Owner and Contractor Play “Hot Potato” with Design Error Claim

The Fifth Circuit recently handed down an important lesson to building owners: if you ask contractors to point out potential design errors, make sure you are prepared to resolve them.  In reversing the district court’s grant of summary judgment in Dallas/Fort Worth International Airport Board v. INET Airport Systems, Inc., 819 F.3d 245 (2016), the Fifth Circuit held that a contract between an airport and a contractor placed the risk for defective design on both parties, and that it was not clear from the record which party had impeded the resolution of a design defect flagged by the contractor.  While contracting parties can allocate the risk of design defects as they see fit, it is imperative to adopt an explicit procedure for resolving flagged defects and to expressly indicate which party has the burden of moving the resolution process along at each stage of the process.

INET Airport Systems, Inc. (INET) entered into a contract with the Dallas/Fort Worth International Airport Board (DFW) for the installation of rooftop air handling units in the passenger boarding bridges in Terminal E of the DFW Airport.  The contract required INET to follow the design specifications provided by DFW, which Campos Engineering (Campos) had prepared for DFW.  INET was prohibited from substituting any materials or designs from Campos’ specifications without prior authorization from DFW, and had a contractual obligation to notify DFW immediately of any apparent defect in the plans or specifications.  The parties were to remedy these design defects through a written change order issued by DFW and agreed to by INET.

INET initiated the change order process in a construction kick-off meeting in October, 2009 when it noted that the rooftop units specified by Campos were potentially incompatible with systems already in place at the airport.  After receiving no immediate response from DFW, INET submitted a Request for Information (RFI) asking how it should proceed.  INET, DFW, and Campos conferred on a resolution to the design error, ultimately generating two proposals.  INET admittedly rejected one of these proposals, as it determined that it would not effectively solve the problem, while DFW failed to fully respond to a second RFI submitted by INET asking for more information regarding the second proposal.  DFW eventually notified INET that INET had failed to meet the substantial completion deadline specified in the contract, declined to pay at least one invoice submitted by INET, and eventually had the work completed by a substitute contractor in July, 2013.  DFW sued INET for breach of contract, and INET countersued claiming entitlement to the money DFW refused to pay and for unjust enrichment and money had and received on the part of DFW.

The Fifth Circuit reversed the district court’s grant of partial summary judgment in favor of INET, finding disputes of material fact regarding which party prevented performance by failing to fully cooperate in arriving at a solution once INET discovered the error.  While the district court focused on determining which party was the first to breach, the Fifth Circuit concentrated on the respective obligations of the two parties once the error was flagged.  The court found that the language of the contract placed the risk of, and obligations to address, defective designs on both parties. The contract charged INET with pointing out potential defects, and DFW was responsible for issuing the change order with a resolution.  However, this change order was not a unilateral power wielded by DFW – it had to be accepted by INET.  Accordingly, the court remanded the case to the district court for a factual inquiry into which party obstructed the change order process, breaching their agreement to work together towards a resolution.