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By: Stanley P. Santire, Esq.

Santire Law Firm, Houston, Texas (http://www.santirelaw.com)

A “No Damages for Delay” contract provision was found unenforceable, based on the application of public policy principles that had previously only been applied in cases of tort liability. The Texas Supreme Court held that advance waivers of breach of contract causes of action are subject to the same public prohibitions against pre-injury waiver of tort liability—in situations where there is evidence of deliberate, intentional, or wrongful conduct. Zachry Construction Corporation v. Port of Houston Authority of Harris County, Texas No. 12-0772, 2014 Tex. LEXIS 768, at *43 (Tex. Aug. 29, 2014).

Aside from significant legal issues, the facts involved interesting engineering. Zachry Construction entered into a contract with the Port to build a wharf on the Bayport Ship Channel. Zachry intended to use an innovative process based on an “ice wall.” The “ice wall” would actually be a barrier of frozen earth. It would insulate the work area from the adjacent Bay, allowing construction in a dry environment instead of working “in the wet.” This was to be achieved by using pipes to circulate chilled brine into an earthen wall. A similar technique is being used in Japan to form a barrier around the damaged Fukushima nuclear power plant. There the purpose is to form an underground barrier and prevent fresh water flowing down adjacent mountains from getting contaminated by water from the leaking plant.

Understanding the Court’s reasoning begins with two contractual provisions. The contract made Zachry an independent contractor in “sole charge of choosing the manner in which the work would be conducted.” Id. The Court pointed out that this benefitted the Port by reducing liability exposure that could arise if the Port controlled Zachary’s work. The Court had to reconcile this provision with another that barred Zachry from recovering damages caused by the Port’s “negligence, breach of contract, or other fault.” Id. With these provisions in place the work proceeded.

Nine months into the project, the Port decided to add a large section to the wharf. Because of being already in the process of working on the wharf based on the initial contract, as a practical matter only Zachry could do this. Counter to the conclusion of Zachry’s engineers, the Port determined that the use of the frozen wall for the extension could weaken the wharf.

Against protest by Zachry based on the contractual right to determine the method of work, the Port would not budge. So Zachry removed the frozen wall already built and at considerably greater cost completed the project by working “in the wet”.

When Zachry sued for damages, the Port asserted two defenses. One was sovereign immunity. The Port of Houston Authority is a local government agency and asserted the Local Government Contract Claims Act, Texas Local Government Code §§271.151 – 160. On this defense, the Court determined that delay damages were permissible under the Act and that sovereign immunity had been waived.

Zachry prevailed on the immunity issue with a majority decision of five to four justices. This immunity decision alone would have made the opinion important for a contractor dealing with a local government entity in Texas. However, because of the broader application the most important aspect of the case is that the Justices unanimously went on to turn back the second defense.

The Port asserted not only that the contract explicitly insulated the Port. The contract even did so with capital letter language as follows:

 “Zachry shall receive no financial compensation for delay or hindrance to the Work. In no way shall the Port Authority be liable . . . . for any damages arising out of or associated with any or hindrance . . . 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.” Id.

 The Court had in front of it a jury finding that Zachry’s delay damages resulted from the Port’s “arbitrary and capricious conduct, active interference, bad faith and/or fraud” Id. This finding was based on the Port forcing Zachry to proceed in a much more expensive approach despite Zachry entering into the contract as an independent contractor in “sole charge of choosing the manner in which the work would be conducted.” Id.

To the Port’s argument that Zachry was a sophisticated party knowingly entering a contract with the waiver of liability provision, the Court laid out the heart of the case with the following contract and tort reasoning:

“We have indicated that pre-injury waivers of future liability for gross negligence are void as against public policy. Generally, a contractual provision exempting a party from tort liability for harm caused intentionally or recklessly is unenforceable on grounds of public policy. We think the same may be said of contract liability. To conclude otherwise would incentivize wrongful conduct and damage contractual relations. This conclusion is supported by lower court decisions in Texas and court decisions in at least 28 American jurisdictions. We join this overwhelming consensus.” Id.

 

About the Author: Stanley Santire, Esq. is an attorney at:

Santire Law Firm (http://www.santirelaw.com); 7500 San Felipe Street, Suite 900; Houston, Texas 77063;| Phone: 713-787-0405; email: stanley@santire.com.

This article is published in ConstructionRisk.com Report, Vol. 17, No. 2 (February 2015).

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