The key question facing the Texas Supreme Court in Zachry Construction v. Port of Houston, 2014 WL 4472616 (TX 2014) was whether a contract’s no-delay-damages (NDD) term can be relied on by a party who intentionally prevents the other side’s performance. The answer: “no.”
The contract involved a $63M contract to construct a wharf big enough to hold two 1600 foot-long ships; each about the size of five football fields. The time to complete the project was 2 years but the municipality insisted that part of the project be done within 9 months.
The contract’s NDD provision insulated the defendant municipality from liability resulting from construction delays; even for missed deadlines caused by the defendant’s negligence, breach of contract or “other fault.”
To accommodate the defendant’s compressed time schedule, the plaintiff advised defendant that plaintiff would have to build a “cutoff wall”, which would allow the plaintiff to work and still stay dry ( since water surrounded the project). After initially agreeing, the municipality changed course and refused to permit the needed cutoff wall. As a result, the project ended up taking 4.5 years – some 2.5 years longer than provided for in the contract.
Plaintiff sued claiming about $30M in delay damages resulting from the defendant’s refusal to accommodate the plaintiff’s request to build the cutoff wall. A jury agreed and after a three-week trial, awarded nearly $19M in damages to the plaintiff. The appeals court reversed; it said the NDD clause immunized the defendant. It then awarded the defendant nearly $11M in attorneys’ fees incurred in litigating plaintiff’s case. The Texas Supreme Court reversed.
Reasons:
A contractor generally has the right to recover delay damages but contracting parties are free to modify or excise a delay damages provision by agreement. Some recognized exceptions to the enforcement of NDD clauses include (1) where a delay isn’t intended or contemplated by the parties; (2) the NDD term results from fraud, misrepresentation or bad faith on the party seeking the term’s benefit; (3) the delay is so long that it’s tantamount to an abandonment of the contract; (4) where the delay results from active interference or intentional conduct of the owner; and (5) where the party seeking the benefit of the NDD term engages in “arbitrary and capricious” conduct.
Texas follows the near-universal damages rule that a party can’t insulate itself from liability its own intentional conduct. This is an offshoot of the general contract law principle that provisions that protect a party from its deliberate, wrongful conduct are generally void as against public policy. Otherwise, a contracting party could purposefully injure another with impunity. This principle applies with equal force to vulnerable individuals and to large corporations (plaintiff is a large construction company).
Here, the Court found that the municipality unreasonably refused to accept the plaintiff’s request to construct the cutoff wall. The Court viewed the defendant’s stubbornness on this point as “arbitrary and capricious” and made it impossible for the plaintiff to timely complete the job. The net result was the court refused to enforce the NDD clause against the plaintiff and reinstated the $19M delay damages jury verdict. The court also re-entered a $1.3M damage award for the plaintiff relating to certain funds held back by the defendant as liquidated damages. (The contract allowed the defendant to deduct $20K per day as liquidated damages for each day the project was delayed.)
Afterwords: Freedom of contract has limits. Even a large construction company like plaintiff is protected from arbitrary conduct that prevents its timely contractual performance. This case presents vivid illustration of a court extending the tort law principle that a party can’t insulate itself from intentional conduct to the breach of contract setting. The case upholds the common sense rule that any contractual provision that allows a contracting party to intentionally prevent the other from performing incentivizes wrongful conduct and clearly violates public policy.