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Where a jury awarded a contractor approximately $19 million for delay and impact costs caused by actions of the project owner (including breach of contract), the judgment was reversed on appeal.  Also, an award of $10.5 Million attorneys fees was granted to the Owner as Prevailing Party.

 Following a three-month trial, a jury awarded a contractor judgment of approximately $19 million for breach of contract by the Port of Houston.  These damages represented the contractor’s increased costs of switching from its proposed frozen wall cutoff design due to the Owner having rejected its shop drawing submittal.  The basis for the award was stated by the jury as “delay and hindrance” to the contractor’s work by the Port.  Although the contract contained a very tough no-damages-for-delay clause, the trial court declined to enforce it.  This was because the court determined, as a matter of law, the Port could not enforce it to preclude delay or hindrance damages resulting from any action by the Port that constituted arbitrary or capricious conduct, active interference, bad faith, or fraud.  On appeal, the judgment was reversed on the basis that the exceptions to a no-damages-for-delay clause should not have been applied.  Port of Houston v. Zachry Construction, 377 S.W. 841 (Tex. 2012).

The appellate court acknowledged that courts in many other jurisdictions give only a “restrained approval” of such provisions because of their harshness, but the court concluded that where a contract in Texas clearly contemplates that the clause will be applied to deny damages regardless of what the Owner might have done, the clause will be enforced.   As stated by the court,

 “However, the parties are free to negotiate and agree upon the conditions under which (1) the contractor will recover damages for delay, and (2) another remedy is available to the contractor for any such delay. In June 2004, Zachry unambiguously agreed that it would perform the contract without the benefit of delay damages, even if the delay was caused by the Port’s breach of contract, negligence, or other fault. Zachry faced significant delays; delays it alleged—and the jury agreed—were caused by the Port’s breach of contract. In November 2005, Zachry proceeded with construction “in the wet,” knowing the contract afforded no damages for delay. We cannot rewrite the provision without depriving the Port of the benefit of the bargain the parties reached in June 2004.”

 The contract clause in question provided:

 “The Contractor shall receive no financial compensation for delay or hindrance of the Work. In no event shall the Port Authority be liable to the Contractor or any Subcontractor or Supplier, any other person or any surety for or any employee or agent of any of them, for any damages arising out of or associated with any delay or hindrance to the Work, regardless of the source of the delay or hindrance, including events of Force Majeure, AND EVEN IF SUCH DELAY OR HINDRANCE RESULTS FROM, ARISES OUT OF OR IS DUE, IN WHOLE OR IN PART, TO THE NEGLIGENCE, BREACH OF CONTRACT OR OTHER FAULT OF THE PORT AUTHORITY. The Contractor’s sole remedy in any such case shall be an extension of time.”

 In reviewing this contract language the court stated that although the parties had already stated the source of the delay was immaterial, “they gave special emphasis to their intent that delay due even in part to conduct by the Port was something they were specially contemplating.”  Moreover, said the court, the clause used all capital letters for the matters regarding the Port’s conduct to set it off from the rest of the paragraph.   And, “Finally, to give utmost emphasis, the parties described three categories of fault: (1) negligence, (2) breach of contract; or (3) other fault.”   All of this was enough for the court to conclude that the parties intended that the waiver of damages was to apply to situations including that at issue in this case.

The appellate court also allowed recovery of $10.5 Million in attorneys fees by the Port as the “prevailing party.”  Almost $15 million was claimed in legal fees and the court noted that although this was almost half the amount of the entire claims in the case, it did not render the fees unreasonable per se.  In fact, the court noted that other cases had allowed prevailing parties’ attorneys fees that exceeded the dollar amounts of the underlying claims in dispute.

Comment:  Courts in most states apply a common law standard like that used by the trial judge in this case to limit enforcement of a no-damages-for-delay clause.  In Texas, however, as demonstrated by the appellate decision here, the courts generally favor enforcing contracts just the way they are written (with a few exceptions) so long as the language is clear and unambiguous, and not otherwise contrary to law or public policy. This decision really demonstrates the importance of negotiating contract terms and conditions that reasonably allocate risk.

With regard to the prevailing attorneys fees that were awarded, this case may cause contract drafters to think twice before including such a clause in the contract.  Although they can be great when you are the prevailing party, they can also greatly increase the risk of loss for the non-prevailing party.  This clause could impact decisions on whether to push all the way through to a litigated decision versus settling for less than one believes is due in order to avoid paying the other party’s attorneys fees.

 

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 15, No. 4 (April 2013).

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