Joe F. Canterbury Jr. 2012-12-26 02:06:22
The major construction law developments for 2012 are the anti-indemnity provisions of Chapter 151 of the Insurance Code1; harsh results of no-damages-for-delay clauses; inadvertent loss of claims by execution of interim lien releases, and arbitration developments. Also, the extent of coverage for defective construction and the contractual exclusion under C.G.L. policies are pending in the Texas Supreme Court.2 Anti-Indemnity Statute The Texas Legislature promulgated restrictions on indemnity agreements in construction contracts with the enactment of Chapter 151 of the Texas Insurance Code, effective Jan. 1, 2012. Subject to the major exceptions of residential and municipal projects, those covered by an owner or contractor controlled insurance program, and the exclusion of bodily injury or death of an employee of an indemnitor (Sec. 151.103); broad form indemnity agreements requiring a party to indemnify others for claims arising out of the negligence or fault of the indemnities or any third party under their control or supervision are void and unenforceable (Sec. 151.102). Also, the statute voids additional insured provisions in contracts and insurance policies to the extent they require coverage for an indemnitee’s own negligence (Sec. 151.104). The anti-indemnity statute cannot be waived by agreement (Sec. 151.151); therefore, it must be carefully considered in all construction-related contracts. The express negligence and conspicuousness tests for enforceable indemnity agreements may not apply to construction agreements made after Jan. 1, 2012, since broad form indemnity will be void anyway. However, if broad form indemnity is sought for claims arising out of employee injuries or deaths, it must meet these tests. Also, since courts have declared indemnification agreements void that did not meet these tests before the enactment of Chapter 151, the best practice will be to use clear and conspicuous language for all indemnity clauses in the construction and subcontract agreements. No-Damages-For-Delay Clauses Contractors routinely encounter no-damages-for-delay clauses, but have accepted their risks under the perception that owner interference, arbitrary acts, fraud, and other generally recognized exceptions would protect them. In Port Authority of Harris County v. Zachry Constr. Corp., the Houston 14th District Court of Appeals reversed a jury award of approximately $18.6 million for the contractor based on a no-damages-for-delay clause.3 In Zachry, a contract with the Port provided a timetable for completion, and that Zachry’s sole remedy for any delays was an extension of time. In the trial court, Zachry contended that the Port breached the contract by direct interference with its means and methods and sought damages for the delays and hindrances. The Port argued that a broad nodamages- for-delay clause prohibited such damages. An instruction was given to the jury that the no-damages-fordelay clause prohibited Zachry’s recovery of delay or hindrance damages unless they resulted from “a delay or hindrance that was the result of the Port’s actions, if any, that constituted arbitrary and capricious conduct, active interference, bad faith and/or fraud.” Based on common law exceptions to no-damages-fordelay clauses accepted in nearly all states, and mentioned in the 14th District’s opinion in City of Houston v. R.F. Ball Const. Co., Inc.,4 33 years ago — and apparently on the jury’s damage award considering its instruction — the trial court applied the exceptions. Using the analytic framework of R.F. Ball, the appellate court framed the issue as to whether Zachry established that the no-damages-fordelay clause at issue was not intended to apply to delay or hindrance that was the result of the Port’s actions. The clause provided that there were to be no damages for delay “regardless of the source”: …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. Since the delay or hindrance damages were caused, at least in part, by the breach of contract, as confirmed by the jury award, the 14th court concluded, in accordance with R.F. Ball, that Zachry had failed to establish that the nodamages- for-delay clause was not intended to apply to the Port’s breach of contract. Although the jury was instructed on the exceptions, it was not asked to make a specific finding on whether the Port’s conduct “constituted arbitrary and capricious conduct, active interference, bad faith and/or fraud.” The court concluded, however, that a specific jury finding would not affect the application of the clause insofar as the court determined that the parties’ emphasis on “other fault” to the specific exclusion of “negligence” communicated the intent that the Port’s conduct that rises above mere negligence or is a departure from the standard of care would not preclude enforcement of the no-damages-fordelay clause. The appellate court concluded that Zachry failed to establish that the clause was not intended to apply to the Port’s conduct, including arbitrary and capricious conduct, active interference, bad faith, or fraud. Zachry argued that the failure to apply the common law exceptions to the contract’s no-damages-for-delay clause would render the contract unbreachable and illusory. The appellate court disagreed, noting that the parties are free to negotiate and agree upon the conditions under which (1) the contractor will recover damages for delay; and (2) other remedies available to the contractor for any such delay. A practical result of the Zachry opinion is that a contracting party can delay and damage the other party by arbitrary and capricious conduct, active interference, bad faith, and/or fraud and shield its actions by a no-damagesfor- delay clause, establishing questionable public policy for Texas. A petition for review is pending in the Supreme Court. At issue is the length that “freedom of contract” can shield conduct that could be argued to be — or should be — against public policy. Interim Release Forms In Zachry, the trial court, finding the interim release forms ambiguous, submitted their meaning to the jury. The 14th court disregarded the jury’s findings and held that the forms released Zachry’s claims to more than $2 million in liquidated damages withheld by the Port.5 Since most construction contracts required releases for interim payments, the decision places contractors in serious jeopardy, requiring careful examination and modification of such forms to avoid inadvertent loss of claims not covered by a partial payment. The dissenting opinion of Justice Tracy Christopher6 seems to set forth the correct legal interpretation of the interim release forms, but unless reversed by the Supreme Court, the majority opinion will place extreme burdens on all contractors and their lawyers to carefully examine and negotiate the forms of interim release documents. Arbitration The majority of construction disputes on commercial projects are resolved by arbitration. Last year’s developments involved some interesting challenges on claims of evident partiality based on inadequate disclosures.7 Another major development is the Texas Supreme Court’s allowing judicial review beyond the grounds of the Federal Arbitration Act, contrary to the U.S. Supreme Court’s opinion in Hall Street Assoc. v. Mattel Inc.8 In Nafta Traders Inc. v. Quinn,9 a contract contained a clause limiting the authority of the arbitrators to render a decision containing reversible errors of state or federal law or to apply a remedy not expressly provided under existing state or federal law. The court, finding that the Texas Arbitration Act could apply to the case, since the FAA was not specified, allowed judicial review, and held that the FAA does not preempt the TAA. For drafters, the case provides a clear lesson — if judicial review is desired, limit the arbitrator’s authority to make legal errors and specify that the TAA will apply to an arbitration. Conversely, if judicial review for legal errors is not desired, specify that the FAA applies. Notes 1. Tex. H.B. 2093, 82nd Leg., R.S. (2011), enacting Ch. 151 of the Texas Insurance Code, became effective Jan. 1, 2012. 2. The 5th Circuit’s opinion in Ewing Const. Co. Inc. v. Amerisure, 684 F.3d 512 (5th Cir. 2012) held that the “contractual liability” exclusion in a CGL policy negated the insurer’s duty to defend defective construction claims of negligence and breach of contract. The opinion was withdrawn and superseded and certified questions on the scope of the contractual liability exclusion were accepted by the Supreme Court of Texas. Ewing Const. Co. Inc. v. Amerisure Ins. Co., 690 F.3d 628 (5th Cir. 2012), certified question accepted (Aug. 24, 2012). 3. Port Auth. of Harris County vs. Zachry Constr. Corp., No. 14– 10–00708–CV, 2012 WL 3223597 (Tex. App.—Houston [14th Dist.] Aug. 9, 2012, pet. filed). 4. 570 S.W. 2d 75 (Tex. Civ. App. —Houston [14th Dist.] 1978, writ ref’d n.r.e.). 5. Zachry, 2012 WL 3223597, at *7-12 6. Id. at *18 (Christopher, J., dissenting). 7. Ponderosa Pine Energy, L.L.C. v. Tenaska Energy Inc., 376 S.W.3d 358 (Tex. App. —Dallas 2012, no pet. h.) (evident partiality claim waived for failure to obtain or seek additional information following arbitrator’s disclosures instead of challenging on information learned following an adverse award). For a case discussing the burden to establish actual bias of an arbitrator instead of “evident partiality” for failure to disclose, see FCA Construction Co. v. J.G. Plumbing Services, No. 01–10–01034–CV, 2012 WL 761147 (Tex. App. —Houston [1st Dist.] Mar. 8, 2012, no pet.) (mem. op.). 8. 552 US 576, 128 S.Ct. 1396 (2008) 9. 339 S.W.3d 84 (Tex. 2011) JOSEPH F. CANTERBURY JR. practices construction law in Dallas. He is a former President of the American College of Construction Lawyers and co-author of the Texas Construction Law Manual (Thompson/West 2012).
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