I have written about the Houston Court of Appeals’ decision in Port of Houston v. Zachry addressing that court’s interpretation of the No Damages for Delay Clause in the contract between those parties. (See my post below from October 6, 2012).
Both Owners and Contractors should be aware of the fact this case is not an isolated decision. Two other prominent cases have been decided by Texas courts in the last year that approach contract interpretation in a similar manner. The underlying theme of these cases is the court’s strict interpretation of contract language in situations where the contract language effectively removes one party’s rights to bring claims or recovery damages. This manner of interpretation is true today in situations where courts in the past would have likely applied common law rules to prevent the harsh results that these courts have rendered. The two cases I am referring to in this post are Cajun Contr. v. Velasco and El Paso Field. Servs. v. Mastec.
Throughout the course of our state’s jurisprudence, various common-law defenses to the application of risk-allocation clauses have been developed. These defenses arose for various reasons. Now, it seems, that that the courts of this state are pulling back some of these defenses in favor of a freedom to contract judicial philosophy.
This philosophy is not a bad thing, in and of itself. However, contracting parties must be aware that the current judicial environment seems to be one where the plain contractual language agreed to by the parties will be enforced by the courts. When entering into contracts, parties must be diligent in negotiating the terms of these risk allocation clauses.
In the Cajun Contractors case, the court was asked to determine the enforceability of a clause requiring notice of claims within a certain time-frame. In that case, the claimant failed to send proper notice of claim in the allotted time. When the case was litigated, the jury and trial court ignored the claim presentment language and awarded damages. The court of appeals, after a lengthy appeal, ultimately decided that the plain language of the contract was enforceable and the presentment language must be enforced. As a result, the claim was disallowed.
In the Mastec case, the parties agreed that all risks associated with underground crossings would be borne by Mastec. At the outset of the project, during the negotiation phase, El Paso Field Services represented to Mastec that there were approximately 280 crossings. During the performance, Mastec encountered almost 800 crossings. These unforeseen crossings resulted in more damages than the base contract. When Mastec sought recovery, the appellate court found that the express language of the risk for these crossings fell solely on Mastec. This one clause had enormous effects on the cost of the project for Mastec. In the past, common law defenses would have been available to escape the harsh interpretation of this clause. Currently, courts are not applying these defenses to release contracting parties from the effects of the language chosen for contracts.
In light of these cases, diligence is essential in negotiating contracts. Be aware of the effect of each clause and plan for contingencies in bids or negotiated pricing based on the risks one is agreeing to accept in the contract.