Date: 11-04-2015

Case Style: Centex/Worthgroup, LLC v. Worthgroup Architects, L.P.

Case Number: 32,331

Judge: Roderick Kennedy

Court: IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO

Plaintiff's Attorney: Alice Lorenz, Pratik Shah and Hyland Hunt

Defendant's Attorney: Kevin Sexton and Andrew Montgomery

Description: 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” clause is relevant to this appeal. The 2
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
3
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.
20 A concept closely related to incorporation by reference, “flow-down” clauses 3 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 {7} The subcontract also includes a provision—referred to by the parties as a flow
2 down clause —which states: 3
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
5
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.
6
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
7
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
8
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.
9
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.
14 We are aware the district court is not required to state its reasons for granting 4 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., 199217 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, 197724 NMCA-137, ¶¶ 34-36, 91 N.M. 325, 573 P.2d 680 (Sutin, J., specially concurring). 10
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. (requiring a showing of “no genuine issue as to any material fact”). It 4
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
11
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]
12
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
13
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
14
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
15
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
16
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.

Outcome: 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 flow-down clause that are widely accepted among other jurisdictions, we determine that the subcontract’s terms regarding liability govern for any one of three reasons:
(1) the flow-down clause’s words of definite limitation must be given effect; (2) the well-recognized rule that when specific provisions in the subcontract conflict with provisions in the prime contract, the subcontract controls; and (3) the order or precedence clause explicitly requires that the subcontract govern when clauses cannot be read as complementary. We hold that the flow-down clause does not incorporate the limitation of liability clause from the prime contract in the subcontract, and Section 1.4.2(b) governs Architect’s liability to Centex. We reverse.

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