CRUCIAL CASE FOR TEXAS CONSTRUCTION

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"The most important construction case before the Texas Supreme Court in 30 years"

That’s what a prominent Texas construction attorney said upon leaving the Texas Supreme Court’s chambers on Wednesday, November 6, 2013—the day the case of Zachry Construction v. Port of Houston Authority was argued in Austin, Texas. A ruling will probably emerge some time in 2014 and will affect every party in the construction project chain. In this particular case, over $20 million in damages are at stake.

Important issues in this case include: 

• When can a contractor sue a governmental entity for breach of contract, and when can’t it? 
• Can one party to a construction contract force responsibility for its delays onto another party through "no damages for delay ("NDFD") clauses? And if so, to what extent? I.e., are there limits, for example fraud, bad faith, intentional misconduct, active interference, etc.?
• If a contractor signs a number of "Affidavits and Partial Release of Liens" in exchange for progress payments, and one or two of these releases waives all claims for payment, does this mean the contractor can’t sue for breach of contract?

A "who’s who" list of parties have weighed in on this case by filing "friend of the court" briefs, including:

Texans for Lawsuit Reform

Texas Civil Justice League

AGC-Texas Building Branch

AGC of Texas

ABC of Texas

American Subcontractors Assn

National Systems Contractors Assn

National Electrical Contractors Assn

Zurich Surety

Texas Aggregates and Concrete Assn

Texas Conference of Urban Counties

Texas Municipal League

Texas City Attorneys Assn

County Judges and Commissioners Assn of Texas

Harris County

Travis County

City of Dallas

City of Houston

City of Fort Worth

City of Arlington

DFW Airport

The facts of the case are that in 2004 the Port of Houston and Zachry entered into a two-year contract to build a 1,660-foot wharf. Nine months into the contract, the Port realized its design was too short for the longer, modern ships. A large Chinese vessel was coming in and had to dock or the Port would have to pay demurrage to the Chinese. So the Port and Zachry had to change orders to get the wharf lengthened quickly.

The signed contract contained a NDFD clause, providing the Port is not responsible even for delays it causes. The contract also contained clauses that the Port could not interfere with Zachry’s means and methods, which nevertheless happened.

The trial court ruled for Zachry, holding that the Port breached the contract and that the NDFD clause doesn’t apply to the Port’s active interference and bad faith towards Zachry. The court of appeals ruled for the Port, holding the NDFD clause absolves the Port. And the Texas Supreme Court will have the final say on the matter.

At oral argument, all nine justices of the Texas Supreme Court were present. The justices’ questions revolved around:

(1) if sophisticated parties sign a contract with a NDFD clause, why should a court meddle with what the parties agreed to? 

(2) 28 of 29 states that have considered these issues have recognized exceptions to enforcing broadly-worded NDFD clauses for active interference, bad faith, fraud, etc. to prevent one party from running over the other; and 

(3) interpretation of what the Texas Legislature passed in Local Govt Code Sec. 271.153(a)(1): "The total amount of money awarded in an adjudication brought against a local governmental entity for breach of a contract subject to this subchapter is limited to the following: (1)  the balance due and owed by the local governmental entity under the contract as it may have been amended, including any amount owed as compensation for the increased cost to perform the work as a direct result of owner-caused delays or acceleration"

The Supreme Court’s decision, which should come in 2014, will have a huge impact on construction projects in Texas and may result in the Legislature wading into this issue.