Construction and Procurement Law News, Q3 2017

An owner that dictates a contractor’s means and methods of constructing a project can be liable to the contractor for breach of contract. In the Port of Houston Auth. v. Zachry Constr. Corp., a case from one of the courts of appeals in Texas, the Port Authority hired a contractor to construct a wharf at the Bayport Ship Channel in Texas. The contractor’s bid was based on the contractor’s plan to build the wharf “in the dry” by using a frozen earthen wall method to seal out the water from the nearby bay. By building the wharf “in the dry” as opposed to “in the wet,” the contractor estimated that it would save significant time and money.

After construction began, the Port Authority issued a change order request for a proposal to extend the size of the wharf. The contractor based its proposal on using the frozen earthen wall method.

After the parties agreed upon and executed the change order, the Port Authority refused to allow the contractor to use the frozen earthen wall method. Consequently, the contractor was forced to construct the wharf “in the wet.” The contractor later sued the Port Authority for the increase in costs that it incurred for switching from working “in the dry” to working “in the wet.”

There were two principal contract provisions at issue. On the one hand, the parties agreed to a standard “independent contractor” provision in which the Port Authority agreed that it did not have the “right to control the manner in which or prescribe the method by which the contractor performs the Work.” Further, the contractor agreed to be “solely responsible” for performing the Work using the means and methods that the contractor chose. This contractual provision clearly contemplated that the contractor had authority to control the means and methods of performing the work. According to the Court, these provisions benefited the Port Authority because they insulated it “from the liability to which it would be exposed were it exercising control over [contractor’s] work.”

On the other hand, the Port Authority relied upon a “review and resubmit” provision in support of its argument that it had the authority to reject the contractor’s use of the frozen earthen wall method. This provision required the contractor to submit designs, drawings, specifications, and other information to the Port Authority for its review. Under this “review and resubmit” provision, the Port Authority had the ability to accept, reject, and require resubmission of plans and designs. The Port Authority argued that, under this provision, it had the contractual right to disapprove of the contractor’s use of the frozen earthen wall plan and require the contractor to use an alternative design to construct the wharf.

The case went to trial, and the jury returned a verdict for the contractor. The jury found that the owner had breached the parties’ contract by requiring the contractor to change its means and methods of construction, and the Port Authority appealed.

On appeal, the Texas appeals court agreed with the jury and held that the Port Authority breached the “independent contractor” provision of the contract. In its analysis, the Court recognized that some of the provisions of the contract allowed the Port Authority to receive submittals concerning the means and methods of construction. However, this did not mean that the Port Authority had the ability to “exercise control” over the contractor’s means and methods of construction. Otherwise, the Port Authority would risk losing the insulation from liability that the “independent contractor” provision afforded it. The Court also emphasized that the frozen earthen wall would not become a part of the permanent work, and therefore, was a method of performing the construction work.

Most construction contracts contain the “independent contractor” provision and “review and resubmit” provision, and this case is a good example of how the provisions are interpreted and work together. It is important for an owner to retain control with regard to final designs and the overall finished work. After all, it is the owner who will utilize the complete project after final completion. Nevertheless, assuming that the contractor has assumed the risks of construction and safety, the contractor must have control over its means and method of construction, especially where the means and method of construction will not become a part of the finished project. The contractor factors the means and methods of construction into the contract price and project schedule, and a change to those means and methods could have a significant impact on the contractor’s bottom line and ability to meet the schedule. Moreover, the owner typically wants the contractor to be solely responsible for the means and methods of construction, thereby insulating the owner from liability if the contractor fails to perform the work in a safe manner. If an owner desires to exercise control over the means and methods of construction, the owner must recognize that it may be liable for any resulting increased costs.