The Texas Supreme Court recently issued an important decision regarding “no damages for delay” clauses in construction contracts. In Zachry Construction v. Port of Houston Authority, the Court found that the owner, the Port of Houston Authority, could not shield itself from liability for damages caused by delays resulting from its intentional misconduct (i.e. arbitrary and capricious conduct, active interference, bad faith, and fraud) despite including the following provision in its construction contract with Zachry:

The Contractor shall receive no financial compensation for delay or hindrance of the Work. In no event shall the Port Authority be liable to the Contactor or any Subcontractor or Supplier, any other person or any surety for or any employee or agent of any of them, for any damages arising out of or associated with any delay or hindrance to the Work, 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. The Contractor’s sole remedy in any such case shall be an extension of time.

All construction project team members should understand the limitations and implications, and the questions left unanswered by the Zachry decision.

Limitations of the Decision

Construction professionals, particularly contractors, should understand that the Court did not find that “no damages for delay” clauses are unenforceable in all circumstances where an owner is at fault. Specifically, a contractor can still be on the hook for owner caused delays when an owner is negligent, if the contract contains an appropriately worded provision. The difference between “negligence” and “intentional misconduct,” however, is often matter of degree and likely an issue for a jury (or other fact finder like an arbitrator). The intentional bad conduct illustrated by the Zachry decision included the owner’s unwillingness to allow the contractor to perform due to the owner’s unexpressed reservations regarding the means and methods the contractor proposed. The Court’s decision rested heavily on the jury’s determination that the owner’s conduct was intentional misconduct, not mere negligence.

Important Implications

The Court held that the owner would not be shielded from liability for delays it caused even if the “no damages for delay” clause in the contract had been more specific (i.e. by specifically stating that the contractor could not recover damages for delay even for the owner’s intentional bad acts). In fact, the Court recognized an important public policy limitation on contractual provisions purporting to limit liability for a party’s intentional infliction of an injury on its contractual counterparty. As a result, this ruling would likely bar enforcement of any contractual provision attempting to prospectively release liability for intentional bad acts.

Open Questions

Questions remain as to if and to what extent Texas courts will recognize all of the traditional exceptions to enforcement of a no damages for delay clause. Those traditional exceptions include:

when the delay: (1) was not intended or contemplated by the parties to be within the purview of the provision; (2) resulted from fraud, misrepresentation, or other bad faith on the part of one seeking the benefit of the provision; (3) has extended for such an unreasonable length of time that the party delayed would have been justified in abandoning the contract; (4) is not within the specifically enumerated delays to which the clause applies; [or]

(5) resulted from other wrongful conduct such as arbitrary and capricious acts or willful and unreasonable actions without due consideration and in disregard of the rights of other parties.

The Texas Supreme Court clearly recognized, at a minimum, the second and fifth exceptions. The Texas Supreme Court did not reject the remaining exceptions, state that they were adopted, or illustrate them. As a result, the extent to which the other exceptions were adopted is unclear.

Practical Consequences

Sooner or later this decision will affect your business. Upstream parties should understand that they will not be able to insulate themselves from all liability for delays, particularly those delays caused by their intentional misconduct. Downstream parties should understand that in most instances “no damages for delay” clauses are enforceable and should think twice before signing a contract that includes them.

For the full opinion, please see here.