Zachary Construction Corporation ("Zachary") won a public construction contract to build a wharf for the Port of Houston Authority of Harris County, Texas (the "Port"). The contract gave Zachary sole control of the manner in which the construction would be conducted including, the "time and seasons," "order of precedence," and "methods" of construction that Zachary determined. The contract also contained a No-Damages-for-Delay Clause that stated that the Port would not pay Zachary any financial compensation for any delay or hindrance to the project regardless of "the source of the delay or hindrance, including events of Force Majeure, 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." A jury found that the Port breached the contract by interfering with Zachary's control of the manner of construction. The Port issued a change order increasing the length of the wharf that Zachary was to build but the Port refused to allow Zachary to use the construction methods it deemed appropriate to accommodate the Port's change order. As a result, Zachary incurred more than $18 Million if delay damages. The Texas Court of Appeals overturned the jury verdict finding that the No-Damages-for-Delay Clause prevented such a result. But the Texas Supreme Court reversed the Texas Court of Appeals and found that the language in the clause that reads "other fault of the Port Authority" rendered the clause unenforceable.
In most states, the law has evolved such that governmental entities can protect themselves from government construction contractor delay claims by including No-Damage-for-Delay Clauses in the contracts for public construction projects. This right flowed from the generally recognized principle that parties are free to contract as they see fit so long as their agreement does not violate the law or certain public policies. And while a government construction contractor may generally agree to assume the risk of construction delays and forgo delay-related damages there are several recognized exceptions based on public policy grounds -- when the delay 1) was not contemplated by parties to be within the scope of the clause; 2) resulted from fraud or bad faith on the part of the party benefiting from the clause; 3) has extended for unreasonable length of time; 4) is not within any specifically identified delays covered by the clause; or 5) is based upon an "active interference." The Supreme Court of Texas interpreted the No-Damages-for-Delay Clause used in the contract between Zachary and the Port to be unenforceable because it was written so as to allow the Port to benefit from its own active interference with a contractor's performance of a public construction contract. http://caselaw.findlaw.com/tx-supreme-court/1676871.html
The Texas Supreme Court rejected the argument that the Port and Zachary were sophisticated parties that could agree to execute a contract with the intent to include among the allowable, non-compensable actions by the Port intentional misconduct, arbitrary and capricious actions, and bad faith. In so doing, the Texas Supreme Court took note of the fact that government construction contractors can estimate potential delaying events when estimating and bidding public projects by assessing plans and specifications, weather data, markets for materials and labor, and soil testing. But they are unable to estimate delays arising from an public owner's direct interference, bad faith, or fraud. Accordingly, the Texas Supreme Court was unwilling to allow a contract clause to survive scrutiny that allowed a government contracting party to inflict damages upon another government contract party with impunity.
No-Damages-for-Delay Clauses in public construction contracts present a number of concerns that government construction contractors and subcontractors should identify, address, negotiate and develop strategies for dealing with early on. GCARL is able to assist you with all aspects of your government construction contract review, analysis, and planning. Consider becoming a GCARL Member and visit us here www.gcarl.com/becoming-member