LAW: THE CONTRACTOR'S SIDE: In the wet, in the clear?

Nov. 13, 2014

Texas court reverses decision, remand case back to trial court

As most contractors know, litigation is expensive, and the outcomes are anything but predicable. Even when the outcome appears to be the correct one, the winning party frequently recovers less than its actual losses.

However, the court system got it right in the case of Zachry Constr. Corp. v. Port of Houston Authority of Harris County,—S.W.3d—, 57 Tex. Sup. Ct. J. 1378 (2014)

Zachry involved a project let by the Port of Houston Authority of Harris County to construct a new 1,660-ft-long wharf. The structure was to be built in five sections, each 135 ft wide by 332 ft long. The channel was to be dredged to a depth of 40 ft beneath the wharf and surrounding area, and revetment placed along the shore beneath the wharf to prevent erosion. 

The contractor planned to use the dredged material to construct an earthen cofferdam around three sides of the construction area, with the fourth side being the shoreline. With the aid of thermal stabilization, the contractor would freeze the earthen material and dewater the interior so that construction could proceed “in the dry.”

Nine months into the project, the Port Authority determined that it needed to lengthen the proposed wharf by 332 ft, and thus began negotiations with the contractor for a change order. The contractor revealed that it would need to construct a fourth “freeze wall” through the middle of the cofferdam that would split the site into two separate areas. However, the Port’s engineers expressed concerns to their internal project team that the freezing process for the fourth wall might jeopardize newly installed piers. Because they were concerned the contractor might refuse to perform the extra work, the project team decided not to communicate the engineers’ concerns to the contractor. The parties executed a change order for $12,962,800.

When the contractor submitted its revised plan to include the fourth freeze wall, the Port rejected it. The contractor was thus forced to construct a significant portion of the wharf “in the wet,” which was more expensive and extended the project by 21⁄2 years. The contractor filed a lawsuit seeking $30 million, which it characterized as delay damages.   

At trial, the Port argued that the contractor could not recover because the contract contains a clause that stated, “In no event shall the Port Authority be liable to Contractor . . . for any damages associated with any delay or hindrance to the Work, regardless of the source of the delay 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 . . . (emphasis author’s).”   

The trial judge instructed the jury that the No Damage for Delay Clause was enforceable and thus the contractor could not recover unless it determined that the delay resulted from arbitrary and capricious conduct, active interference, bad faith and/or fraud. The jury determined just that and awarded the contractor $18,602,697, plus attorney’s fees of $10,697,750. The Port appealed.

The Texas Court of Appeals reversed the earlier decision. Although acknowledging the bad faith exception to enforcement of a No Damage for Delay clause, it held that the parties themselves contemplated bad faith by virtue of the language “or other fault of the Port Authority” in their clause. It therefore held that the clause precluded recovery even though the jury determined the conduct was bad faith, etc. The contractor then appealed that reversed decision.

The Texas Supreme Court ruled that the No Damage for Delay clause at issue here was unenforceable for two reasons. First, it ruled that “or other fault” in the phrase, “the Port’s negligence, breach of contract or other fault” merely referred to conduct similar to “negligence” or “breach of contract” and did not include more egregious conduct. Second, it held that even if the clause expressly included intentional, fraudulent or bad faith acts, courts in Texas refuse to enforce such clauses because they incentivize wrongful conduct and are against public policy. Accordingly, the court reversed the Court of Appeals and remanded the case back to the trial court. 

The owner’s conduct in this case was clearly wrongful and the Texas Supreme Court’s opinion was refreshing to read. However, one wonders why the contractor characterized its claim as a delay claim in the first instance rather than simply referring to it as a change in the work that warranted compensation for direct cost and an extension of time. R&B

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