9/17/2014 The Dispute Resolver: No-Damages-For-Delay Provision Does Not Shield Owner from Liability for Deliberate Interference

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Analysis of Developments in Construction Law for Division 1 of the ABA Forum on the Construction Industry -- ADR, Dispute
Avoidance, and Litigation
The Dispute Resolver
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Tuesday, September 16, 2014
No-Damages-For-Delay Provision Does Not Shield Owner from
Liability for Deliberate Interference With a Contractors Work.
In a much-anticipated decision, the Texas Supreme Court has ruled in favor of a general contractor seeking to recover
funds withheld by an owner for delays that the jury found were caused by the owners deliberate and wrongful
interference. The Court addressed the effect of a no-damages-for-delay provision in the construction contract, as well
as whether language in the waivers the contractor submitted for progress payments also waived the contractors
claims for delay damages. Finally, the Court analyzed at length whether the applicable statutes waived the
governmental immunity of the owner, a local port authority.
Zachry Construction Corporation agreed to construct a wharf for the Port of Houston Authority for over $62 million.
The construction contract gave Zachry control over the means and methods of the work. It also stated that Zachry
could not recover any damages from delays in the work, even if the delays resulted from the negligence, breach of
contract or other fault of the Port Authority. The parties agreed to a provision that permitted the Port to recover its
attorneys fees from Zachry if Zachry brought an unsuccessful claim under the contract.
As part of the construction of the wharf, Zachry planned to utilize an innovative technique that involved creating a long
U-shaped berm made of frozen earth that would extend into the water to surround the worksite. Water would then be
removed from the worksite, allowing Zachry to work in the dry for much of the construction work. Zachry believed
that this technique would make the work less expensive, complete it more quickly, and provide environmental benefits
to the Port.
Nine months into the project, the Port asked Zachry to add another section to the wharf, expanding the scope of the
project by almost $13 million. To continue to meet the time deadlines in the project, Zachry proposed building a cutoff
wall through the middle of the worksite, splitting the work area into two parts. Though the Port had reservations about
this plan, it did not raise its concern before the parties executed the change order.
Two weeks later, the Port ordered Zachry to revise its plans to remove the cutoff wall. This forced Zachry to finish only
a portion of the wharf in the dry, and then to remove the wall. The remainder of the project had to be finished in the
wet, resulting in a delay of about two and a half years.
Zachry sued the Port several weeks after its refusal to allow construction of the cutoff wall. Zachry claimed about $30
million in delay damages. The Port argued that the contract precluded delay damages. The trial court disagreed,
finding that the provision unenforceable if Zachry showed that the Ports intentional misconduct caused the delay.
Zachry also sought to recover about $2.36 million in contract funds withheld by the Port as liquidated damages for
delays. In response, the Port argued that Zachry had waived its claims by submitting applications for progress
payments that included releases of certain claims. The trial court found the waiver language ambiguous and submitted
the issue of its meaning to the jury.
In its defense, the Port contended that governmental immunity precluded Zachrys claims. The Port also
counterclaimed for close to $1 million in repair costs to remedy defective wharf fenders installed at the project, and for
all of its attorneys fees under a contract provision that permitted the Port to recover all attorneys fees for any of
Zachrys claims that were not successful.
After a trial, a jury found that the Port breached the contract by rejecting the cutoff wall design, causing about $18.6
million in delay damages. According to the jury, the delay resulted from the Ports arbitrary and capricious conduct,
active interference, bad faith and/or fraud. The jury found that Zachry had not released its claim to the withheld funds,
but also found in favor of the Port on the counterclaims for defective work.
On appeal, the court of appeals reversed the judgment in favor of Zachry. It found that the no-damages-for-delay
provision barred any recovery of delay damages, regardless of whether the Port had intentionally or arbitrarily caused
the delays. The court also held that the progress-payment releases were unambiguous and precluded any claims for
the withheld funds. Finally, the court of appeals rendered judgment in favor of the Port on its claim for attorneys fees,
awarding the Port almost $10.7 million.
The Texas Supreme Court reversed the court of appeals, holding that:
1. The no-damage-for-delays language did not apply, as a matter of public policy, to claims for delays caused by
the owners intentional or arbitrary interference;
Background
Summary of the Texas Supreme Courts holdings
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9/17/2014 The Dispute Resolver: No-Damages-For-Delay Provision Does Not Shield Owner from Liability for Deliberate Interference With a Contractors
http://abaconstructionforumdivision1.blogspot.com/2014/09/no-damages-for-delay-provision-does-not.html 2/3
Posted by Jason L. Cagle at 6:02 PM
Labels: Damage Waivers, Delay Damages, Governmental Immunity, Public-Policy Exceptions, Texas
2. The actual waiver that the contractor signed for the progress payments was not ambiguous, and it did not
waive the claims for the withheld claims;
3. Governmental immunity did not bar the contractors delay claims;
4. The Port was entitled to recover on its defective-work claims; and
5. The Port was not entitled to the award of attorneys fees.
Though the decision was 5-4, the dissent agreed with the majority on points 2 and 4, above. The dissent primarily
concerned the governmental immunity issue (point 3), and thus did not reach the public-policy issue (point 1).
The Court found the no-damages-for-delay provision unenforceable against delay claims based on the owners
intentional or reckless misconduct. While a contractor generally may agree to assume the risk of construction delays,
exceptions to their enforcement apply where the delay resulted from the owners fraud, misrepresentation, or bad
faith, or where the delay resulted from the owners active interference or other wrongful conduct, which includes
arbitrary acts, willful misconduct, acting without due consideration, and acting in disregard of other parties rights. As
the jury found that the Port caused the delays through arbitrary and capricious conduct, active interference, bad faith
and/or fraud, the Court found that the Port could not enforce the provision against Zachry.
The Court noted that it was doubtful that the waiver of delay damages due to the Ports negligence, breach of
contract or other fault would even apply to deliberate, wrongful misconduct. It cited an amicus brief from the
Associated General Contractors of Texas, which pointed out that contractors can (and often do) include in their
estimates potential delaying events such as quality and completeness of plans and specifications, material shortages,
weather issues, and soil conditions. These foreseeable issues can be taken into account using the contractors years
of experience, education, and training. But no contractor can accurately assess potential delays that may arise due to
an owners direct interference, willful acts, negligence, bad faith fraudulent acts, and/or omissions.
Under Texas law, contractual provisions seeking to exempt a party from tort liability for its own future intentional or
reckless misconduct are void as against public policy. The Court applied the same rule to contract liability, to avoid
incentiviz[ing] wrongful conduct and damag[ing] contractual relations. Even though Texas, unlike many other states,
does not impose a duty of good faith and fair dealing in the performance of all contracts, the Court found such a duty
unnecessary to prohibit provisions allowing a contracting party to evade liability for deliberate misconduct in the future.
Next, the Court reversed the court of appeals ruling that Zachry had waived its claims for the $2.36 million that the
Port withheld as liquidated damages. The Court disagreed with the trial courts finding that the waiver language was
ambiguous, instead holding that language unambiguously did not include Zachrys claims. In particular, the progress-
payment application released claims on the portion of the Work completed and listed on the invoice. The liquidated
damages withheld by the Port, in contrast, were for delayed work that had not been completed, rather than work
already finished.
Interestingly, the Court admitted that Zachrys underlying construction contract could be read to require Zachry to
waive such claims when it applied for progress payments. However, the language in the waiver Zachry actually
submitted (whether it complied with the contract or not) did not encompass the claims for the withheld funds.
Finally, a large portion of the majority, and the entire dissent, focused on whether the Texas legislature had waived
the Ports governmental immunity for Zachrys delay claims. A more detailed examination of this issue is beyond the
scope of this post, but the dispute concerned a statute waiving the governmental immunity of a local governmental
entity for a contractors claims for its balance due and owed . . . under the contract. The majority and the dissent
agreed that this issue was jurisdictional, but disagreed on whether delay damages were owed under the contract
where, as here, the contract expressly prohibited delay damages. The majority found that such damages fell within the
scope of the waiver.
This decision could significantly narrow the enforcement of contract provisions limiting recovery of damages in Texas.
With some exceptions, Texas has prohibited contractual provisions that require a contractor to indemnify another
person for property damage resulting in whole or in part from the fault of the other person, its agent, or its employee.
TEX. INS. CODE 151.102. The Zachry decision adds a public-policy exception invalidating waivers of damages caused
by intentional or reckless misconduct. Contractors could argue that this exception applies to more than delay claims.
For example, a waiver of consequential damages could be invalidated if a general contractor showed that the owners
intentional or reckless misconduct caused the damages. Moreover, the Courts reasoning might apply to conduct that
is less culpable than recklessness, such as acting without due consideration, arbitrarily, or in disregard of other
parties rights.
Zachry Constr. Corp. v. Port of Houston Auth., --- S.W. 3d ----, No. 12-0772 (Tex. Aug. 29, 2014) (Hecht, C.J.), (Boyd,
J., dissenting).
A contractor cannot waive claims for delays caused by the owners intentional or arbitrary
interference
A contractual requirement for the contractor to waive claims does not prevail over the actual
language of the waivers signed
The Texas Supreme Court narrowly held that there was no governmental immunity for the
contractors delay claims under these circumstances
Parties to construction contracts could use the public-policy exception to avoid damage
waivers
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9/17/2014 The Dispute Resolver: No-Damages-For-Delay Provision Does Not Shield Owner from Liability for Deliberate Interference With a Contractors
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