The Texas Supreme Court has issued a decision that could have a huge impact on the construction industry in Texas involving several high-profile issues the industry has passionately debated for years.

In Zachry Construction Corporation v. Port of Houston Authority, the court in a 5-4 decision ruled in favor of the contractor for amounts recoverable for liquidated damages improperly withheld as well as delay damages. The court arrived at this decision despite a robustly worded no-damages-for-delay clause.

In rendering its decision, the court examined in detail the applicability of governmental immunity under the Local Government Contract Claims Act (Tex. Loc. Gov’t Code §§ 271.151-.160), the law with regard to no-damages-for-delay provisions and the effects of interim lien releases.

In this case, the parties had entered into a contract for the construction of a wharf on the Bayport Ship Channel used to load and unload ships carrying containerized goods. The wharf would extend over the water, and the channel below was required to be dredged to a depth of 40 feet beneath the wharf and surrounding area. Zachry Construction Corporation intended to implement an innovative plan that used the soil dredged from the channel to construct an eight-foot-wide earthen berm around the entire worksite, including into the channel, so that construction could be performed “in the dry.”

Nine months into the project, the Port of Houston Authority decided to extend the length of the wharf. After negotiations, the parties entered into a change order increasing the work under the contract, with pricing for the change order based on Zachry’s innovative concept for performing the work “in the dry.” However, after the change order was issued, the Port ordered Zachry to resubmit its plans to perform the work under the change order. Zachry argued at the time that the contract allowed it to determine the method and manner of performing the work, but the Port insisted that Zachry resubmit new plans for performing the work. The court found that the practical effect of the Port’s order was to deny Zachry the right to implement its innovative method of construction. Zachry eventually finished the project using methods required by the Port that resulted in delays and increased costs to Zachry.

In a case that has been active in the courts since 2006, Zachry sued the Port for substantial delay damages arising from the construction of the wharf plus delay liquidated damages that had been withheld. Although the Port claimed sovereign immunity, the court thoroughly analyzed the applicability of the Act and determined that delay damages were permissible under the Act and sovereign immunity had been waived.

In addition, the court provided a comprehensive outline of the law related to no-damages-for-delay provisions and the exceptions to enforcement of such clauses. Although a contractor may generally agree to assume the risk of construction delays and not seek damages through a no-damages-for-delay provision, the court also cited to “generally recognized exceptions” that include “fraud…or other bad faith” and “active interference” or other wrongful conduct such as “arbitrary and capricious acts.”

The jury ultimately found that Zachry’s delay damages resulted from the Port’s arbitrary and capricious conduct, active interference, bad faith and/or fraud. Based upon the jury’s findings, the court held that the no-damages-for-delay provision was unenforceable and did not shield the Port from liability for interfering with Zachry’s work on the project.

Finally, the Port argued that the interim lien releases required under the contract released all claims for payment throughout the progress of the project. The court reviewed the language in the contract as well as the language in the lien releases, but determined that the lien releases were not specific enough and did not release the Port from Zachry’s claims for delay damages or the wrongfully withheld liquidated damages.

Clearly, with a 5-4 decision, the court was divided. However, the dissenting justices focused on whether the Act waived the delay damages or whether the Port had sovereign immunity. The dissent argues that the Act did not waive the Port’s immunity against Zachry’s claims for delay damages and that the claim should have been dismissed.

When planning a construction project: the takeaway

Not as common as it used to be, the no-damages-for-delay provision is a clause that must be carefully considered, negotiated and drafted to incorporate the parties’ full intent. Both parties, the owner and contractor, must understand the current state of the law before drafting.

The ramifications to poorly drafted contracts can be severe – not least, a poorly drafted contract can result in years of legal proceedings and substantial damages.