty under a negligent misrepresentation theory.  This case could change current law and establish new avenues for a general contractor to recover losses caused by other professionals due to inaccuracies in the plans and specifications, and increase the liability of design professionals beyond the terms of their contracts with the Owner. 

 

We will update you on Eby when the opinion is released, hopefully sometime in 2014.  

 

 
Dallas Court of Appeals Enforces Arbitration Agreement Tacked on as an Exhibit to a Purchase Order
 

Although courts have, over the years, grown more and more favorable to arbitration, there has always been a clear requirement that there be an enforceable arbitration agreement between the parties before arbitration would be ordered.  The right to arbitrate derives from and arises out of agreement and both parties must have agreed for arbitration to be ordered.  The Dallas Court of Appeals recently seems to have eroded this requirement in Tecore Inc. v. Airwalk Communications, Inc.

 

In this case, Tecore found itself bound by an arbitration provision (and other "terms and conditions") printed on an Exhibit A to an Airwalk Purchase Order, which Tecore had never referenced or signed.  This was true even though the evidence of intent between the parties showed Tecore had not intended or desired arbitration, but had in fact been resisting such an agreement during negotiations.

 

Airwalk and Tecore had been in negotiations after their long-term purchase agreement, which did not contain a provision to arbitrate, expired.  Tecore had made it clear it did not want the new contract to include an agreement to arbitrate. No new contract had been signed, but Tecore wanted to sell some Airwalk products.

 

Airwalk presented a Purchase Order quoting price terms and also referencing and attaching an Exhibit A containing "terms and conditions" - one of which was an arbitration agreement.  Tecore fell into a trap for the unwary by attempting to return a purchase order form referencing the offered quoted price, but omitting Exhibit A.  After a series of exchanges, none of which contained Tecore's assent to the Exhibit A conditions, Airwalk sent a "Purchase Order Acceptance" which stated "terms and conditions of sale are per Airwalk Communications, Inc. Standard Terms and Conditions of Sale unless otherwise agreed to in writing." Airwalk argued that by agreeing to its Standard Terms and Conditions arbitration was required under the agreement. 


When a dispute arose, Tecore was forced to arbitration over its objection, lost the arbitration and appealed to the trial court.  The trial court found and the Dallas Court of Appeals affirmed that the exchange of purchase orders, ending with Airwalk's "Purchase Order Acceptance" created a binding contract.  Although there was no copy signed by Tecore expressly accepting the "terms and conditions," the court found that the arbitration agreement was agreed to by Tecore as a result of Airwalk's acceptance.  The courts rejected Tecore's contract arguments and found that Tecore had agreed to arbitrate. 

 

Practical Lessons from the Tecore v. Airwalk Decision

 

The Tecore v. Airwalk decision reinforces:

  1. That  those of you, who utilize purchase orders, need to be wary of and carefully review "terms and conditions" and "exhibits" to price quotations/offers and, if you intend to change the terms of the offer, to make it expressly clear what you are rejecting.
  2. If arbitration is not your intent, make sure you read the fine print since, according to the Dallas Court of Appeals, the fine print can dictate your choice of dispute resolution and presumably other terms.
  3. In addition, cross out the terms not agreed to in order to indicate your clear rejection of such terms or add something to the effect that arbitration is not agreed.  
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