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A contract is an exchange of promises, some written and others not. The written promises in a construction subcontract might be found in the document the parties actually sign, or in other documents to which the signed document refers.

Other promises may be contained in a verbal agreement. Still other promises are implied by the courts, such as the obligation of good faith and fair dealing which, at a minimum, restricts each party from actively obstructing the other party’s attempts to keep its promises under the contract, though it may not guarantee that work will be done in any particular sequence.

Another promise that courts have implied into construction contracts is sometimes known as the “Spearin warranty” or the “Spearin doctrine,” so-called because it was recognized in the U.S. Supreme Court’s decision in the case of United States v. Spearin. Spearin was a lawsuit brought by a government contractor to recover compensation for work it had performed before it was forced to stop due to flooding of its work area, which it had excavated for construction of a dry dock at the Brooklyn Navy Yard. The flooding resulted from an inadequate drainage system, which the contractor had built in accordance with a government-provided design. The design required Spearin to relocate a section of six-foot sewer pipe within an existing city sewer system. The Supreme Court held:

The risk of the existing system proving adequate might have rested upon Spearin, if the contract for the dry dock had not contained the provision for relocation of the six-foot sewer. But the insertion of the articles prescribing the character, dimensions and location of the sewer imported a warranty that if the specifications were complied with, the sewer would be adequate.

The “warranty that if the specifications were complied with, the sewer would be adequate,” might be loosely referred to as a “warranty of constructability,” i.e., a warranty that an owner-provided design is capable of being built. The Supreme Court carefully limited the warranty of constructability to the extent that plans and specifications were actually provided by the owner, where it noted that “The risk of the existing system proving adequate might have rested upon Spearin, if the contract for the dry dock had not contained the provision for relocation of the six-foot sewer.” The Supreme Court further emphasized that important qualification:

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. Thus one who undertakes to erect a structure upon a particular site, assumes ordinarily the risk of subsidence of the soil. But if the contractor is bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequence of defects in the plans and specifications. This responsibility of the owner is not overcome by the usual clauses requiring builders to visit the site, to check the plans, and to inform themselves of the requirements of the work as is shown by [two earlier Supreme Court decisions], where it was held that the contractor should be relieved, if he was misled by erroneous statements in the specifications.

The Spearin decision makes it quite clear that where the contractor is not “bound to build according to plans and specifications prepared by the owner,” then the contractor may very well “be responsible for the consequence of defects in the plans and specifications.” On a modern “design-build” project, for example, the builder is the designer, or, at the very least, is made expressly responsible for reviewing, approving and adopting plans that are prepared by someone else. In either case, the project is clearly designated as “design-build,” and there is no question that the builder must include the cost to pay design professionals in its bid price.

 Design and Information Disclaimers

Unfortunately, requirements for builders to provide “design-build” warranties aren’t always clearly identified or obvious. Instead, the owner or an upper-tier builder may use a disclaimer, which denies responsibility for the constructability of all of the design, or even just key parts of the design, by burying it in the general conditions, specifications, or other contract documents.

Another, much more recent construction case arising out of work site flooding was decided by a U.S. Court of Appeals in 2003, and illustrates a particularly subtle way that disclaimers can shift the cost of design deficiencies, as well as the burden for studying existing site conditions, to the builder. The owner, a public entity, sought a contractor to build a subway tunnel, after conducting its own study of the subsurface site conditions. In order to use a cheaper method of tunneling, the public owner had determined that a dewatering system was needed to lower the groundwater, and it designed and specified a dewatering system in the bid documents.

However, the bid specifications disclaimed any warranty for the effectiveness of the owner-designed dewatering system. The disclaimer wasn’t labeled “design warranty” or “design disclaimer,” so that the builder would be sure to notice it. Instead, the disclaimer was contained in a section of the specifications providing that “the designed dewatering system may not eliminate all groundwater from the tunnel excavation.” The same section went on to say that “The Contractor shall be prepared to support the tunnel face … and to handle and convey groundwater from the tunnel to appropriate discharge locations,” and that “additional dewatering wells may be required….”

The last phrase, “additional dewatering wells may be required,” is quite brief, but is identifiable as a disclaimer. It says, in effect, “this part of the design might not be good enough.” It disclaims any representation by the owner that the design would be sufficient to overcome the subsurface groundwater conditions.

The builder’s costs proved to be nearly double the amount of its lump-sum, $43 million bid, because the dewatering system, as designed, was grossly insufficient to reduce the water level as required for the cheaper tunneling method. The contractor cited United States v. Spearin, which the Court of Appeals acknowledged as “the seminal case recognizing a cause of action for breach of contractual warranty of specifications.” The Court of Appeals ruled, however, that the builder had assumed responsibility for any deficiencies in the design of the dewatering system.

In effect, then, the builder was warranting that the design of the dewatering system would be sufficient in light of existing subsurface site conditions, although the contract didn’t say so explicitly. The contract only said that the owner wasn’t warranting the design, where it said “additional wells may be required.” Nonetheless, that turn of phrase was enough to shift all the extra costs to the builder when the design proved ineffective.

Note also that the owner had a specific reason for disclaiming responsibility for the number of dewatering wells in its design. Before it solicited bids on the building contract, during the design phase, the owner’s engineer had studied the subsurface conditions and advised that no dewatering system was likely to be effective. In fact, the engineer’s first report advised that the cheaper method of tunneling, which required the dewatering system, should be “strictly prohibited on this contract.” The owner’s engineer said the same thing in a second report as well. It was only when the owner sent its engineer back to the drawing board a third time that it concluded a dewatering system might work, and then its design called for over 300 dewatering wells. The bid specifications, however, provided for only 61 dewatering wells, albeit with the disclaimer that “additional wells may be required.” In other words, bidders should assume the very worst when they see a design disclaimer in the bid documents.

Disclaimers might deal with a specific aspect of the design and/or site conditions, as in the above example, or they might apply to the entire design, as in a general disclaimer that the plans and specifications may not comply with local building codes. In either event, provisions contained in the prime contract documents are likely to be flowed-down to subcontractors who provide the work and materials, and who thus have the most to lose. Subcontractors might also conceivably find design disclaimers in a subcontract form prepared by a design-builder.

Construction contract documents are, to an enormous degree, an object lesson in the use of exculpatory language and disclaimers, the purpose of which is to shift the costs of the project leaders’ mistakes onto the backs of the businesses hired to perform the work. Design and information disclaimers are, in essence, a back-handed form of design warranty, where the warranty is provided by a builder who did not prepare the design or perform in-depth studies of underground site conditions. Unfortunately, any disclaimer of the suitability of a particular portion of a design is probably included for very specific reasons that will not be disclosed to bidders, who are sought to be kept “in the dark.” Design disclaimers should be viewed with extreme caution by subcontractors, who should always seek to have them removed or countered with other contract language.