El Paso Field Services, L.P. and Gulfterra South Texas, L.P. F/K/A El Paso South Texas, L.P. v. Mastec North America, Inc. and Mastec, Inc.

• Court: Texas Supreme Court
• Decided: December 21, 2012
• Docket: 10-0648
• Status: Published

Opinion

IN THE SUPREME COURT OF TEXAS 444444444444 NO . 10-0648 444444444444

EL PASO FIELD SERVICES, L.P. AND GULFTERRA SOUTH TEXAS, L.P. F/K/A/ EL PASO SOUTH TEXAS, L.P., PETITIONERS,

v.

MASTEC NORTH AMERICA, INC. AND M ASTEC , INC ., RESPONDENTS

4444444444444444444444444444444444444444444444444444 ON PETITION FOR REVIEW FROM THE COURT OF APPEALS FOR THE FIRST DISTRICT OF TEXAS 4444444444444444444444444444444444444444444444444444

JUSTICE GUZMAN , joined by JUSTICE MEDINA and JUSTICE LEHRMANN , dissenting.

Since early in Texas’s statehood, this Court has recognized that specific laws prevail over

conflicting general laws.1 For over eight decades, we have applied the same principle when

construing contracts.2 In this contract dispute over a due diligence obligation, two clauses required

El Paso to perform due diligence in locating foreign crossings while another clause stated that

MasTec assumed all risk pertaining to the work, notwithstanding other provisions in the contract.

Our time-honored rules of construction require us to interpret the specific due diligence provisions

1 Story v. Runkle, 32 Tex. 398, 400 (1869).

2 Kuntz v. Spence, 67 S.W .2d 254, 257 (Tex. 1934); Great S. Life Ins. Co. v. Cherry, 24 S.W .2d 512, 513 (Tex. Civ. App.— Eastland 1930, writ ref’d). as an exception to the general all risk provision, thereby giving both meaning. But today, the Court

departs from that time-honored tradition and negates the due diligence provisions in their entirety.

Whatever method an owner chooses to locate foreign crossings, the industry standard is to disclose

85–90% of them. El Paso disclosed only 35%. The jury was entitled to—and did—find that El Paso

did not exercise due diligence. Because I cannot agree with the Court’s significant departure from

our long line of precedents governing our approach to contract construction, I respectfully dissent.

I. Factual Background

This case involves the replacement of a metal pipeline. When a pipeline crosses a foreign

object (such as other pipelines, roads, rivers, fences, and other structures), that object is referred to

as a foreign crossing. Replacing the portion of a pipeline at a foreign crossing often requires the

investment of a significant amount of resources, most notably manpower. It is customary for

pipeline owners to compile information on foreign crossings (known as alignment sheets) as the

foreign crossings to their pipelines are built or modified. As a matter of due course, at the time a

pipeline is going to be replaced, owners make their alignment sheets available to bidding contractors

so they evaluate the potential need for additional time or resources and factor that additional criteria

into the bid. In some cases, a contractor will be able to inspect the pipeline easement before bidding

the job, but such an inspection will not always detect fiberglass or plastic pipelines. Metal detectors

cannot detect such lines if they have no metal tracers, and pipelines are not always marked on the

surface. The most accurate pre-bid method of identifying foreign crossings is from the owner’s

alignment sheets.

2 Here, El Paso purchased a 68-mile pipeline built during World War II. El Paso decided to

replace the line because it was too shallow. El Paso had received the preliminary alignment sheets

dating to before the pipeline was built. It had no alignments sheets showing foreign crossings built

since 1940. An El Paso representative described its alignment sheets as “very inadequate, but it is

all we had to work with.”

Accordingly, El Paso hired a surveying company to assess the route and identify foreign

crossings. The surveyor testified that El Paso did not ask him to detect lines with no metal. The

surveyor walked the line using metal detectors and noting physical markings of lines. At a pre-bid

meeting, El Paso disclosed to pipeline contractors the surveyor’s alignment sheets—which showed

280 foreign crossings. The industry practice for contractors is to allocate a 10–15% contingency in

a bid to account for, among other things, unexpected and unidentified foreign crossings.

El Paso owned another pipeline of the same size in the same right of way. El Paso had a

survey for that adjacent pipeline that showed significantly more foreign crossings than the survey

of the pipeline at issue here.3

After soliciting bids, El Paso selected MasTec, which submitted the lowest bid. Importantly,

the contract they agreed to twice specified that “[El Paso] will have exercised due diligence in

locating foreign pipelines and utility line crossings.” The contract also provided “that anything in

this Contract or in any representations, statements or information made or furnished by [El Paso] or

any of its representatives notwithstanding, [MasTec] assumes full and complete responsibility for

3 Valero also owned a pipeline in the same right of way. A Valero representative was on site while MasTec was replacing El Paso’s pipeline, and Valero’s alignment sheets showed significantly more foreign crossings than El Paso disclosed. El Paso never contacted Valero regarding this information.

3 any such conditions pertaining to the Work, the site of the Work or its surroundings and all risks in

connection therewith.”

Once the pipeline replacement construction commenced, MasTec hired Steve Edwards, who

specialized in detecting foreign crossings, to work ahead of the construction crew to confirm the

location of foreign crossings. Edwards used a metal detector, referred to as an M-scope, to locate

metal lines as well as fiberglass and PVC lines with metal tracers. But the device could not detect

lines containing no metal. Edwards testified that the only method to identify such lines is to speak

with landowners to generally determine where pipelines are situated and then pressure wash and

remove the soil to locate the lines.

In a typical job, Edwards testified he would discover 5–10% more foreign crossings than an

owner had disclosed. Here, Edwards located approximately 794 total foreign crossings4—284%

more than El Paso disclosed. The jury found that El Paso failed to comply with the contract. At

trial, the jury was asked whether El Paso exercised due diligence in locating foreign crossings. The

jury found that El Paso breached the contract.

II. Discussion

The primary goal when construing a written contract is to ascertain the true intent of the

parties as expressed in the writing. Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 662 (Tex.

2005). We accomplish this by examining the entire writing so as to harmonize all provisions and

render none meaningless. Id.; King v. Dallas Fire Ins. Co., 85 S.W.3d 185, 193 (Tex. 2002). “No

4 As the Court notes, other evidence in the record indicates there could have been even more than 794 foreign crossings, but MasTec only claims there were 794 foreign crossings in this appeal. __ S.W .3d at __, n.2.

4 single provision taken alone will be given controlling effect; rather, all the provisions must be

considered with reference to the whole instrument.” Coker v. Coker, 650 S.W.2d 391, 393 (Tex.

1983). To harmonize conflicting provisions, we treat narrow provisions as exceptions to general

provisions. Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133–34 (Tex. 1994); see also Jackson

v. State Office of Admin. Hearings, 351 S.W.3d 290, 297 (Tex. 2011); Kuntz v. Spence, 67 S.W.2d

254, 257 (Tex. 1934); Great S. Life Ins. Co. v. Cherry, 24 S.W.2d 512, 513 (Tex. Civ.

App.—Eastland 1930, writ ref’d).

Construing the contract here requires that we examine the term due diligence. Because the

contract did not define due diligence, we must ascribe the term its ordinary meaning. Heritage Res.,

Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex. 1996). As the Court notes, Black’s Law Dictionary

defines due diligence as “[t]he diligence reasonably expected from, and ordinarily exercised by, a

person who seeks to satisfy a legal requirement or to discharge an obligation.” BLACK’S LAW

DICTIONARY 523 (9th ed. 2009). We have stated that “‘diligence’ is relative and incapable of exact

definition. Its meaning must be determined by the circumstances of each case. Reasonable diligence

has been defined as such diligence that an ordinarily prudent and diligent person would exercise

under similar circumstances.” Strickland v. Lake, 357 S.W.2d 383, 384 (Tex. 1962). Due diligence

“is usually a question of fact.” Id.

In construing the term as requiring MasTec to shoulder the risk for El Paso’s lack of

diligence, the Court ignores well settled rules of construction that no clause should be rendered

meaningless and that a narrow provision is construed as an exception to a conflicting general

5 provision. And because there was some evidence that El Paso failed to use due diligence, we should

not disturb the jury’s finding.

A. The Court Negates the Due Diligence Requirements

The Court maintains that its reading of the contract does not negate the due diligence

requirements but instead contemplates a joint effort with El Paso conducting a survey and MasTec

assuming the risk for the inaccuracies in the survey. But substantively, this reading negates the due

diligence clauses. What if El Paso hired a surveyor that found zero foreign crossings? Is it plausible

that the parties would intend that such a finding constitutes due diligence? Under the Court’s

rationale, such an illogical approach would have been the intended outcome merely because El Paso

hired a surveyor. The Court is in effect rewriting the contract to negate the due diligence

requirements and, in so doing, violates our long-standing rules of interpretation.

We determine the intent of the parties by assessing the entire writing and giving effect to all

provisions. Valence Operating, 164 S.W.3d at 662. In order to assure that no one provision controls

all others, we have long treated specific provisions as exceptions to general provisions. Forbau, 876

S.W.2d at 133–34; Kuntz, 67 S.W.2d at 257; Cherry, 24 S.W.2d at 513. The clause the Court relies

on is unquestionably general (that MasTec assumes all risk, notwithstanding other provisions). The

clauses stating that El Paso must use due diligence in locating foreign crossings are specific. But

rather than giving both provisions meaning (as we must) by treating the diligence provisions as a

limited exception to the risk provision, the Court negates the diligence provisions in their entirety.

To do so forces MasTec to shoulder the due diligence burden the contract squarely places on El Paso.

Here, the contract requires that we give meaning to both provisions and allow the jury to decide

6 whether El Paso’s disclosure satisfied its due diligence obligation. The Court ignores well settled

rules and, in error, disregards the jury’s verdict.

To illustrate the importance of ascribing some meaning to a due diligence clause, an example

is helpful. The parties’ contract contains a force majeure clause that relieves each party of liability

for failure to perform due to a force majeure event. This force majeure clause would presumably

include hurricanes. Hurricanes are risk. Under the Court’s view, MasTec would assume the risk of

a hurricane in the all risk clause, despite the fact that it specifically bargained to not assume the risk

of a hurricane in the force majeure clause.5 But such an interpretation renders the force majeure

clause meaningless—an outcome we seek to avoid. Valence Operating, 164 S.W.3d at 662; Coker,

650 S.W.2d at 393. The rules of construction are in place to determine the intent of the parties when

harmonizing conflicting provisions. Valence Operating, 164 S.W.3d at 662. They do precisely that

here by specifically allocating narrow risks (such as force majeure events and due diligence for

locating foreign crossings) and then shouldering MasTec with all other risk.

There are circumstances in which an all risk provision may trump a due diligence provision.

For example, the due diligence clause could: (1) state the information provided was a courtesy but

due diligence was within the contractor’s scope of work;6 (2) disclaim any accuracy of the due

5 Granted, the all risk clause relates to “conditions pertaining to the W ork.” But MasTec encountered one hurricane and two tropical storms during the work, which dropped 66” of rain on the work site. No one disputes that this rain had a significant impact on the work site.

6 See, e.g., Geodyne Energy Income Prod. P’ship I-E v. Newton Corp., 161 S.W .3d 482, 488 (Tex. 2005).

7 diligence; or (3) have the other party disclaim any reliance on the due diligence.7 This contract

contained no such disclaimers.

The description of El Paso’s alignment sheets as due diligence along with the lack of

disclaimers brings this case outside the ambit of our holdings in Lonergan v. San Antonio Loan &

Trust Co., 104 S.W. 1061 (Tex. 1907), and City of Dallas v. Shortall, 114 S.W.2d 536 (Tex. 1938).

Lonergan involved an owner supplying an architect’s defective specifications to a contractor.

Lonergan, 104 S.W. at 1065. We based our holding that the owner was not liable to the contractor

for the defective specifications on two principles. Id. First, the contractor in all probability knew

better than the owner that the architect’s specifications were defective. Id. Here, El Paso had

superior knowledge of the foreign crossings as it owned the pipeline and owned another pipeline in

the same easement with alignment sheets showing significantly more foreign crossings. Second, in

Lonergan, the contract in no way made the owner the guarantor of the accuracy of the specifications.

Id. at 1066. Here, the contract stated that the owner’s investigation and disclosure of the foreign

crossings was “due diligence.” Lonergan does not support El Paso.

Likewise, Shortall does not support El Paso. There, the owner stated: “In case these

specifications or plans are not thoroughly understood, parties making bids shall apply to the Engineer

for further information before bids are submitted, as no claims on any such grounds will be

entertained . . . .” 114 S.W.2d at 538. El Paso made no such disclaimer advising that the foreign

crossings “are not thoroughly understood” but instead stated that its alignment sheets constituted due

7 See, e.g., Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W .3d 323, 331 (Tex. 2011) (discussing the effect of disclaimers of reliance on fraudulent inducement claims).

8 diligence. El Paso’s use of the term due diligence and the lack of any disclaimers effectively vitiate

its reliance on Lonergan or Shorthall.

B. There Is Some Evidence El Paso Did Not Use Due Diligence

Construing the contract to mean that the due diligence clauses required El Paso to use due

diligence (as they must), we must determine if there is some evidence supporting the jury’s finding

that El Paso breached its obligation. We have defined due diligence as what an ordinarily prudent

and diligent person would do in similar circumstances. Strickland, 357 S.W.2d at 384. We have

also discussed due diligence in the oil and gas context in terms of industry practice. See Exxon Corp.

v. Emerald Oil & Gas Co., L.C., 348 S.W.3d 194, 206 (Tex. 2011).

Here, the testimony indicates that the industry standard is for contractors to allot a 10–15%

contingency for such things as foreign crossings an owner did not disclose. In other words, the

industry standard is for owners to disclose 85–90% of foreign crossings. El Paso disclosed 35% of

the foreign crossings. The gross disparity between the industry standard and El Paso’s disclosure

evinces that El Paso failed to use due diligence and the jury’s finding must not be disturbed.

The Court attempts to distinguish this undisputed testimony in two ways: (1) that industry

standards are not necessarily synonymous with industry practices; and (2) that the standard for due

diligence for older pipelines is the same as for newer pipelines. The record is devoid of support for

either position. First, the Court is unable to cite any authority for treating industry standards and

practices differently in the due diligence context. If an owner used a novel method of locating

pipelines and found 100% of them, it would be difficult to claim that it failed to use due diligence.

9 Regardless of the practice El Paso employed (hiring a surveyor and not instructing it to locate non-

metal lines), it grossly failed to meet the industry standard (identifying 85–90% of pipelines). The

failure in the Court’s interpretation is that El Paso warranted the work in locating foreign crossings

as due diligence: “[El Paso] will have exercised due diligence in locating foreign pipelines and utility

line crossings.” Under the guise of industry practice, the Court changes the focus of due diligence

to the hiring of a surveyor—not the locating of foreign crossings.

Neither is there support for the Court’s assertion that the standard for older pipelines is the

same. The Court again conflates categories to rewrite the contract. Due diligence looks at similar

situations. Strickland, 357 S.W.2d at 384. Older pipelines can have non-metal foreign crossings that

were placed before laws required metal tracers in non-metal lines. El Paso’s method of using a metal

detector and visual inspection may well be suitable for locating foreign crossings for a newer

pipeline (which involves few unidentified, non-metal foreign crossings). But El Paso’s method was

unsuitable for an older pipeline with a significant number of non-metal lines, as evinced by El Paso’s

1940s survey of an adjacent pipeline identifying significantly more foreign crossings than the recent

survey of the pipeline at issue. Due diligence, as it is commonly understood, requires that El Paso

use greater efforts in locating foreign crossings in an older pipeline, such as instructing the surveyor

to locate non-metal lines. El Paso could have avoided its obligation, assuming it considered it

onerous, by simply disclaiming due diligence. It did not do so here.

In any event, El Paso’s methodology was so deficient that it identified only 35% of foreign

crossings, far less than the industry standard of 85–90% and even less than El Paso’s survey from

10 its adjacent pipeline in the 1940s. There is some evidence to support the jury’s finding that El Paso

breached its obligation.

III. Conclusion

Well settled rules of contract construction require us to construe the due diligence clauses

in this contract as a limited exception to the all risk clause. Ignoring these well settled rules, the

Court renders meaningless a more specific provision. The industry standard is for owners to disclose

85–90% of foreign crossings. Here, El Paso disclosed a mere 35%. In sum, the jury was entitled

to find that El Paso breached its due diligence obligation, and we should not set aside its finding.

I respectfully dissent.

___________________________ Eva M. Guzman Justice

OPINION DELIVERED: December 21, 2012