Everything’s Bigger in Texas, Including the Construction Litigation (Part 2 of 3)

This is the second of a three-part series exploring the Texas Supreme Court’s decision in Zachry Construction Corp. v. Port of Houston Authority of Harris County.  A summary of the case can be found at Part 1 of the series.  Part 3 will address the lien waiver issues raised by the decision.  This post considers the “no-damages-for-delay” aspects of the case, specifically exceptions to enforcement of such contract clauses.

What Zachry Says About No-Damages-for-Delay Clauses

The Texas Supreme Court began its analysis by noting that as a general rule, a contractor can assume the risk of, and not seek damages for, construction delays by agreeing to a no-damages-for-delay clause (“NDFD clause”) in a construction contract.  The court, however, then went on to note five “generally recognized exceptions” to the enforcement of such clauses:

1. When the delay is not intended or contemplated by the parties to be within the purview of the NDFD clause;
2. When the delay results from fraud, misrepresentation, or other bad faith on the party seeking the benefit of the NDFD clause;
3. When the delay has extended for such an unreasonable length of time that the party delayed would have been justified in abandoning the contract;
4. When the delay is not within the specifically enumerated delays to which the clause applies; and
5. When the delay is based upon the active interference or other wrongful conduct of the party seeking the benefit of the NDFD clause, including arbitrary and capricious acts in willful disregard of the rights of other parties.

The jury in Zachry had found that the “bad faith” and “active interference” exceptions (i.e., the Port Authority’s interference with Zachry’s means and methods for performing changed work after initially accepting Zachry’s proposal and work plan) applied and awarded Zachry delay damages, despite the NDFD clause in its contract with the Port Authority.  The Texas Court of Appeals reversed, “[a]s harsh as this result seems,” because it believed the parties intended to include the kind of misconduct found by the jury within the ambit of the NDFD clause.

By reversing the Court of Appeals and reinstating the jury’s verdict in favor of Zachry, the Texas Supreme Court adopted the rule that pre-breach waivers of future liability for intentionally damaging the other contracting party violate both the law and principles of public policy.  As a result, the Court refused to enforce the NDFD clause.

The State of “No-Damages-for-Delay” in North Carolina

The Texas Supreme Court noted that at least 28 other American jurisdictions have determined that NDFD clauses cannot shield one party from deliberately and wrongfully interfering with another party’s work.  Unfortunately, North Carolina is not among those 28 jurisdictions.  Indeed, a review of the case law reveals that North Carolina appellate courts have yet to consider the “bad faith” and “active interference” exceptions to NDFD clause enforcement at all.  Here’s what we do know about the state of NDFD clause enforcement in North Carolina:

• In APAC-Carolina, Inc. v. Greensboro-Highpoint Airport Authority, 110 N.C. App. 664, 431 S.E.2d 508 (1993), the North Carolina Court of Appeals (“COA”) considered the “not within the contemplation of the parties” exception to NDFD clause enforcement, holding that because the prime contract called for unclassified excavation and since wet weather was predictable, the undercut and erosion control work performed by the contractor was within the contemplation of the parties.  The COA therefore rejected the exception and enforced the NDFD clause.  The North Carolina General Assembly, however, responded to the decision by enacting N.C. Gen. Stat. § 143-134.3, which bars enforcement of NDFD clauses in contracts between public owners and prime contractors.  Note, however, that the statute’s protection extends neither to prime contracts for private projects nor to subcontracts for private or public projects.

• In Watson Electrical Construction Co. v. City of Winston Salem, 109 N.C. App. 194, 426 S.E.2d 420 (1993), the COA avoided consideration of either the “not within the contemplation of the parties” or the “active interference” exceptions to NDFD clause enforcement by finding that the contractor was not seeking to apply an exception, but rather pursuing damages for the owner’s failure to approve a time extension required by the contract.  The COA concluded the contract was ambiguous as to what damages the contractor could recover as a result of the owner’s failure to approve the time extension, and remanded the case to the trial level for findings of fact on the issue.

• In Southern Seeding Service, Inc. v. W.C. English, Inc., 217 N.C. App. 300, 719 S.E.2d 211 (2011), the COA held that an equitable adjustment clause “trumped” the subcontract’s NDFD clause, so that the subcontractor in question could recover its increased material and labor costs arising from unforeseen circumstances.  I blogged about the Southern Seeding decision when it was issued, and you can find my analysis here.

It could be argued that both the Watson and Southern Seeding cases stand for the proposition that the North Carolina appellate courts do not favor NDFD clauses and might be open to applying all of the five “generally recognized exceptions” to NDFD clause enforcement, including the “bad faith” and “active interference” exceptions.  The absence of much case law authority on the subject, however, makes it difficult to predict how the COA might handle Zachry-type issues.

The Upshot for Contractors Building in the Tarheel State

So where does that leave construction contractors and subcontractors (and the lawyers who represent them)?  In a state of limbo, that’s where.  Until our appellate courts wrestle with the same issues the Texas courts addressed in Zachry, it’s not possible to predict with much accuracy the extent to which they might apply the “bad faith” and “active interference” exceptions to enforcement of NDFD clauses.  That, in turn, means a couple of things for you and your construction company:

• The safest course of action is to strike NDFD clauses during the contract drafting stage.  If the party above you in the contractual chain won’t consent to that change, consider proposing language that would include the five exceptions to NDFD clause enforcement within the NDFD provision.

• If you’re performing a contract containing an NDFD clause and are impacted by delays beyond your control, and for which one or more parties above you in the contractual chain might be responsible, document the facts and circumstances of the delay, as well as your damages, carefully.  Send notice letters, take pictures, keep impeccable logs and meeting minutes, segregate and track your delay costs, etc.  The better developed the factual record, the better the opportunity to successfully argue an exception to NDFD clause enforcement later on.

• Contact an experienced construction attorney to help you understand and manage the risk of NDFD clauses.

UPDATE 8:42 a.m. 1.15.2015.  My Twitter feed delivered this yesterday:

The linked article discusses a June 2014 decision of the Supreme Court of North Dakota refusing to enforce a no-damages-for-delay clause based on the active interference exception.  As in Zachry, the active interference in question was the owner’s meddling in the contractor’s means and methods.  Texas and North Dakota appear to be the 29th and 30th jurisdictions, respectively, to acknowledge the active interference exception to no-damages-for-delay enforceability.