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 owner’s 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
contractor’s 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.
Background
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 Port’s 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 Zachry’s 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 Zachry’s 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 Port’s
“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.
Summary of the Texas
Supreme Court’s holdings
The Texas Supreme Court reversed the court of appeals,
holding that:
- The no-damage-for-delays language did not apply,
as a matter of public policy, to claims for delays caused by the owner’s
intentional or arbitrary interference;
- 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;
- Governmental immunity did not bar the contractor’s
delay claims;
- The Port was entitled to recover on its
defective-work claims; and
- 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).
A contractor cannot
waive claims for delays caused by the owner’s intentional or arbitrary
interference
The Court found the no-damages-for-delay provision
unenforceable against delay claims based on the owner’s 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 owner’s fraud, misrepresentation, or bad faith, or where the
delay resulted from the owner’s 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 Port’s “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 owner’s 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.
A contractual requirement
for the contractor to waive claims does not prevail over the actual language of
the waivers signed
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 court’s finding that the
waiver language was ambiguous, instead holding that language unambiguously did
not include Zachry’s 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 Zachry’s 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.
The Texas Supreme
Court narrowly held that there was no governmental immunity for the contractor’s
delay claims under these circumstances
Finally, a large portion of the majority, and the entire
dissent, focused on whether the Texas legislature had waived the Port’s
governmental immunity for Zachry’s 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
contractor’s 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.
Parties to
construction contracts could use the public-policy exception to avoid damage
waivers
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 owner’s intentional or
reckless misconduct caused the damages. Moreover, the Court’s 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.”
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