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Kent Holland, J.D.
ConstructionRisk, LLC

Although parties are free to negotiate away a contractor’s right to recover for delay damages, the Supreme Court of Texas held that a “no-damages-for-delay” provision in a contract cannot shield a project owner from liability for deliberately and wrongfully interfering with the contractor’s work. This is true even when the owner is a local governmental entity and there is an issue of sovereign immunity. But what if the contractor signed lien releases throughout the project after the date it had asserted a claim for its damages? The court held that such a lien release does not release a claim unless it specifically states the intent to do so on the form. In this case, the contractor’s claim for delay damages was preserved despite having executed subsequent waivers and releases through the lien release forms. Zachry Construction Corporation v. Port of Houston Authority of Harris County, 449 S.W.3d 98 (Tex. Supreme Court, 2014).

Zachry contracted to construct a wharf. The contract made Zachry an independent contractor, “in sole charge of choosing the manner in which the work would be conducted.” But the Port nevertheless had authority to review Zachry’s plans and oversee construction.

Zachry devised an innovative plan that it believed would make the work less expensive and allow it to be completed more quickly. It planned to use soil dredged from the channel to construct an 8-foot-wide earthen berm extending out toward the center of the channel and then running parallel to the shore to form a long wall around the construction area. By doing this, Zachry would be able to work “in the dry.”

Nine months into the project, the Port realized that it needed two 1,000-foot berths to accommodate ships it ultimately expected to service. It began discussions with Zachry on a change order. To complete the two sections and continue to work “in the dry”, Zachry proposed to build a freeze wall, in addition to the one it had already planned. This would serve as a cutoff wall through the middle of the project to spilt the project into two parts.

The Port issued a change order accepting Zachry’s approach, but two weeks later, the Port changed its mind and ordered Zachry to revise and resubmit its plans without the cutoff wall. Zachry protested that the Port had no authority under the contract to determine the method and manner of the work. But as the Court stated, “The Port would not budge.” Zachry’s only option, therefore, was to work “in the wet” which would delay completion of the project and increase its cost.

Several weeks after the Port refused to allow construction of the cutoff wall, Zachry sued, eventually claiming $30 million in damages from delays caused by the Port. The Port countered, arguing that the following clause precluded recovery by Zachry:

“[Zachry] shall receive no financial compensation for delay or hindrance to the Work. In no event shall the Port Authority be liable to [Zachry] 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. [Zachry’s] sole remedy in any such case shall be an extension of time.”

Zachry argued that such a no-damage-for-delay provision is unenforceable if the Port’s intentional conduct caused the delay. It also sought recovery of $2.36 million in delay damages (liquidated damages) that had been withheld by the Port.

In response, the Port argued that Zachry’s claim to the liquidated damages was precluded by the releases it executed to obtain the periodic payments from which liquidated damages were withheld. The releases contained the following language:

“[Zachry] hereby acknowledges and certifies that [the Port] has made partial payment to [Zachry] on all sums owing on Payment Estimate Number [–––] and that it has no further claims against [the Port] for the portion of the Work completed and listed on the Schedule of Costs in Payment Estimate Number [–––]. The trial court concluded that this language did not unambiguously release Zachry’s claim to the liquidated damages withheld and asked the jury to decide what effect it had.”

The jury at the trial found that the Port breached the contract by rejecting Zachry’s cutoff wall design, causing Zachry to incur delay damages. It also found that the delay “was the result of the Port’s … arbitrary and capricious conduct, active interference, bad faith and/or fraud.” The jury concluded that the waivers and releases signed by Zachry with each paid invoice did not release Zachry’s claim to the liquidated damages.

The Port appealed the trial court judgment to the state court of appeals, which reversed the judgment and held that the no-damages-for-delay clause served as an absolute bar to recovery for the delay claims, and it also held that the releases unambiguously released Zachry’s claims to the liquidated damages that had been withheld. This holding was reversed by the Texas Supreme Court in the current decision.

Port Could not claim sovereign immunity

First, the Supreme Court ruled on whether the Port could successfully assert that it had immunity from suit pursuant to the state code. The answer was a resounding – No. This is because, says the court, “the code waives immunity for a contract claim for delay damages not expressly provided for in the contract.”

No-Damages-for-Delay clause is unenforceable

Next, the Court dealt with the question of whether the time-honored “freedom of contract” has limits. Texas is one of the states that gives great deference to the rights of parties to contract as they will, and the courts will typically enforce terms and conditions of contracts even if they result in unfortunate consequences to one of the parties. But, here, the Court states there are indeed limits to how much deference will be given. The court stated:

“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. The Port argues that the cases from other jurisdictions are inapposite because those jurisdictions all recognize a party’s duty of good faith in performing a contract, and Texas does not. But the law need not impose a duty of good faith on a party to prohibit him from attempting to escape liability for his future, deliberate, wrongful conduct. The Port argues that withholding enforcement of a no-damages-for-delay provision is in derogation of freedom of contract. But that freedom has limits. ‘As a rule, parties have the right to contract as they see fit as long as their agreement does not violate the law or public policy.’ Enforcing such a provision to allow one party to intentionally injure another with impunity violates the law for the reasons we have explained. The Port also argues that Zachry is a sophisticated party, a very large construction company that can protect itself. But the law’s protection against intentional injury is not limited to the helpless. Finally, the Port argues that the conduct found by the jury does not qualify for the exception. But the jury charge tracked the language of the second and fifth exceptions. The charge correctly described the misconduct that cannot be covered by a no-damages-for-delay provision.  Accordingly, we conclude that the no-damages-for-delay provision, Section 5.07 of the parties’ contract, was unenforceable.”

“Affidavit and Partial Release of Lien” did not release Zachry claims

The release language in question provided as follows:

“[Zachry] hereby acknowledges and certifies that [the Port Authority] has made partial payment to [Zachry] on all sums owing on Payment Estimate Number [–––] and that it has no further claims against [the Port Authority] for the portion of the Work completed and listed on the Schedule of Costs in Payment Estimate Number [–––].”

Zachry argued that the releases covered only liens. The Port argued in contrast that the releases covered all claims for payment. The lower appellate court found that the language of the releases was unambiguous and that it unambiguously covered and barred Zachry’s claim for recoupment of the liquidated damages withheld by the Port. The Supreme Court looked at the language of the release and also found it to be unambiguous – but completely in the opposite way – the releases did not cover Zachry’s claim. As explained by the court,

“The release forms were captioned “Affidavit and Partial Release of Lien”. In the form language, Zachry acknowledged “partial payment … on all sums owing” on a specified invoice and stated that it had “no further claims against [the Port] for the portion of the Work completed and listed on” the invoice. The release plainly refers only to claims for work completed, not for liquidated damages withheld for delays—work not completed. Furthermore, Zachry actively disputed the Port’s right to withhold liquidated damages from the first time the Port did so, and that dispute was never resolved. The purpose of progress payment releases is to ensure that the contractor will not accept payment for work performed and then insist on additional payment for that work. Zachry’s releases can no more be interpreted to extend to its claim for liquidated damages the Port withheld than to its claim for delay damages. The jury failed to find that the releases in fact covered Zachry’s claim. We agree, as a matter of law.”

Comment: This is an important case for setting some much needed important limits on the enforcement of a no-damages-for-delay clause.

 

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. 17, No. 4 (June/July 2015).

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