Zachry Construction Corp. v. Port of Houston Authority of Harris County No. 12-0772

Chief Justice Hecht delivered the opinion of the court, joined by Justice Green, Justice Guzman, Justice Devine, and Justice Brown.

Petitioner, Zachry Construction Company contracted with respondent, the Port of Houston Authority of Harris County, to construct a wharf on the Bayport Ship Channel. The concrete wharf would extend over the water to be used for loading and unloading ships carrying different goods. A provision of the contract made Zachry an independent contractor in sole charge of choosing the manner in which the work would be conducted, insulating the Port from liability. Zachry had a complicated yet innovative plan to construct the port, but because time was of the essence to the Port, Zachry agreed to pay $20,000 per day as liquidated damages for any missed deadlines. Nine months into the project, the Port requested that an additional section be added to the wharf. While the Port had reservations about the plan discussed with Zachry to complete this new addition, it did not share its concerns and the change order was finalized. Two weeks later the Port ordered Zachry to redo its plans for the new addition, but Zachry protested saying that the Port had no right to determine the method of the work pointing to the control section of the contract. At this point, Zachry’s only option was to do as the Port requested, causing delays in the completion of the project. After Zachry completed the original section of the wharf, the Port began withholding liquidated damages from payments because the remainder of the project was not yet complete. The project was finished more than two-and-one-half years after the contract deadline. Zachry sued the Port claiming damages from delays caused by the Port. The Port asserted that a section of the contract precluded delay damages. Zachry also sough recovery in delay damages withheld by the Port.

The trial court found that such a no-delay-damages provision could not be enforced if the Port’s intentional misconduct caused the delay. The court also held that the contract’s liquidated damages provision was invalid, and that the language of that provision and releases signed by Zachry did not unambiguously release Zachry’s claim to the liquidated damages withheld. The jury found that the Port breached the contract, the delay was the result of the Port’s conduct, that Zachry had not released its claims, but that the Port was entitled to an offset of damages for the use of defective wharf fenders.

The court of appeals held that the no-delay-damages provision of the contract barred Zachry’s recovery, that Zachry had unambiguously released its claims to the liquidated damages withheld, and that the Port was entitled to the offset.

Issue One: Whether the Local Government Contract Claims Act waives a local governmental entity’s immunity from suit on a contract claim for delay damages the contract does not call for. The issue is broken into two parts: first, whether the Act’s limitations on recovery held define and restrict the scope of the waiver immunity, and second, whether the delay damages Zachry seeks are permitted by the Act, so that the Port’s immunity is waived. The court concluded that the delay damages Zachry seeks are permitted by the Act; therefore, the Port’s immunity is waived.

The Act’s immunity clause, Section 271.152, states that “[a] local governmental entity . . . that enters into a contract subject to this subchapter waives sovereign immunity to suit . . . subject to the terms and conditions of this subchapter.” The court determined that the contract between the Port and Zachry qualifies under the Act. The “terms and conditions” referred to are found in the Act’s other nine sections. The focus of this decision was on section 271.153(a)(1), which states that “ . . . the total amount of money awarded . . . is limited to . . . the balance due and owed by the local governmental entity under the contract . . . including any amount owed as compensation for the increased cost to perform the work as a direct result of owner-caused delays or acceleration.” Because Zachry pled facts with evidentiary support that constituted a claim for which immunity is waived, the court concluded that the Act does not waive immunity from suit on a claim for damages not recoverable under section 271.153.

In regards to section 271.153(a)(1)’s reference to “the balance due and owed,” the Port asserted that no balance could be due and owed under a contract unless the contract expressly calls for payment. However, the court found no such requirement in the statute. It determined that a balance due and owed is the amount of damages for breach of contract payable and unpaid. The Act allows recovery of contract damages, including delay damages, and nothing in the Act suggests that those recoverable damages be stated in the contract, mainly because owner-caused delays cannot be determined in advance.

Issue One Holding: The court concluded that the Local Government Claims Act waives immunity for a contract claim for delay damages not expressly provided for in the contract.

Issue Two: Whether Zachry’s claim is barred by the no-damages-for-delay provision of the contract. The court concluded that the provision was unenforceable.

The court reiterated the principle that contractors can agree to assume the risk of construction delays and not seek damages, but that there are exceptions to the enforcement of that agreement to not recover delay damages. Zachry urged that two of these five exceptions applied in this case: 1) when the delay resulted from fraud, misrepresentation, or other bad faith on the part of one seeking the benefit of the provision, and 2) when the delay was based upon active interference or other wrongful conduct, including arbitrary and capricious acts.

While the jury found that the delay damages resulted from the Port’s capricious conduct and active interference, the court of appeals determined that the exceptions could not apply if the parties intended the no-damages-for-delay provision to cover the Port’s conduct. Because of the language of the provision, the court of appeals said that the parties were bound by the contract. However, looking to the law that states a contractual provision exempting a party from tort liability for harm caused intentionally is unenforceable, the Supreme Court determinedcontract liability should be treated the same. Concluding otherwise would lead to wrongful conduct and would strain contractual relationships.

Issue Two Holding: The no-damages-for-delay provision of the contract was unenforceable.

Other Issues: Zachry also sought to recover damages the Port withheld as liquidated damages for the failure to meet deadlines; however, the Port argued that Zachry’s execution of documents entitled “Affidavit and Partial Release of Lien” for each progress payment constituted a release of claims for those payments. The court held that as a matter of law, the releases are unambiguous, but that they do not cover Zachry’s claim because the releases referred to claims for work completed, not for liquidated damages withheld—work not completed.

The trial court and court of appeals offset Zachry’s award for the use of defective wharf fenders. The court determined that the evidence was legally sufficient to support the jury’s finding that the fenders were defective and that Zachry breached this part of the contract.

Finally, because Zachry prevailed on its claims for delay damages and recovery of liquidated damages, the Port’s attorney fees will not be awarded.

Justice Boyd, dissenting, joined by Justice Johnson, Justice Willett, and Justice Lehrmann.

The dissent argues that the delay costs are not part of “the balance due and owed” under this contract and therefore, the Port’s immunity against Zachry’s claim is not waived. The dissent relies upon the legislature’s declaration that courts cannot construe a statute to waive immunity unless the waiver is clear and unambiguous.

Although the dissent agrees with the majority that delay damages can be part of the balance due and owed, it does not agree that these delay damages are due and owed under this contract because the contract expressly provides that the Port would have no liability for any delay damages. The Act is construed to read that when a payment is not provided for under the contract, but does arise under the common law, that payment may be due and owed under the court’s judgment, but not as part of “the balance due and owed under the contract.”

The dissent urges that the majority shifted the focus from the “mature debt” that is “under the contract” to prospective liability that a court may impose in a breach of contract action. The balance due and owed is not equivalent to the amount of damages for breach of contract payable and unpaid. The dissent also states that under the majority’s construction of the Act, the amount of damages is not limited at all. The dissent contends that section 271.153(a)(1) only allows for recovery of amounts provided for in the contract. Not only does the dissent disagree with the majority’s construction of the Act, but it also states that prior case law indicates that a “balance due and owed . . . under the contract” must be provided for in the parties’ agreement.

Although the dissent agrees that owner-caused delay damages are not quantifiable at the time of contracting, because the parties here expressly agreed that Zachry would receive no compensation for delay even if that delay was ownercaused, then delay damages are not recoverable. Therefore, those delay damages are not a part of “the balance due and owed.” The dissent would hold that section 271.153 permits an award of delay damages, but only if those damages are provided for in the agreement. Because the dissent finds that Zachry’s delay damages are not part of “the balance due and owed,” there should be no award for damages in this case, and thus, the Port’s immunity is not waived. The claim should be dismissed for lack of jurisdiction.