Court Limits Application of No-Damages-For-Delay Clause

In a widely watched decision, the Texas Supreme Court recently ruled in Zachry Construction Corporation v. Port of Houston Authority that a local government entity could not rely on a no-damages-for-delay provision to shield itself from liability for deliberately and wrongfully interfering with a contractor’s ability to perform construction of a wharf. The contractor had originally proposed an innovative means of completing the work by using soil it dredged from the canal to enable it to build the wharf “in the dry.” After the contractor commenced its work, the Port determined that the wharf needed to be longer than originally anticipated to accommodate the expected ships. The Port issued a change order for this additional work despite its reservations about the contractor using its innovative method of working “in the dry” for this the new section. Two weeks after issuing the change order, the Port ordered the contractor to revise and re-submit its plans and ultimately refused to allow the contractor to use its chosen means and method of performing the work for this new section of the wharf. The contractor then sued for $30 million in delay damages.

Although a jury found that the contractor’s delay damages resulted from the Port's “arbitrary and capricious conduct, active interference, bad faith and/or fraud,” the lower appellate court reversed the jury’s verdict holding that the no-delay-damages provision of the contract barred the contractor’s recovery of delay damages In reversing the appellate court, the Texas Supreme Court found that “[a]s 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.” It concluded, however, that enforcing the no-delay-damages provision in the parties’ contract would “allow one party to intentionally injure another with impunity” and therefore would violate law and public policy. The court also rejected the argument that the contractor was a large, sophisticated company that could have protected itself by not including such a provision finding that “the law's protection against intentional injury is not limited to the helpless.”

This decision should give some comfort to contractors that are forced to include similar no-damages-for-delay provisions in their contracts that the intent and purpose of such provisions is to cover ordinary delay that may be experienced on a contract and can reasonably be anticipated by a contractor. Such provisions, at least as determined by the Texas Supreme Court, are not intended to protect an owner from damages it may cause by intentionally interfering or obstructing with a contractor’s work.