Not So Fast: Texas Supreme Court rejects court of appeals attempt to re-write contracts from the bench

It has long been accepted in Texas, and elsewhere, that “where one agrees to do, for a fixed sum, a thing possible to be performed, he will not be excused or become entitled to additional compensation, because unforeseen difficulties are encountered.” In other words, a person doesn’t get to back-out of a contract just because it becomes less profitable than originally expected. Recently, a Texas court of appeals opinion in El Paso Field Services v. MasTec North America placed that long standing principle of contract law in jeopardy. This week, in an opinion mirroring arguments put forth by Pacific Legal Foundation in its brief in that case, the Texas Supreme Court has put any speculation about the security of that principle to rest.

In 2003 El Paso Field Services (El Paso) hired MasTec (a construction company) to replace an underground pipeline near the town Victoria, Texas.  As is common in such arrangements, El Paso provided MasTec with drawings of the proposed project, which included estimates about the terrain and any underground obstacles that MasTec might encounter while replacing the line. El Paso also allowed MasTec to inspect the area in which the work would be done prior to agreeing on a price for the work. After the inspection, El Paso and MasTec entered into a standard contract for the replacement of the pipeline at a fixed price. That contract contained a clause stating that MasTec had inspected the site and assumed “all risks” and “all costs” arising from unforseen underground obstacles.

Shortly after work on the project began, it became clear that the drawings of the proposed pipeline that El Paso had provided to MasTec grossly underestimated the amount of underground obstacles that would affect pipeline construction. In particular, El Paso’s drawings failed to include more than 794 “foreign crossings” that MasTec would now have to work around at great cost to complete the job — an omission well beyond the margin of error generally accepted in common practice.

MasTec sued, originally claiming fraud, but eventually dropping those charges in favor of arguing that the court should interpret the contract so that the assumption of risk clause was not controlling. Surprisingly, the lower court agreed, holding that “no one provision could have such controlling effect.”  According to the Court of Appeals, because El Paso was in a better position to know about the underground obstacles it bore the burden of unforseen obstructions, regardless of the language of the agreement.  In other words, if you screw up bad enough, the Court won’t hold you to your end of the bargain. Thankfully, the Texas Supreme Court disagreed.

As the Court pointed out, the problem with the lower courts ruling is that it takes a term of a contract that the parties agreed to– the risk allocation clause–  and essentially renders it meaningless.  And Courts simply shouldn’t be in the business of rewriting contracts between consenting sophisticated adults. Had MasTec sued for fraud, it would have been in a different position because, in the case of fraud, their is deceit and no agreement is formed. But, when no fraud is claimed, the parties deserve the dignity and respect of being treated as adults. Even if that means they have to take a hit from a nasty agreement.