Beware of Plans, Specifications Disclaimers by Owners When Reviewing Contracts

by William Coats, director, member of the executive committee and the head of the construction/surety section of Houston-based Coats/Rose.

The construction industry should be aware of FHA requirements. Failure to design and construct buildings covered by the FHA in accordance with its requirements has resulted in significant penalties.

A recent court opinion emphasizes that in order for an owner to be liable for supplying inadequate plans, the contract itself must evidence an intent to shift the burden of risk to the owner.

As early as 1918, in United States v. Spearin, the United States Supreme Court decided that a contractor was not responsible for the consequences resulting from defects in plans and specifications furnished by the owner if the contractor was obligated to build according to such plans and specifications.

The Texas Supreme Court, however, looking at this same issue in 1907, reasoned that the contractor implied that it understood the plans when it contracted to construct the building according to the specifications provided by the owner. Therefore, any warranty or guaranty as to adequacy or suitability of the plans and specifications by the owner, must be expressed in the contract. Consequently, the Texas Supreme Court ruled that an owner was not a guarantor of the sufficiency of the specifications simply because it submitted the plans for bids on the work and thereafter entered into a contract with the contractor.

It turns out that the 1907 case, Lonergan v. San Antonio Loan & Trust Co., is the only Texas Supreme Court decision on this subject, although there is a subsequent line of authority in the Texas court of appeals that holds that an owner does impliedly warrant the sufficiency of the plans and specifications supplied to the contractor.

These cases all hold that that the Lonergan rule was not applicable and is distinguishable because of the specific facts of each case. They also follow the rule that was announced in Spearin. The Lonergan rule, however, has never been explicitly overturned. Most recently, the U.S. Court of Appeals, Fifth Circuit, addressed the conflict in Interstate Contracting Corp. v. City of Dallas.

The contractor in Interstate sued the City of Dallas alleging that it was liable for the accuracy of the plans and specifications. Apparently, the plans and specifications represented that the contractor would be able to obtain sufficient levee-fill material from on-site locations. Ultimately, the contractor could not, and had to incur additional expense in manufacturing the fill material. This, according to the contractor, was a breach of contract and of an implied warranty that the on-site locations contained suitable fill materials.

The Fifth Circuit analyzed the Lonergan rule and the several Texas lower court opinions concerning the Lonergan rule. The Fifth Circuit found that under Lonergan, "the Texas Supreme Court would require contractual language indicating an intent to shift the burden of risk to the owner in order to find an owner breached a contract by providing defective plans." The Court then added that the Texas Court of Appeals decisions to the contrary were, "…simply not well reasoned."

The Interstate opinion emphasizes that in order for an owner to be liable for supplying inadequate plans, the contract itself must evidence an intent to shift the burden of risk to the owner.

The practical implications of this decision and the Lonergan rule is that contractors should carefully review all contracts for any disclaimers by the owner as to the plans and specifications, and if possible, to include recitals and disclosures that the contractor is relying solely on the plans and specifications provided by the owner and that the owner is assuming that obligation and liability. Otherwise, contractors will continue to bid projects at their own peril, and cannot rely on the plans and specifications provided by the owner to protect them from unanticipated problems or issues.