Court Opinion

ID: 2929096
Source: CourtListenerOpinion
Date Created: 2015-09-14 16:08:29.683576+00
Date Added: 2024-06-11T15:22:36.083335
License: Public Domain

1      IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO

 2 Opinion Number: __________

 3 Filing Date: September 10, 2015

 4 NO. 32,331

 5 CENTEX/WORTHGROUP, LLC,

 6        Plaintiff-Appellant,

 7 v.

 8 WORTHGROUP ARCHITECTS, L.P. and
 9 TERRACON, INC.,

10        Defendants-Appellees.

11 APPEAL FROM THE DISTRICT COURT OF OTERO COUNTY
12 Jerry H. Ritter, District Judge

13 Lorenz Law
14 Alice T. Lorenz
15 Albuquerque, NM

16   Akin Gump Strauss Hauer & Feld LLP
17   Pratik A. Shah
18   Hyland Hunt
19   Washington, D.C.

20 for Appellant
1   Montgomery & Andrews, P.A.
2   Kevin M. Sexton
3   Andrew S. Montgomery
4   Santa Fe, NM

5 for Appellee Worthgroup Architects, L.P.
 1                                         OPINION

 2 KENNEDY, Judge.

 3 I.      INTRODUCTION

 4   {1}   This   appeal   involves    a    dispute   between   a   general   contractor,

 5 Centex/Worthgroup, LLC (Centex), and a subcontractor, Worthgroup Architects, L.P.

 6 (Architect). Centex and Architect entered into a contractual relationship which,

 7 among other things, governed the construction of a Mechanically Stabilized Earth

 8 (MSE) Wall. The MSE Wall ultimately failed, and Centex brought this suit against

 9 Architect and Terracon, Inc., claiming over $6,000,000 in damages for redesign and

10 repair costs that it incurred. Centex asserted that Architect is required to cover the

11 costs Centex incurred in redesigning and repairing the MSE Wall. Architect

12 conversely asserted that its monetary obligations to Centex have been satisfied by the

13 payment of proceeds of insurance coverage that it was contractually obligated to

14 procure and maintain.

15   {2}   Centex appeals a grant of summary judgment to Architect, in which the district

16 court apparently determined that a limitation of liability clause in a prime contract

17 flowed down to the subcontract by virtue of a flow-down clause. We reverse. We note

18 that Centex contends genuine issues of material fact remain, but, for the reasons that

19 follow, we decline to consider whether this is the case and remand so that the district

20 court can consider the facts and arguments in light of the holding in this Opinion.
 1 II.         BACKGROUND

 2   {3}       In February 2002, the Inn of the Mountain Gods Resort and Casino (Owner)

 3 contracted with Centex for an expansion and renovation project. These parties

 4 defined the terms of their business relationship in a second amended design/build

 5 construction contract (the prime contract). Centex then entered into a subcontract

 6 with Architect, where Architect agreed to perform design work on the project. Both

 7 the prime contract and the subcontract are relevant to our analysis in this case.1

 8   {4}       We begin with a brief overview of the prime contract and subcontract, continue

 9 with an account of the proceedings in district court, and end with a discussion of the

10 law relevant to our holding.

11 A.          The Prime Contract

12   {5}       The prime contract governs the contractual relationship between Owner and

13 Centex with regard to the project. The first section of the prime contract that the

14 parties have termed the “limitation of liability” clause2 is relevant to this appeal. The

15 limitation of liability clause provides:

16             In addition to all other insurance requirements set forth in this
17             Agreement, Design/Builder shall require its design professional
18             Subcontractor(s) to obtain and maintain professional errors and

19       1
           Architect also entered into an agreement with Terracon, Inc. for services to
20 construct the MSE Wall. Terracon has since been dismissed from this case.
           2
21             For the sake of clarity, we will continue using this characterization.
                                                  2
 1         omissions coverage with respect to design services in accordance
 2         herewith. . . . [S]uch coverage shall be for each such design professional
 3         Subcontractor in an amount not less than $3,000,000. Owner agrees that
 4         it will limit Design/Builder liability to [O]wner for any errors or
 5         omissions in the design of the Project to whatever sums Owner is able
 6         to collect from the above described professional errors and omissions
 7         insurance carrier.

 8 B.      The Subcontract

 9   {6}   The subcontract, which governs the contractual relationship between Centex

10 and Architect with regard to the project, contains an incorporation by reference

11 clause, which requires Architect to perform the design work in strict accordance with

12 the prime contract and incorporates the prime contract by reference. The subcontract

13 reflects Centex’s and Architect’s intent that “all the terms of all documents are to be

14 considered as complementary.” Should such an interpretation be impossible,

15 however, the parties provide the desired sequence for use of the documents,

16 hereinafter referred to as the order of precedence clause.

17         [T]he order of precedence of the documents, . . . shall be: (1) the most
18         current approved edition of the [c]onstruction [d]ocuments; (2)
19         modifications to [the subcontract]; (3) [the subcontract], unless the
20         [prime contract] imposes a higher standard or greater requirement on the
21         parties, in which case the [prime contract]; (4) the [prime contract],
22         unless the provisions of (3) apply.

                                               3
 1   {7}   The subcontract also includes a provision—referred to by the parties as a flow-

 2 down clause3—which states:

 3         In respect of the [d]esign [w]ork, [Architect] shall, except as otherwise
 4         provided herein, have all rights toward [Centex] which [Centex] has
 5         under the [prime contract] towards the Owner and [Architect] shall, to
 6         the extent permitted by applicable laws and except as provided herein,
 7         assume all obligations, risks[,] and responsibilities toward [Centex]
 8         which [Centex] has assumed towards the Owner in the [prime contract]
 9         with respect to [the d]esign [w]ork.

10 The central dispute between the parties revolves around the meaning and reach of this

11 provision.

12   {8}   The subcontract also provides a general liability clause, which makes Architect

13 responsible for “[r]edesign costs and additional construction costs of [Centex] and/or

14 the [c]ontractor required to correct [Architect’s] errors or omissions,” but specifies

15 that Architect’s “responsibility shall not preclude the pursuit of available insurance

16 proceeds on account thereof[.]”

17   {9}   Finally, the subcontract assigns rights and obligations to the parties regarding

18 insurance and liability. For instance, Architect is required to procure “insurance

19 coverage from insurers acceptable to [Centex]” and “shall be responsible for all

           3
20         A concept closely related to incorporation by reference, “flow-down” clauses
21   are commonly used in construction contracts to allow a subcontractor to “assume
22   toward the general contractor all of the obligations and responsibilities the contractor
23   assumes toward the owner in the [prime] contract.” T. Bart Gary, Incorporation by
24   Reference and Flow-Down Clauses, 10 Const. Law 1, 46 (1990).
                                                4
 1 deductibles relating to claims under all applicable insurance policies on account of

 2 the [d]esign [w]ork, including the [p]rofessional [l]iability [i]nsurance provided by

 3 Design Builder.” Architect is further required to name Centex, the [c]ontractor, and

 4 Owner as “additional insureds” on the insurance coverage and maintain the coverage

 5 “until expiration of [Architect’s] obligations” under the subcontract. Another section

 6 of the subcontract requires Architect to “provide a [p]roject [p]olicy for [p]rofessional

 7 [l]iability insurance with [l]imits of [l]iability of $3,000,000 per occurrence and

 8 $3,000,000 Aggregate.”

 9 C.       Construction And Failure of the MSE Wall

10   {10}   Construction of the MSE Wall began in June 2003. The MSE Wall began to

11 fail in April 2004, causing damage to various “adjacent structures and ground-

12 supported elements.” Owner demanded that Centex remedy the defects and damage.

13 Despite having demanded that Architect redesign the MSE Wall and repair any

14 damage that resulted from the wall’s failure, Centex spent over $6,000,000 for others

15 to redesign and repair the MSE Wall in September 2004. Centex, as a named insured,

16 requested payment of the available policy limits from Lexington Insurance Company

17 (Lexington) and received payment in the amount of $3,000,000, representing the full

18 policy limit for the claim submitted.

                                               5
 1 D.       District Court Proceedings

 2   {11}   Centex commenced this suit against Architect in May 2007 seeking

 3 $6,766,155.56, plus costs and expenses, on the grounds that Architect refused to

 4 adequately reimburse Centex for the damages incurred in implementing the redesign

 5 and repairs required by Owner. Centex’s complaint alleges negligence, negligent

 6 misrepresentation, breach of contract, and entitlement to attorney fees. Architect, in

 7 its response to Centex’s complaint, counterclaimed against Centex with three claims:

 8 declaratory judgment based on the limitation of liability clause in the prime contract

 9 and satisfaction of liability via Lexington’s payment of the insurance proceeds;

10 breach of contract based on Centex’s failure to enforce the limitation of liability

11 clause against Owner; and indemnification also based on Centex’s failure to enforce

12 the limitation of liability clause in favor of Architect. Architect later filed a motion

13 for summary judgment, asserting that the prime contract’s limitation of liability

14 clause, which was incorporated into the subcontract through the flow-down clause,

15 limited Centex’s ability to recover damages arising from design errors or omissions.

16 Architect also asserted in its motion that the Lexington payment satisfied and

17 therefore extinguished Architect’s liability to Centex for design errors and omissions.

18 Architect further asserted that summary judgment was appropriate because of

                                              6
 1 Centex’s failure to enforce the limitation of liability clause for the benefit of

 2 Architect, as required by the subcontract.

 3   {12}   The district court held a hearing on the motion for summary judgment, during

 4 which the parties argued extensively over what insurable risk the Lexington payment

 5 was intended to satisfy. Centex argued that the policy was paid for construction

 6 defects while Architect argued that the Lexington policy was paid for design errors

 7 and omissions. No release was executed as a result of the Lexington payment. When

 8 the district court questioned Centex as to why, if the policy was for construction

 9 defects, Centex did not recover from the remaining policy covering design errors and

10 omissions, Centex conceded that if the Lexington policy were indeed for construction

11 defects, it could conceivably make another claim against a design errors and

12 omissions policy. Centex insisted, however, that while the prime contract was set up

13 to shield Owner from excess costs, the subcontract was not constructed to similarly

14 shield Architect from shouldering redesign costs. After hearing arguments from the

15 parties, the district court ordered supplemental briefing so that the parties could

16 address what exactly the insurance payout covered. Architect included a letter from

17 Lexington to Centex as an exhibit in its supplemental briefing, in which Lexington

18 reminded Centex that its policy specifically excluded “any claim based upon or

                                              7
 1 arising out of the cost to repair or replace any faulty . . . construction . . . performed

 2 in whole or in part by . . . the insured[.]”

 3   {13}   Upon completion of briefing, the district court issued an order granting

 4 Architect’s motion for summary judgment. The order simply stated that, “having

 5 considered all of the pleadings and arguments of counsel, it is the finding and

 6 conclusion of the [c]ourt that there are no disputed issues of material fact and that

 7 [Architect is] entitled to judgment as a matter of law in accordance with [its]

 8 motion[].” Looking to the contract and these facts, we cannot determine on what basis

 9 the district court granted judgment as a matter of law. However, given the terms of

10 the contracts, we hold that summary judgment was not appropriate, as a matter of law,

11 for the reasons that follow.

12 III.     DISCUSSION

13   {14}   Neither counsel cites, nor have we been able to find, any New Mexico authority

14 precisely on point. The issue, which is one of first impression in New Mexico, is

15 whether the flow-down clause allows the limitation of liability clause in the prime

16 contract to limit Architect’s liability to whatever sums Centex could collect from the

17 errors and omissions insurance policy, or whether Architect’s liability is controlled

18 by the general liability clause in the subcontract. We hold that the general liability

19 clause in the subcontract controls Architect’s liability in the context of this case.

                                                  8
 1 A.       Standard of Review

 2   {15}   Rule 1-056(C) NMRA allows a party to move for summary judgment when

 3 there is “no genuine issue as to any material fact” and the moving party is entitled to

 4 “a judgment as a matter of law.” E.g., Self v. United Parcel Serv., Inc., 1998-NMSC-

 5 046, ¶ 6, 126 N.M. 396, 970 P.2d 582. Where the facts are not in dispute and only the

 6 legal significance of the facts is at issue, summary judgment is appropriate. Gardner-

 7 Zemke Co. v. State, 1990-NMSC-034, ¶ 11, 109 N.M. 729, 790 P.2d 1010. “[W]hen

 8 the [district] court’s grant of summary judgment is grounded upon an error of law,

 9 [however,] the case may be remanded so that the issues may be determined under the

10 correct principles of law.” Rummel v. Lexington Ins. Co., 1997-NMSC-041, ¶ 16, 123

11 N.M. 752, 945 P.2d 970.

12 B.       The Language of the Subcontract Controls

13   {16}   Although the parties disagree as to how the prime contract and the subcontract

14 apply in this instance, the district court made no finding as to ambiguity, and the

15 parties agree that the contracts are not ambiguous. See Kirkpatrick v. Introspect

16 Healthcare Corp., 1992-NMSC-070, ¶ 14, 114 N.M. 706, 845 P.2d 800 (stating rule

17 that “ambiguity is not established simply because the parties differ on the contract’s

18 proper construction”). We consider the contracts to be sufficient to reach our result.

                                               9
 1   {17}   Rather than indicate on what undisputed facts it relied when granting summary

 2 judgment, or orally recite its reasons for doing so, the district court mirrored the

 3 language of Rule 1-056(C), stating that there were “no disputed issues of material

 4 fact.” Id.4 (requiring a showing of “no genuine issue as to any material fact”). It

 5 appears, based on its order, that the district court applied the flow-down clause,

 6 incorporated the limitation of liability clause into the subcontract, and determined that

 7 Architect’s obligation to procure insurance was satisfied by the Lexington policy. If

 8 this is the case, the Lexington payment would have released Architect from liability

 9 for Centex’s claims.

10 1.       The Flow-Down Clause Contains “Words of Definite Limitation” That
11          Must Be Given Effect

12   {18}   Our courts strive to give effect to a contract according to its terms.

13 Aktiengesellschaft Der Harlander Buamwollspinnerie Und Zwirn-Fabrik v. Lawrence

            4
14          We are aware the district court is not required to state its reasons for granting
15   summary judgment. Garrett v. Nissen Corp., 1972-NMSC-046, ¶¶ 11-12, 84 N.M. 16,
16   498 P.2d 1359, overruled on other grounds by Klopp v. Wackenhut Corp., 1992-
17   NMSC-008, 113 N.M. 153, 824 P.2d 293. In complicated or novel cases such as this
18   one, however, it assists the parties in their briefing to “know upon what grounds the
19   judgment was granted in order to properly present the controversial issue to the
20   appellate court.” Wilson v. Albuquerque Bd. of Realtors, 1970-NMSC-096, ¶ 12, 81
21 N.M. 657, 472 P.2d 371, overruled in part by Akre v. Washburn, 1979-NMSC-017,
22   92 N.M. 487, 590 P.2d 635. It is equally beneficial to appellate courts attempting to
23   conduct competent appellate review. See Phillips v. United Serv. Auto. Ass’n, 1977-
24   NMCA-137, ¶¶ 34-36, 91 N.M. 325, 573 P.2d 680 (Sutin, J., specially concurring).
                                               10
 1 Walker Cotton Co., 1955-NMSC-090, ¶ 33, 60 N.M. 154, 288 P.2d 691. “Parties to

 2 a contract agree to be bound by its provisions . . . . When a contract was freely entered

 3 into by parties negotiating at arm’s length, the duty of the courts is ordinarily to

 4 enforce the terms of the contract which the parties made for themselves.” Nearburg

 5 v. Yates Petroleum Corp., 1997-NMCA-069, ¶ 31, 123 N.M. 526, 943 P.2d 560

 6 (citation omitted); 17A C.J.S. Contracts § 432 (2015) (“[W]here it is not ambiguous,

 7 a construction contract is to be construed according to its terms.” (footnote omitted)).

 8 As such, where a subcontract contains “words of definite limitation,” those words are

 9 given effect and the incorporation of the prime contract is limited accordingly. Perry

10 v. United States ex rel. Newell, 146 F.2d 398, 400 (5th Cir. 1945) (reasoning that

11 because the subcontract contained “words of definite limitation,” the work description

12 incorporated from the prime contract “was effective only to the extent that it did not

13 conflict with what was specifically agreed upon” in the subcontract). “Although a

14 subcontract may incorporate by reference the terms of the prime contract, the

15 incorporation may be limited to a special purpose.” Mountain States Constr. Co. v.

16 Tyee Elec., Inc., 718 P.2d 823, 825 (Wash. Ct. App. 1986).

17   {19}   Centex and Architect dispute the importance of Section 1.4.2(b) in the

18 subcontract. Section 1.4.2(b) provides that Architect is responsible for “[r]edesign

19 costs and additional construction costs of [Centex] required to correct [Architect’s]

                                              11
 1 errors or omissions.” In its discussion of the flow-down clause’s applicability, Centex

 2 argues that the “except as otherwise provided herein” language contained in the flow-

 3 down clause limits the flow-down clause’s applicability because Section 1.4.2(b)

 4 specifically allocates the liability between Centex and Architect. Thus, Centex argues,

 5 the flow-down clause does not bring in the limitation of liability clause of the prime

 6 contract because liability was otherwise provided for in the subcontract. We agree

 7 with Centex.

 8   {20}   The express language of the flow-down clause limits the incorporation of the

 9 prime contract into the subcontract. By its terms, only rights, obligations, risks, or

10 responsibilities that the prime contract set forth—and the subcontract has not

11 allocated otherwise—can flow down to the subcontract: “[Architect] shall, except as

12 otherwise provided herein, have all rights . . . obligations, risks and responsibilities

13 toward [Centex.]” “Except as otherwise provided” are “words of definite limitation.”

14 Cf. Holdeman v. Epperson, 111Ohio St. 3d 551, 2006-Ohio-6209, 857 N.E.2d 583,

15 at ¶ 19 (naming “except as otherwise provided in the operating agreement” as a

16 “limiting word[]” (internal quotation marks and citation omitted)). Section 1.4.2(b)

17 allocates Architect’s liability to Centex, clarifying that Architect is liable for redesign

18 and additional construction costs required to correct Architect’s errors or omissions.

19 The rights created in the limitation of liability clause, if allowed to flow down to the

                                               12
 1 subcontract, “limit [Architect’s] liability to [Centex] for any errors or omissions in the

 2 design of the [p]roject” to sums collected from errors and omissions insurance. Both

 3 provisions purport to allocate Architect’s liability to Centex, but do so in ways that

 4 are so different that they cannot coexist. In order to give the “except as otherwise

 5 provided herein” language full effect, we therefore limit the flow-down clause’s

 6 broad incorporation of the prime contract; by its express terms, the subcontract’s

 7 allocation of liability governs.

 8 2.       To The Extent That Section 1.4.2(b) and the Limitation Of Liability
 9          Clause Allocate Architect’s Liability Differently, Section 1.4.2(b) Controls

10   {21}   Even without the flow-down clause’s words of definite limitation, the

11 subcontract’s allocation of liability still prevails over the flow-down clause’s

12 incorporation of the prime contract. Numerous jurisdictions have implemented the

13 rule that “if the specific provisions of the subcontract conflict with the plans and

14 specifications, or with the general contract between the prime contractor and the

15 owner (all of which are incorporated into the subcontract), the terms of the

16 subcontract prevail.” McKinney Drilling Co. v. Collins Co., 517 F. Supp. 320, 327-28

17 (N.D. Ala. 1981). “[W]here the [s]ubcontract has clearly stated the parties’ intentions

18 at the time of contracting, the flow-through clause cannot be read to render those

19 clear intentions a nullity.” Larry Snyder & Co. v. Miller, No. 07-CV-455-PJC, 2010

20 WL 830616, at *6 (N.D. Okla. Mar. 2, 2010). “The general language of a standard

                                               13
 1 incorporation clause cannot trump the specific language of the subcontract[.]”

 2 Bernotas v. Super Fresh Food Mkts., Inc., 863 A.2d 478, 484 (Pa. 2004).

 3   {22}   The allocation of liability in the prime contract cannot coexist with Section

 4 1.4.2(b). Architect’s liability under one is not equivalent to its liability under the

 5 other. While the prime contract limits Centex’s recovery from Architect to “whatever

 6 sums” it can collect from the errors and omissions insurance carrier, the subcontract

 7 allows, without limit, recovery for redesign costs and additional construction costs,

 8 and does not preclude “pursuit of available insurance proceeds.” Pursuant to the legal

 9 principles outlined above, the express allocation of liability in the subcontract

10 prevails over the limitation of liability clause in the prime contract; Section 1.4.2.(b)

11 governs Architect’s liability to Centex. Architect must therefore shoulder full

12 responsibility for the consequences of its errors and omissions, if any.

13 3.       Our Interpretation Is In Accordance With the Order of Precedence Clause

14   {23}   The parties are divided on whether our interpretation of the contracts is in

15 accord with the order of precedence clause. We conclude that it is. See APAC–Tenn.,

16 Inc. v. J.M. Humphries Constr. Co., 732 S.W.2d 601, 604 (Tenn. Ct. App. 1986)

17 (holding that the clear language of the order of precedence clause required that the

18 subcontract govern in the event that the prime contract’s provisions were inconsistent

19 with the subcontract). In the order of precedence clause, the parties required that all

                                              14
 1 terms and all documents be considered as complementary and laid out an order of

 2 precedence “in the event that such an interpretation is not possible[.]” The parties

 3 agreed that, in the event that the terms of the contracts somehow conflict, the

 4 subcontract governs unless the prime contract “imposes a higher standard or greater

 5 requirement on the parties,” in which case the prime contract governs. Each party

 6 argues that its own interpretation of the flow-down clause’s applicability is in accord

 7 with the application of the “higher standard.” For example, Centex argues that the

 8 prime contract does not impose any higher standard, so the subcontract should

 9 govern. Conversely, Architect argues that the prime contract actually imposes a

10 higher standard than the subcontract, so the prime contract should govern.

11   {24}   To the extent that the flow-down clause causes any conflict between the two

12 agreements’ allocation of liability, we agree with Centex; the subcontract imposes a

13 higher standard. Section 1.4.2(b) represents a more severe undertaking for Architect

14 than the limitation of liability clause in terms of monetary responsibility for its own

15 errors and omissions. The limitation of liability clause imposes the requirement that

16 Architect obtain and maintain a $3,000,000 insurance policy, which then covers its

17 liability, while Section 1.4.2(b) allows Architect to potentially be liable for any

18 construction or redesign costs incurred as a result of its errors and omissions.

19 Architect is therefore liable for a much higher amount of money for its errors and

                                             15
 1 omissions under Section 1.4.2(b) than under the limitation of liability clause. As such,

 2 the subcontract takes precedence, and our determination that the terms of the

 3 subcontract govern over conflicting terms incorporated from the prime contract is

 4 therefore in accordance with the order of precedence clause.

 5   {25}   Although the flow-down clause does not incorporate the limitation of liability

 6 clause into the subcontract under our holding here, the flow-down clause is not

 7 rendered superfluous. It still applies to incorporate other clauses from the prime

 8 contract into the subcontract, so long as such an incorporation does not run afoul of

 9 its own words of definite limitation. It is only when the subcontract provides rights,

10 obligations, risks, and responsibilities that differ from those set forth in the prime

11 contract that the subcontract governs regardless of the flow-down clause application.

12 IV.      CONCLUSION

13   {27}   We conclude that the district court based its grant of summary judgment on a

14 mistaken interpretation of the law. Applying rules governing the applicability of the

15 flow-down clause that are widely accepted among other jurisdictions, we determine

16 that the subcontract’s terms regarding liability govern for any one of three reasons:

17 (1) the flow-down clause’s words of definite limitation must be given effect; (2) the

18 well-recognized rule that when specific provisions in the subcontract conflict with

19 provisions in the prime contract, the subcontract controls; and (3) the order or

                                              16
1 precedence clause explicitly requires that the subcontract govern when clauses cannot

2 be read as complementary. We hold that the flow-down clause does not incorporate

3 the limitation of liability clause from the prime contract in the subcontract, and

4 Section 1.4.2(b) governs Architect’s liability to Centex. We reverse.

5   {28}   IT IS SO ORDERED.

6                                        ___________________________________
7                                        RODERICK T. KENNEDY, Judge

8 WE CONCUR:

 9 _________________________________
10 MICHAEL D. BUSTAMANTE, Judge

11 _________________________________
12 JONATHAN B. SUTIN, Judge

                                           17