Centex/Worthgroup, LLC v. Worthgroup Architects, L.P.

• Decision Date: 10 September 2015
• Docket Number: No. 32,331.,32,331.
• Parties: CENTEX/WORTHGROUP, LLC, Plaintiff–Appellant, v. WORTHGROUP ARCHITECTS, L.P. and Terracon, Inc., Defendants–Appellees.
• Court: Court of Appeals of New Mexico

365 P.3d 37

CENTEX/WORTHGROUP, LLC, Plaintiff–Appellant,

v.WORTHGROUP ARCHITECTS, L.P. and Terracon, Inc., Defendants–Appellees.

No. 32,331.

Court of Appeals of New Mexico.

Sept. 10, 2015.

Certiorari Denied, Dec. 22, 2015, No. S-1-SC-35549.

Lorenz Law, Alice T. Lorenz, Albuquerque, NM, Akin Gump Strauss Hauer & Feld LLP, Pratik A. Shah, Hyland Hunt, Washington, D.C., for Appellant.

Montgomery & Andrews, P.A., Kevin M. Sexton, Andrew S. Montgomery, Santa Fe, NM, for Appellee Worthgroup Architects, L.P.

OPINION

KENNEDY, Judge.

I. INTRODUCTION

{1} This appeal involves a dispute between a general contractor, Centex/Worthgroup, LLC (Centex), and a subcontractor, Worthgroup Architects, L.P. (Architect). Centex and Architect entered into a contractual relationship which, among other things, governed the construction of a Mechanically Stabilized Earth (MSE) Wall. The MSE Wall ultimately failed, and Centex brought this suit against Architect and Terracon, Inc., claiming over $6,000,000 in damages for redesign and repair costs that it incurred. Centex asserted that Architect is required to cover the costs Centex incurred in redesigning and repairing the MSE Wall. Architect conversely asserted that its monetary obligations to Centex have been satisfied by the payment of proceeds of insurance coverage that it was contractually obligated to procure and maintain.

{2} Centex appeals a grant of summary judgment to Architect, in which the district court apparently determined that a limitation of liability clause in a prime contract flowed down to the subcontract by virtue of a flow-down clause. We reverse. We note that Centex contends genuine issues of material fact remain, but, for the reasons that follow, we decline to consider whether this is the case and remand so that the district court can consider the facts and arguments in light of the holding in this Opinion.

II. BACKGROUND

{3} In February 2002, the Inn of the Mountain Gods Resort and Casino (Owner) contracted with Centex for an expansion and renovation project. These parties defined the terms of their business relationship in a second amended design/build construction contract (the prime contract). Centex then entered into a subcontract with Architect, where Architect agreed to perform design work on the project. Both the prime contract and the subcontract are relevant to our analysis in this case.¹

{4} We begin with a brief overview of the prime contract and subcontract, continue with an account of the proceedings in district court, and end with a discussion of the law relevant to our holding.

A. The Prime Contract

{5} The prime contract governs the contractual relationship between Owner and Centex with regard to the project. The first section of the prime contract that the parties have termed the "limitation of liability" clause² is relevant to this appeal. The limitation of liability clause provides:

In addition to all other insurance requirements set forth in this Agreement, Design/Builder shall require its design professional Subcontractor(s) to obtain and maintain professional errors and omissions coverage with respect to design services in accordance herewith.... [S]uch coverage shall be for each such design professional Subcontractor in an amount not less than $3,000,000. Owner agrees that it will limit Design/Builder liability to [O]wner for any errors or omissions in the design of the Project to whatever sums Owner is able to collect from the above described professional errors and omissions insurance carrier.

B. The Subcontract

{6} The subcontract, which governs the contractual relationship between Centex and Architect with regard to the project, contains an incorporation by reference clause, which requires Architect to perform the design work in strict accordance with the prime contract and incorporates the prime contract by reference. The subcontract reflects Centex's and Architect's intent that "all the terms of all documents are to be considered as complementary." Should such an interpretation be impossible, however, the parties provide the desired sequence for use of the documents, hereinafter referred to as the order of precedence clause.

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

{7} The subcontract also includes a provision—referred to by the parties as a flow–2 down clause³ —which states:

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

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

{8} The subcontract also provides a general liability clause, which makes Architect responsible for "[r]edesign costs and additional construction costs of [Centex] and/or the [c]ontractor required to correct [Architect's] errors or omissions," but specifies that Architect's "responsibility shall not preclude the pursuit of available insurance proceeds on account thereof[.]"

{9} Finally, the subcontract assigns rights and obligations to the parties regarding insurance and liability. For instance, Architect is required to procure "insurance coverage from insurers acceptable to [Centex]" and "shall be responsible for all deductibles relating to claims under all applicable insurance policies on account of the [d]esign [w]ork, including the [p]rofessional [l]iability [i]nsurance provided by Design Builder." Architect is further required to name Centex, the [c]ontractor, and Owner as "additional insureds" on the insurance coverage and maintain the coverage "until expiration of [Architect's] obligations" under the subcontract. Another section of the subcontract requires Architect to "provide a[p]roject [p]olicy for [p]rofessional [l]iability insurance with [l]imits of [l]iability of $3,000,000 per occurrence and $3,000,000 Aggregate."

C. Construction And Failure of the MSE Wall

{10} Construction of the MSE Wall began in June 2003. The MSE Wall began to fail in April 2004, causing damage to various "adjacent structures and ground-supported elements." Owner demanded that Centex remedy the defects and damage. Despite having demanded that Architect redesign the MSE Wall and repair any damage that resulted from the wall's failure, Centex spent over $6,000,000 for others to redesign and repair the MSE Wall in September 2004. Centex, as a named insured, requested payment of the available policy limits from Lexington Insurance Company (Lexington) and received payment in the amount of $3,000,000, representing the full policy limit for the claim submitted.

D. District Court Proceedings

{11} Centex commenced this suit against Architect in May 2007 seeking $6,766,155.56, plus costs and expenses, on the grounds that Architect refused to adequately reimburse Centex for the damages incurred in implementing the redesign and repairs required by Owner. Centex's complaint alleges negligence, negligent misrepresentation, breach of contract, and entitlement to attorney fees. Architect, in its response to Centex's complaint, counterclaimed against Centex with three claims: declaratory judgment based on the limitation of liability clause in the prime contract and satisfaction of liability via Lexington's payment of the insurance proceeds; breach of contract based on Centex's failure to enforce the limitation of liability clause against Owner; and indemnification also based on Centex's failure to enforce the limitation of liability clause in favor of Architect. Architect later filed a motion for summary judgment, asserting that the prime contract's limitation of liability clause, which was incorporated into the subcontract through the flow-down clause, limited Centex's ability to recover damages arising from design errors or omissions. Architect also asserted in its motion that the Lexington payment satisfied and therefore extinguished Architect's liability to Centex for design errors and omissions. Architect further asserted that summary judgment was appropriate because of Centex's failure to enforce the limitation of liability clause for the benefit of Architect, as required by the subcontract.

{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 was intended to satisfy. Centex argued that the policy was paid for construction defects while Architect argued that the Lexington policy was paid for design errors and omissions. No release was executed as a result of the Lexington payment. When the district court questioned Centex as to why, if the policy was for construction defects, Centex did not recover from the remaining policy covering design errors and omissions, Centex conceded that if the Lexington policy were indeed for construction defects, it could conceivably make another claim against a design errors and omissions policy. Centex insisted, however, that while the prime contract was set up to shield Owner from excess costs, the subcontract was not constructed to similarly shield Architect from shouldering redesign costs. After hearing arguments from the parties, the district court ordered supplemental briefing so that the parties could address what exactly the insurance payout covered. Architect included a letter from Lexington to Centex as an exhibit in its supplemental briefing, in which Lexington reminded Centex...