September 10, 2015 – Centex/Worthgroup, LLC v. Worthgroup Architects, L.P. and Terracon, Inc., No. 32,331

IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO
Opinion Number: __________
Filing Date: September 10, 2015
NO. 32,331
CENTEX/WORTHGROUP, LLC,
Plaintiff-Appellant,
v.
WORTHGROUP ARCHITECTS, L.P. and
TERRACON, INC.,
Defendants-Appellees.
APPEAL FROM THE DISTRICT COURT OF OTERO COUNTY
Jerry H. Ritter, District Judge
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

1Architect also entered into an agreement with Terracon, Inc. for services to
construct the MSE Wall. Terracon has since been dismissed from this case.
2For the sake of clarity, we will continue using this characterization .
2
{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

3A concept closely related to incorporation by reference, “flow-down” clauses
are commonly used in construction contracts to allow a subcontractor to “assume
toward the general contractor all of the obligations and responsibilities the contractor
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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-
down clause3 —which states:

assumes toward the owner in the [prime] contract.” T. Bart Gary, Incorporation by
Reference and Flow-Down Clauses, 10 Const. Law 1, 46 (1990).
4
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

5
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.

6
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

7
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
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 that its policy specifically excluded “any claim based upon or arising out of

8
the cost to repair or replace any faulty . . . construction . . . performed in whole or in
part by . . . the insured[.]”
{13} 	Upon completion of briefing, the district court issued an order granting
Architect’s motion for summary judgment. The order simply stated that, “having
considered all of the pleadings and arguments of counsel, it is the finding and
conclusion of the [c]ourt that there are no disputed issues of material fact and that
[Architect is] entitled to judgment as a matter of law in accordance with [its]
motion[].” Looking to the contract and these facts, we cannot determine on what basis
the district court granted judgment as a matter of law. However, given the terms of the
contracts, we hold that summary judgment was not appropriate, as a matter of law, for
the reasons that follow.
III. 	DISCUSSION
{14} 	Neither counsel cites, nor have we been able to find, any New Mexico authority
precisely on point. The issue, which is one of first impression in New Mexico, is
whether the flow-down clause allows the limitation of liability clause in the prime
contract to limit Architect’s liability to whatever sums Centex could collect from the
errors and omissions insurance policy, or whether Architect’s liability is controlled
by the general liability clause in the subcontract. We hold that the general liability
clause in the subcontract controls Architect’s liability in the context of this case.

9
A. 	Standard of Review
{15} 	Rule 1-056(C) NMRA allows a party to move for summary judgment when
there is “no genuine issue as to any material fact” and the moving party is entitled to
“a judgment as a matter of law.” E.g., Self v. United Parcel Serv., Inc., 1998-NMSC-
046, ¶ 6, 126 N.M. 396, 970 P.2d 582. Where the facts are not in dispute and only the
legal significance of the facts is at issue, summary judgment is appropriate. Gardner-
Zemke Co. v. State, 1990-NMSC-034, ¶ 11, 109 N.M. 729, 790 P.2d 1010. “[W]hen
the [district] court’s grant of summary judgment is grounded upon an error of law,
[however,] the case may be remanded so that the issues may be determined under the
correct principles of law.” Rummel v. Lexington Ins. Co., 1997-NMSC-041, ¶ 16, 123
N.M. 752, 945 P.2d 970.
B. 	The Language of the Subcontract Controls
{16} 	Although the parties disagree as to how the prime contract and the subcontract
apply in this instance, the district court made no finding as to ambiguity, and the
parties agree that the contracts are not ambiguous. See Kirkpatrick v. Introspect
Healthcare Corp., 1992-NMSC-070, ¶ 14, 114 N.M. 706, 845 P.2d 800 (stating rule
that “ambiguity is not established simply because the parties differ on the contract’s
proper construction”). We consider the contracts to be sufficient to reach our result.

4We are aware the district court is not required to state its reasons for granting
summary judgment. Garrett v. Nissen Corp., 1972-NMSC-046, ¶¶ 11-12, 84 N.M. 16,
498 P.2d 1359, overruled on other grounds by Klopp v. Wackenhut Corp., 1992-
NMSC-008, 113 N.M. 153, 824 P.2d 293. In complicated or novel cases such as this
one, however, it assists the parties in their briefing to “know upon what grounds the
judgment was granted in order to properly present the controversial issue to the
appellate court.” Wilson v. Albuquerque Bd. of Realtors, 1970-NMSC-096, ¶ 12, 81
N.M. 657, 472 P.2d 371, overruled in part by Akre v. Washburn, 1979-NMSC-017,
92 N.M. 487, 590 P.2d 635. It is equally beneficial to appellate courts attempting to
conduct competent appellate review. See Phillips v. United Serv. Auto. Ass’n, 1977-
NMCA-137, ¶¶ 34-36, 91 N.M. 325, 573 P.2d 680 (Sutin, J., specially concurring).
10
{17} 	Rather than indicate on what undisputed facts it relied when granting summary
judgment, or orally recite its reasons for doing so, the district court mirrored the
language of Rule 1-056(C), stating that there were “no disputed issues of material
fact.” Id.4 (requiring a showing of “no genuine issue as to any material fact”). It
appears, based on its order, that the district court applied the flow-down clause,
incorporated the limitation of liability clause into the subcontract, and determined that
Architect’s obligation to procure insurance was satisfied by the Lexington policy. If
this is the case, the Lexington payment would have released Architect from liability
for Centex’s claims.
1. 	The Flow-Down Clause Contains “Words of Definite Limitation” That
Must Be Given Effect
{18} 	Our 	courts 	strive 	to 	give 	effect 	to 	a 	contract 	according 	to 	its 	terms.
Aktiengesellschaft Der Harlander Buamwollspinnerie Und Zwirn-Fabrik v. Lawrence
Walker Cotton Co., 1955-NMSC-090, ¶ 33, 60 N.M. 154, 288 P.2d 691. “Parties to

11
a contract agree to be bound by its provisions . . . . When a contract was freely entered
into by parties negotiating at arm’s length, the duty of the courts is ordinarily to
enforce the terms of the contract which the parties made for themselves.” Nearburg
v. Yates Petroleum Corp., 1997-NMCA-069, ¶ 31, 123 N.M. 526, 943 P.2d 560
(citation omitted); 17A C.J.S. Contracts § 432 (2015) (“[W]here it is not ambiguous,
a construction contract is to be construed according to its terms.” (footnote omitted)).
As such, where a subcontract contains “words of definite limitation,” those words are
given effect and the incorporation of the prime contract is limited accordingly. Perry
v. United States ex rel. Newell, 146 F.2d 398, 400 (5th Cir. 1945) (reasoning that
because the subcontract contained “words of definite limitation,” the work description
incorporated from the prime contract “was effective only to the extent that it did not
conflict with what was specifically agreed upon” in the subcontract). “Although a
subcontract may incorporate by reference the terms of the prime contract, the
incorporation may be limited to a special purpose.” Mountain States Constr. Co. v.
Tyee Elec., Inc., 718 P.2d 823, 825 (Wash. Ct. App. 1986).
{19} 	Centex and Architect dispute the importance of Section 1.4.2(b) in the
subcontract. Section 1.4.2(b) provides that Architect is responsible for “[r]edesign
costs and additional construction costs of [Centex] required to correct [Architect’s]
errors or omissions.” In its discussion of the flow-down clause’s applicability, Centex

12
argues that the “except as otherwise provided herein” language contained in the flow-
down clause limits the flow-down clause’s applicability because Section 1.4.2(b)
specifically allocates the liability between Centex and Architect. Thus, Centex argues,
the flow-down clause does not bring in the limitation of liability clause of the prime
contract because liability was otherwise provided for in the subcontract. We agree
with Centex.
{20} 	The express language of the flow-down clause limits the incorporation of the
prime contract into the subcontract. By its terms, only rights, obligations, risks, or
responsibilities that the prime contract set forth—and the subcontract has not allocated
otherwise—can flow down to the subcontract: “[Architect] shall, except as otherwise
provided herein, have all rights . . . obligations, risks and responsibilities toward
[Centex.]” “Except as otherwise provided” are “words of definite limitation.” Cf.
Holdeman v. Epperson, 111Ohio St. 3d 551, 2006-Ohio-6209, 857 N.E.2d 583, at ¶
19 (naming “except as otherwise provided in the operating agreement” as a “limiting
word[]” (internal quotation marks and citation omitted)). Section 1.4.2(b) allocates
Architect’s liability to Centex, clarifying that Architect is liable for redesign and
additional construction costs required to correct Architect’s errors or omissions. The
rights created in the limitation of liability clause, if allowed to flow down to the
subcontract, “limit [Architect’s] liability to [Centex] for any errors or omissions in the

13
design of the [p]roject” to sums collected from errors and omissions insurance. Both
provisions purport to allocate Architect’s liability to Centex, but do so in ways that are
so different that they cannot coexist. In order to give the “except as otherwise
provided herein” language full effect, we therefore limit the flow-down clause’s broad
incorporation of the prime contract; by its express terms, the subcontract’s allocation
of liability governs.
2. 	To The Extent That Section 1.4.2(b) and the Limitation Of Liability Clause
Allocate Architect’s Liability Differently, Section 1.4.2(b) Controls
{21} 	Even without the flow-down clause’s words of definite limitation, the
subcontract’s allocation of liability still prevails over the flow-down clause’s
incorporation of the prime contract. Numerous jurisdictions have implemented the rule
that “if the specific provisions of the subcontract conflict with the plans and
specifications, or with the general contract between the prime contractor and the
owner (all of which are incorporated into the subcontract), the terms of the subcontract
prevail.” McKinney Drilling Co. v. Collins Co., 517 F. Supp. 320, 327-28 (N.D. Ala.
1981). “[W]here the [s]ubcontract has clearly stated the parties’ intentions at the time
of contracting, the flow-through clause cannot be read to render those clear intentions
a nullity.” Larry Snyder & Co. v. Miller, No. 07-CV-455-PJC, 2010 WL 830616, at
*6 (N.D. Okla. Mar. 2, 2010). “The general language of a standard incorporation

14
clause cannot trump the specific language of the subcontract[.]” Bernotas v. Super
Fresh Food Mkts., Inc., 863 A.2d 478, 484 (Pa. 2004).
{22} 	The allocation of liability in the prime contract cannot coexist with Section
1.4.2(b). Architect’s liability under one is not equivalent to its liability under the other.
While the prime contract limits Centex’s recovery from Architect to “whatever sums”
it can collect from the errors and omissions insurance carrier, the subcontract allows,
without limit, recovery for redesign costs and additional construction costs, and does
not preclude “pursuit of available insurance proceeds.” Pursuant to the legal principles
outlined above, the express allocation of liability in the subcontract prevails over the
limitation of liability clause in the prime contract; Section 1.4.2.(b) governs
Architect’s liability to Centex. Architect must therefore shoulder full responsibility
for the consequences of its errors and omissions, if any.
3. 	Our Interpretation Is In Accordance With the Order of Precedence Clause
{23} 	The parties are divided on whether our interpretation of the contracts is in
accord with the order of precedence clause. We conclude that it is. See APAC–Tenn.,
Inc. v. J.M. Humphries Constr. Co., 732 S.W.2d 601, 604 (Tenn. Ct. App. 1986)
(holding that the clear language of the order of precedence clause required that the
subcontract govern in the event that the prime contract’s provisions were inconsistent
with the subcontract). In the order of precedence clause, the parties required that all

15
terms and all documents be considered as complementary and laid out an order of
precedence “in the event that such an interpretation is not possible[.]” The parties
agreed that, in the event that the terms of the contracts somehow conflict, the
subcontract governs unless the prime contract “imposes a higher standard or greater
requirement on the parties,” in which case the prime contract governs. Each party
argues that its own interpretation of the flow-down clause’s applicability is in accord
with the application of the “higher standard.” For example, Centex argues that the
prime contract does not impose any higher standard, so the subcontract should govern.
Conversely, Architect argues that the prime contract actually imposes a higher
standard than the subcontract, so the prime contract should govern.
{24} 	To the extent that the flow-down clause causes any conflict between the two
agreements’ allocation of liability, we agree with Centex; the subcontract imposes a
higher standard. Section 1.4.2(b) represents a more severe undertaking for Architect
than the limitation of liability clause in terms of monetary responsibility for its own
errors and omissions. The limitation of liability clause imposes the requirement that
Architect obtain and maintain a $3,000,000 insurance policy, which then covers its
liability, while Section 1.4.2(b) allows Architect to potentially be liable for any
construction or redesign costs incurred as a result of its errors and omissions.
Architect is therefore liable for a much higher amount of money for its errors and

16
omissions under Section 1.4.2(b) than under the limitation of liability clause. As such,
the subcontract takes precedence, and our determination that the terms of the
subcontract govern over conflicting terms incorporated from the prime contract is
therefore in accordance with the order of precedence clause.
{25} 	Although the flow-down clause does not incorporate the limitation of liability
clause into the subcontract under our holding here, the flow-down clause is not
rendered superfluous. It still applies to incorporate other clauses from the prime
contract into the subcontract, so long as such an incorporation does not run afoul of
its own words of definite limitation. It is only when the subcontract provides rights,
obligations, risks, and responsibilities that differ from those set forth in the prime
contract that the subcontract governs regardless of the flow-down clause application.
IV. 	CONCLUSION
{27} 	We conclude that the district court based its grant of summary judgment on a
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

17
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.
{28} 	IT IS SO ORDERED.
___________________________________
RODERICK T. KENNEDY, Judge
WE CONCUR:
_________________________________
MICHAEL D. BUSTAMANTE, Judge
_________________________________
JONATHAN B. SUTIN, Judge