Texas Court of Appeals Holds That Owner’s Change to Contractor’s Means and Methods Resulted in a “Breach,” Instead of a “Change” Subject to the Changes Clause

by Pepper Hamilton LLP
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Port of Houston Auth. of Harris Cnty. v. Zachry Constr. Corp., 2016 Tex. App. LEXIS 13306 (Tex. App. Houston 14th Dist. Dec. 15, 2016)

This contract dispute dates back to 2004, when the Port of Houston Authority contracted with Zachry Construction to build a shipping wharf in Harris County, Texas. Zachry’s bid proposed, as part of its means and methods, building the wharf “in the dry” by using a frozen earthen wall to seal out water from the construction area. Several months into the project the Port Authority decided to extend the wharf. Zachry again proposed freeze-wall technology for the extension, and the parties entered into a change order.

The Port Authority then refused to approve Zachry’s frozen wall design, and directed Zachry to either present an alternative design an alternate means of mitigating risk. Unable to identify a viable alternative design, Zachry switched from the frozen wall design and completed the construction “in the wet”.

In 2006, Zachry sued the Port Authority for breach of contract to recover the extra costs associated with delays caused by having to switch its means and methods. The jury found that the Port Authority breached the contract, and awarded Zachry over $18 million. The Port Authority appealed, raising a host of issues. The Texas Court of Appeals reversed the judgment in favor of Zachry, based on the contract’s no-damages-for-delay clause and on progress payment releases.

The Texas Supreme Court reversed and remanded the case back to the Court of Appeals so it could address the Port Authority’s remaining issues: (i) whether there was insufficient evidence for the jury to find that the Port Authority breached the contract by requiring Zachry to alter its means and methods, and (ii) whether Zachry failed to satisfy a condition precedent in the changes clause by not giving notice to the Port Authority that it viewed the Port Authority’s directive to switch the means and methods for performing the work as a breach of the contract.

On remand, the Court of Appeals affirmed the jury verdict and held that (i) the contract gave Zachry exclusive control over its means and methods and there was sufficient evidence for the jury to find that the Port Authority breached the contract by requiring Zachry to change its means and methods, and (ii) the contract only required notice when there were changes to the “work,” not a breach of the contract.

The Court determined that if the Port Authority had any control over the means and methods, it would vitiate a section of the contract that clearly gave the contractor exclusive control over its means and methods. The contract also expressly protected the Port Authority from any liability for Zachry’s means and methods. As such, the Court found that if the Port Authority had control over these means and methods, it would risk losing this protection.

The Court also held that Zachry did not fail to satisfy a condition precedent in the contract because the contract’s notice provisions only applied to changes relating to the work, rather than a breach of the contract. The notice provisions do not mention “breach.”  Zachry contended that the rejection of the frozen wall design was a breach (a contention with which the Court agreed) and not a “change or modification” to the work. The Court thus concluded that the contract did not require Zachry to give notice. The Court also noted that accepting the owner’s interpretation of the contract would violate a Texas statute which voids contract provisions requiring notice within 90 days as a condition precedent to a breach of contract claim.

To view the full text of the court’s decision, courtesy of Lexis®click here.

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