Firms delivering projects on a design-build basis should carefully evaluate how the governing agreement and any change orders define the standard of care and the nature and scope of damages arising from a failure to meet that standard.
A December 2024 decision by the Colorado Court of Appeals, Veolia Water Technologies Inc. v. Antero Treatment LLC, illustrates how an email attached to a change order can affect the governing standard of care and erode protections often relied upon by design-builders to mitigate risk, such as limitations of liability and economic loss considerations.
Further reading:
- What are contractors’ legal options when public agencies claim immunity?
- For design professionals, it’s critical that contracts define ‘consequential damages’
- Beware ‘scope gaps’; one subcontractor found out the hard way with court loss
The appellate court concluded that the design-builder breached the standard of care based on a representation contained in an email incorporated by reference into a change order. Other conduct attributable to the design-builder and related to the same email significantly increased the design-builder’s exposure to certain damages, including eliminating a negotiated damages cap where fraud was shown.
The case
Veolia Water Technologies and Antero Treatment entered a series of agreements culminating in an August 2015 design-build agreement under which Veolia promised to deliver a turnkey wastewater treatment facility in West Virginia. The facility was designed to process fracking wastewater by separating and crystallizing solids into waste salt suitable for landfilling while producing reusable or releasable water.
The DBA incorporated earlier bench-scale and limited notice-to-proceed work and contained two performance features central to the subsequent dispute:
- A waste-salt requirement, including a “no free liquids”/paint-filter-test specification and the broader promise of a stable, nonhazardous solid suitable for disposal.
- A negotiated power-consumption guarantee intended to preserve the facility’s economic viability.
Shortly after Veolia and Antero executed the DBA, Veolia proposed a redesign to address power concerns by “splitting” the crystallizer train’s fourth effect into two chambers (4A and 4B), which would reduce chiller needs and power draw but would produce different waste salts. Antero approved that redesign through change order 1, which referenced and attached a set of emails and other materials as an exhibit.
In a key email, Veolia’s project director represented that the 4B salt would be “suitable stable for the envisaged landfill strategy,” based on prior testing.
The facility began operating in 2017 but experienced a host of issues. The 4B salt consistently came out wet and soupy, preventing direct landfilling and requiring costly solidification measures. At the same time, the facility experienced repeated mechanical failures and operational problems, including equipment breakdowns, shutdowns, and repairs. Veolia failed to achieve crucial contractual milestones for performance testing (substantial completion and final completion) by the dates required in the DBA.
Veolia blamed some setbacks on allegedly “abnormal substances” in the influent wastewater; Antero contended the influent remained contractually compliant and that the problems reflected design and construction deficiencies and departures from “prudent industry practices.” After years of attempted remediation and worsening disputes, Antero terminated the DBA in September 2019 and mothballed the facility.
The parties sued each other, the cases were consolidated, and following a lengthy bench trial, the Denver District Court entered judgment for Antero on its breach-of-contract and fraud claims.
Among other things, the court found that the aforementioned change order incorporated the referenced emails and added an enforceable stability/landfillability commitment for 4B salt. It also ruled that Veolia failed to deliver a turnkey facility, perform in accordance with prudent industry practices, complete required work, and meet contractual milestones.
Further, the court said Veolia fraudulently induced Antero both to execute the DBA (by not disclosing internal power/feasibility concerns and the reasons for the redesign) and approve the change order (by not disclosing the risks the split fourth effect posed to salt stability).
The trial court awarded damages and fees using a benefit-of-the-bargain/market-value approach rather than cost of repair, reasoning that repair had proved impracticable after extensive unsuccessful efforts. On appeal, Veolia challenged the incorporation-by-reference ruling and related breach findings, argued that Antero’s fraud claims were barred by Colorado’s economic loss rule, and attacked the damages methodology. Antero conditionally cross-appealed on damages limitations.
The ruling
The Colorado Court of Appeals affirmed the decision, holding that the change order incorporated by reference the specific email communications, including the project director’s Sept. 1, 2015, email addressing the consequences of splitting the fourth effect into two chambers (4A/4B). Because change order 1’s recitals expressly identified those emails and the parties exchanged and attached them as part of the signed change order, the court concluded the parties had knowledge of and assented to the incorporated terms.
Veolia’s representation that “the salt quality from 4B will be suitable stable for the envisaged landfill strategy” therefore became an enforceable contractual commitment, not mere background discussion.
The appellate court next affirmed the trial court’s finding that Veolia breached the design-build agreement (as modified) in multiple ways. The record supported findings that Veolia failed to provide contractually compliant 4B waste salt (the 4B output remained wet/soupy, necessitating solidification before landfilling), failed to design and construct the facility consistent with “prudent industry practices,” failed to deliver a turnkey facility ready for immediate use, failed to complete required work, and failed to meet major contractual milestones.
Turning to tort, the court held that Colorado’s economic loss rule did not bar Antero’s intentional fraud theories, including fraudulent inducement and concealment. It reasoned that Veolia’s common-law duty to refrain from deliberate concealment or misrepresentation of material facts was independent of its contractual duties, including the implied covenant of good faith and fair dealing, and the fraud allegations were not merely breach-of-contract claims recast in tort.
The court also upheld the trial court’s decision to use a market-value/benefit-of-the-bargain framework rather than a cost-of-repair measure. Given evidence that the central waste-salt defect persisted after years of attempted remediation and that Veolia ultimately indicated the problem would not be resolved, the trial court acted within its discretion in treating repair as impractical and valuing the facility as an income-producing asset.
The court further concluded that using projected income as one input to an income approach to fair market value did not convert the award into barred “lost profits” consequential damages.
Takeaways
This was a well-written decision that offers important practical lessons for this audience, whether you are a design-builder, contractor, or engineer.
First, be precise about what a change order incorporates. Change order 1’s recitals referenced specific communications (including a Sept. 1 email), and the parties attached those emails as an exhibit. The court treated that package as incorporated and enforceable – so a contractor’s “confirming” email language (here, that 4B salt would be “suitable stable for the envisaged landfill strategy”) can operate like a specification if it is clearly identified, exchanged, and tied to the signed change order.
Next, remember that clauses with the terms “turnkey” and “prudent industry practices” can be outcome-determinative when tied to operations evidence. In this case, the owner prevailed by pointing to clear performance failures – repeated outages and shutdowns, structural steel repairs to prevent collapse, inability to treat the expected influent range, and persistent noncompliant 4B salt requiring costly solidification measures – rather than abstract disagreements over design choices.
The third takeaway is that economic loss rule defenses may fail for intentional concealment/misrepresentation. The record in the case contained internal communications acknowledging risks – including warnings that everyone would be “in trouble” if 4B material were to “melt” between the centrifuge and the landfill and notes to “downplay” the reason for the redesign – supporting a finding that the duty not to deliberately conceal material facts was independent of contract performance, particularly where the contract constrained unilateral design changes and contemplated enhanced exposure for fraud.
Finally, remember that proof of damages should match the reality of what remedy is needed to deal with the issue.
In this case – which included years of attempted fixes and admissions that the key defect would not be resolved, making repair impractical – the appellate court found it appropriate for the trial court to use a market-value/benefit-of-the-bargain framework supported by expert valuation. Projected income was permissible as one input to fair market value (an “income approach”) rather than as a standalone lost-profits claim barred by contract.
