LESSONS LEARNED FROM CONSTRUCTION
CLAIMS AS THEY RELATE TO NOTICE REQUIREMENTS IN DELAY CLAIMS
Dismissal
of Claims Because the Contractor Failed to Give Notice of the Claim
On October 15, 2014, the U.S. Court of
Federal Claims opined that because the contractor’s delays
were not excused and because there is was evidence of bad faith, the Contracting
Officer’s (“CO”) decision to terminate the contract for default would be
sustained and the contractor lost its claim.
The contractor had failed to present those delays to the CO within 10
days of the start of the delay. The
contractor did not argue that it provided the required notice or that GSA
waived its right to insist upon timely notice. The contractor thus had a duty to begin
construction and complete it according to the schedule. The contractor failed to do so and was found
in default. Furthermore, the government
will now be awarded reprocurement costs and liquidated damages for the delay in
project completion. The case is Lake Charles XXV, LLC v. The United States
of America, U.S. Court of Federal Claims, Case No. 09-363C, 15 October
2014.
See also
Schiavone Construction Co., Inc., etc.,
Plaintiff-Appellant, v The City of New York, etc., Defendant-Respondent,
Court of Appeals on New York, 2013. The
Court unanimously affirmed the Order, Supreme Court, New York County
(Melvin L. Schweitzer, J.), entered January 10, 2012, which denied plaintiffs'
motion to amend the statutory notice of claim and the complaint, and granted
defendant's motion to dismiss the complaint without costs.
The Court of Appeals said
that Plaintiffs' orginal notice of claim failed to comply with the strict
notice provisions of the parties' contract; thus, plaintiffs waived their claim
under the contract (see A.H.A. Gen. Constr.
v New York City Hous. Auth., 92 NY2d 20, 31-32
[1998]). Plaintiffs do not assert that
defendant "frustrated or prevented the occurrence of the condition
[precedent]" to their suit (see id. at 31 [internal quotation marks omitted]). Moreover, no fewer than three clauses in the
contract alert the parties to the importance of compliance with all notice procedures;
allowing plaintiffs to ignore those procedures would be to contravene
longstanding black-letter law that a contract should not be read to
"render any portion meaningless" and should be "so interpreted
as to give effect to its general purpose" (see Beal Sav. Bank v Sommer, 8
NY3d 318, 324-325 [2007] [internal quotation marks omitted]).
Notice Requirements Exist in Almost All
Contracts
Construction contracts typically
contain provisions requiring prompt written notice of any act or event that
causes an excusable delay. This is often
a condition precedent to a contractual right to request an extension of time to
complete the project and to recover monetary damages due to the delay. The
purpose of these provisions is to provide the owner and architect/engineer with
prompt notice so a timely investigation may be undertaken to determine the
validity of the claim. The owner is
generally not responsible for adjustment of time and/or price unless he
receives timely written notice of the claim.
The notice provision often has a
salutary effect on potentially major disruptions by: (1) alerting other parties
to problems about which they may not be aware; (2) bringing parties together to
discuss options to resolve or mitigate; (3) giving the owner the option of not
proceeding if time or costs are too great; and, (4) allowing parties to set up
systems to track actual delays from particular events and closely track the
resulting costs. Board of Ed. of Enlarged Ogdensburg City School
Dist. v. Wager Const. Corp., 37 N.Y.2d 283, 372 N.Y.S.2d 45 (1975). It is typically understood that
substantial compliance with a notice provision is a condition precedent to a
contractor’s right to an extension of time and damages (Vanderlinde Elec. Corp. v. City of Rochester,
54 A.D.2d 155, 388 N.Y.S.2d 388 (4th Dep’t 1976)), unless only
contractual, not statutory, notice provisions apply and the contractor has
actual knowledge of the delay. Hunts
Point Multi-Service Center, Inc. v. Terra Firma Const. Management & General
Contracting, LLC., 5 A.D.3d 183, 773 N.Y.S.2d 48 (1st Dep’t 2004).
Notice
requirements should be complied with as closely as possible, and a failure to
give written notice may be fatal to a delay claim, even if the delay was
obvious to or known by the owner. Written notice is often required where a
public entity is involved, and contractors should not rely on a court holding
that the owner waived the notice requirements. Huff Enterprises, Inc. v. Triborough Bridge and Tunnel
Authority, 191 A.D.2d 314, 595 N.Y.S.2d 178 (1st Dep’t 1993). Notice
requirements for public construction projects are set forth in statutes, which
are automatically part of every contract made by most government entities,
including school districts and the State itself. Anderson Const. Co. v. Board of Ed., Union Free School
Dist. No. 3, Town of Babylon, 229 N.Y.S.2d 337 (Sup. 1962). Furthermore,
compliance with statutory notice provisions is mandatory to maintain a claim. Public Improvements, Inc. v. Board
of Ed. of City of New York (P.S. 72, Bronx), 81 A.D.2d 537, 438 N.Y.S.2d 305
(1st Dep’t 1981).
Under most circumstances, a notice of
claim must be made within a certain finite time frame specified in the
contract. Contract notices vary, but can
be as short as five days and as long as ninety days. In the Lake Charles XXV, LLC case cited
above, the time to file the notice was ten days. A written cost
estimate is usually required within fifteen to thirty days thereafter.
A
delay damage claim arises when the contract is substantially completed or when
the contract is terminated or work ceases. Nyack
Bd. of Educ. V. K Capolino Design and Renovation, Ltd., 114 A.D.2d 849, 494
N.Y.S.2d 758 (2d Dep’t 1985). Substantial completion allows the
contractor to itemize the damages and realistically estimate the remainder of
the damages. Board of Ed.
of Enlarged Ogdensburg City School Dist., 37 N.Y.2d 283. Furthermore,
depending on the statute or contract involved, a notice of claim may be
ineffectual or premature if filed before the accrual of the claim. Anderson Const. Co., 229 N.Y.S.2d
337.
In public construction projects, notice
requirements are set forth by statute. For example, the Contract Disputes Act
sets out the notice requirements for claims against the Federal Government. Compliance with the relevant statutes is
mandatory to maintain a claim against the government. If such notice is not given, and the owner
has not waived the notice provision, the contractor may forfeit its claim for a
time extension and assume liability to the owner for damages attributable to
the delay. See Fla. N.R. Co. v. Southern Supply Co., 112 Ga. 1, 37 S.E.
130 (1900). Courts generally do not permit contractors to recover delay damages
without proper notice because, absent such notice, the owner may not know about
and have the opportunity to eliminate the cause of the delay and, consequently,
may be prevented from providing appropriate notice to other parties. See
Allgood Electric Co., Inc. v. Martin K. Eby Construction Co., Inc., et al.,
959 F. Supp. 1573 (M.D.Ga. 1997).
In June of 1998, in a decision that is
bound to be frequently cited in New York in support of strict enforcement of
written notice of claim requirements, New York's highest Court reaffirmed the
necessity of strict contractor compliance with Notice requirements. In A.H.A.
General Construction Inc. v. New York City Housing Authority, the New
York Court of Appeals rejected a contractor's claim for more than $900,000
against the New York City Housing Authority based on the contractor's failure
to comply with the Housing Authority's contract requirements for the
performance of disputed work. The Court
held that the only way for the contractor to be excused from these contract
provisions would be to show that the Housing Authority prevented or hindered
compliance with the notice and reporting requirements of the contract.
The contract at issue required, inter
alia that while the contractor was performing disputed work, the
contractor would furnish daily written reports stating the name of each worker,
the number of workers employed in performing the work, and the quantity of any
materials used in the performance of the work. The contract stated that the
contractor could not assert any claim concerning the disputed work unless it
strictly complied with all the requirements relating to the provision of
information with respect to such claims. The contractor failed to comply with
the daily record keeping, and at the end of the job submitted a list of claims
for extra work.
The contractor furnished evidence that
on several occasions, the Housing Authority acted in bad faith in its dealings
with the contractor. Nevertheless, the Court of Appeals held the public
agency's bad faith was insufficient to relieve the contractor from strict
compliance with the notice provisions of the contract. The contractor, while
presenting evidence of bad faith, was not able to prove that the Housing
Authority did anything to prevent it from submitting the notice documentation
required under the contract.
The Court of Appeals highlighted the
notice and information requirements for public agencies to be notified
immediately of deviations from the project's budget thus allowing the public
agency to take action to avoid or minimize unnecessary expense. The court held
that notice and information requirements were conditions precedent to
compensation for extra work.
This case is very similar to the Schiavone
Construction Co., Inc., etc., cited
above. Schiavone also failed to give a
detailed breakdown of all the delays and the associated costs. It only provided a total cost of the delays,
but is insufficient.
Lessons
Learned
A properly
drafted notice of claim provision should include a definite time frame, the address
and method of serving the notice, a provision for a prompt "all hands
meeting," and a complete list of the documents which must be presented
with the final claim. These documents
should include copies of work logs with entries made daily containing the names
of the workmen used on the extra work, and the nature and quantity of any
materials, physical plant and equipment used during the work. A well-drafted contract should also contain a
"complete integration clause," indicating that the contract
represents the entire agreement between the owner and the contractor, thus
barring a claim by the contractor of waiver or some other side agreement to
vary or alter the terms of the contract.
Waiver of the Claim
for Failure to Provide Proper Notice
A contractor may have waived its right
to recover delay damages from an owner in various ways. For example, if a contractor
signs a change order that either expressly or implicitly waives its right to
the delay damages, its claim may be lost. In Brandt Corp. v. City of New
York, 199 N.E.2d 493 (N.Y. 1964), the contract included a provision that
the acceptance of final payment constituted a waiver and release of all
claims. Although the contractor had previously submitted notice to the
owner that it intended to seek recovery on a claim for over $20,000, the court
held that the contractor’s acceptance of the final payment barred the
claim. Similarly, an owner may waive the right to seek damages after it
makes a final payment to the contractor. See Centerre Trust Co. v.
Continental Insurance Co., 167 Ill. App. 3d 376, 521 N.E.2d 219 (1988).
Improper is no notice at all. Many Contractors who recognize the
need for notice avoid confrontation through alternate channels. Examples of “improper notice” include
providing notice of a delay claim by submitting a periodically revised schedule
without comment, or noting the claim in regular meeting minutes or daily
reports without specific correspondence to the Owner. Even worse is relying on a claim that an
Owner “knew” or “should have known” of the claim, lack of express notice
notwithstanding. The contractor will
always lose these claims from the beginning, without even arguing the merits of
the claims themselves. So, please read
the contract and follow the notice requirements precicely.
In K-Con Building Systems, Inc. v. The United States, 114
Fed. Cl. 595 (2014), the contractor apparently agreed to incorporate the
proposed changes into the design without objection, and later (much later)
first gave notice of the claim. If the contractor had contemporaneously noted
that it felt the proposals were changes to the design, the result might have
been different. In dealing with claims
and contract requirements, courts often look to the essence of the agreement’s
procedures to see if the practical objective has been achieved. The United States Court of Federal Claims
recently held that a contractor’s claim for additional compensation for a
change should be denied because the contractor failed to satisfy its contract’s
written notice requirements.
Start Elevator, Inc. v. New York City Housing
Authority
In the Start Elevator action the plaintiff elevator contractor
sought damages in the sum of $495,564.33 for change order work it allegedly
performed for the New York City Housing Authority (“NYCHA”). The
defendant City of New York moved for an order dismissing the contractor’s claim
on the grounds that Start Elevator “failed to file a written notice of claim
with NYCHA within 20 days after its claim for extra charges arose, as required
by Section 23 of the General Conditions of the Contract.” (NYCHA
also claimed that the contractor released it from any claims.)
After the submission of papers and
oral argument on the motion, the New York County Supreme Court found that the
plaintiff contractor “failed to comply with the unambiguous terms of Section 23
of the parties’ Contract, which makes the filing of a notice of claim a
“condition precedent to suit or recovery”” and accordingly dismissed the
contractor’s claim.
Claiming reversible error, on appeal
the contractor argued that two separate letters dated April 28 and May 4, 2004
constituted a notice of claim pursuant to section 23 of the parties’ contract.
However, the Appellate Division found this argument to be unavailing.
With respect to the April 28 letter, the Appellate Division pointed out that it
merely stated the contractor would forward an estimate for the increased cost
for the claimed extra work, whereas section 23 of the contract required the
notice of claim to actually state the “amount of the extra cost”. And
although the contractor’s May 4 letter stated the amount of the extra cost for
the alleged extra work, the Appellate Division found it significant that the
letter was “not designated as a notice of claim”. Based on the
foregoing, the Appellate Division unanimously affirmed the dismissal of the
contractor’s claim for payment for the alleged extra work.
These recent decisions by the
Appellate Division for the First Department should serve as a word of caution
to contractors that they must strictly comply with all contractual notice
provisions contained in their contract, regardless of how burdensome such
provisions may be and irrespective of the “hard feelings” they are afraid will
be created. The contract should be thoroughly reviewed for all notice
provisions and the exact requirements of each notice provision should be
carefully examined and complied with in a timely manner. And as the
Start Elevator decision makes
clear, the submission of any such notices should be expressly designated as a
notice of claim as the Courts may not find ordinary correspondence to comply
with the strict contractual requirements. It is also advisable to state
specifically the article or paragraph of the contract pursuant to which the
notice of claim is being submitted. Failure to adhere to such
notice provisions can be very costly as demonstrated by the recent cases above
and an experienced construction lawyer should be consulted to assure proper
compliance.
Common
Elements of Contractual Notice Requirements
While notice provisions will vary
from contract to contract, most contain the following common elements:
Specified
Time Limits.
Most notice provisions mandate specific time limits by which a party must
provide notice of a claim. Time limits vary, but common time frames found
in construction contracts range between seven days to 30 days. These time
limits are typically triggered when the contractor “becomes aware” of a
claim. Of course, determining the exact moment when a contractor “becomes
aware” of a claim is often a source of dispute in construction
litigation. Some courts have held that a contractor may not be able to
assess its claim until a project has been completed. See,
e.g., James Corp. v. North Allegheny School Dist., 938 A.2d 474
(Pa. Commw. Ct. 2007).
Description
of Claim. Typically,
notice provisions will require a contractor to describe and/or provide evidence
of its claim. Disputes often arise as to what and how much information
ought to be provided.
Designated
Party to Receive Notice.
It is common for construction contracts to designate the party that must
receive notice from the contractor. If provided to the wrong party, the
contractor’s notice is at risk of being deemed ineffective and might preclude
the claim. See Michael L. Orndahl,Construction Change
Order Claims: Notice Requirements for Changes and Related Claims (citingCameo
Homes v. Kraus-Anderson Constr. Co.,394 F.3d 1084 (8th Cir. Minn.
2005)).
In Writing. Many notice provisions
require a party to submit its notice of claim in writing. Owners and
contractors often dispute what type of “writing” is required and how “writing”
should be defined. For example, some courts have accepted meeting minutes
or monthly project schedule updates as written notice of a claim. See,
e.g., Vanderline Elec. Corp. v. City of Rochester, 54 A.D.2d 155 (N.Y. App.
Div. 1976). By contrast, other courts have refused to accept “requests
for information” or a letter outlining a potential claim as
satisfying the written notice requirement. See Orndahl, supra (quotingStarks
Mechanical, Inc. v. New Albany-Floyd County Consolidated School Corp., 854
N.E.2d 936 (Ind. Ct. App. 2006); Barclay White Skanska, Inc. v.
Battelle Memorial Institute, 2006 U.S. Dist. LEXIS 18947 (D. Md. Apr. 12,
2006)).
Overcoming
Inadequate Notice
Strict enforcement of notice
provisions varies from state to state in the United States or even case by
case. As a result, the type of notice deemed satisfactory in one case
might be insufficient in another. Steven G.M. Stein, 2 Construction
Law § 4.13 (Matthew Bender & Company, Inc. 2014).
Certain jurisdictions have a
reputation for being more strict when it comes to compliance with notice
requirements. For example, courts in New York, New Jersey, Washington,
and Maryland have been known to harshly enforce contractual notice
provisions. See, e.g., Mike M. Johnson, Inc. v. County of Spokane,78
P.3d 161 (Wash. 2003); Phoenix Signal and Elec. Corp. v. New York State
Thruway Authority,90 A.D.3d 1394 (N.Y. App. Div. 3d Dept. 2011).
Other states adopt a more liberal “fairness demands” approach to enforcing
notice provisions. See Earl K. Messer, Construction
Contract Notice of Claim Provisions Are Generally Strictly Enforced in Ohio,June
23, 2012 (citing the American Bar Association’s Construction
Lawyer publication at Volume 32, No. 1, Winter 2012).
When faced with a defense of
inadequate notice, contractors generally raise one or a combination of the
following common arguments: (1) the owner received actual notice—i.e, had
direct or constructive knowledge of the claim or events leading to the claim;
(2) the owner was not prejudiced by lack of formal notice; (3) the owner had
“waived” or frustrated the giving of notice or was otherwise estopped from
enforcing the notice provision due to some previous action; or (4) the contractor
substantially complied with the notice provision. Some of these arguments
are discussed in greater detail below.
Actual
Knowledge and Lack of Prejudice
As stated above, some courts are
reluctant to enforce burdensome notice provisions. This is
particularly true where an owner may be deemed to have actual knowledge of
events giving rise to a claim, even if the contractor’s notice was technically
non-compliant. See, e.g., Hoel-Steffen Constr. Co. v. United
States, 456 F.2d 760 (U.S. Ct. Cl. 1972) (refusing to strictly enforce a
notice provision where government and project owner had actual knowledge of a
situation that was the subject of the contractor’s claim); but
see Eggers & Higgins v. United States, 403 F.2d 225 (U.S.
Ct. Cl. 1968) (owner prejudiced by lack of notice where claim was brought
nearly five years after the required date).
For example, imagine a scenario
where unusual or severe weather results in project delays or gives rise to a
dispute among the parties. Claims (or potential claims) arising from
severe weather are usually obvious to an owner, which may obviate the need for
a contractor to send formal notice. SeeOrndahl supra (citing New
Pueblo Constructors, Inc. v. State,696 P.2d 185 (1985)). If the lack
of formal notice does not prejudice or harm the owner in any way, many U.S.
courts will allow the contractor to bring its claim. See id.
Waiver
Depending on the parties’ course of
conduct, an owner may be deemed to have waived its right to enforce a
contractual notice provision. See, e.g., Welsh v. Gindele
& Johnson, 50 A.D.2d 971 (N.Y. App. Div. 1975). For example, one
court held that an owner may have waived its right to notice after telling a
contractor that giving notice would be “useless.” See Stone v.
City of Arcola,536 N.E.2d 1329 (Ill. App. Ct. 1989).
Another common example of waiver
occurs where a contractor gives oral notice of a claim, even though the
contract mandates written notice. In this scenario, many courts will look
to the parties’ course of conduct during the project. See Orndahl, supra (quoting Charles
T. Driscoll Masonry Reconstruction Co. v. County of Ulster, 40 A.D.3d 1289
(N.Y. App. Div. 2007)). An owner may be deemed to have waived its ability
to enforce a written notice requirement if the parties establish a pattern of
inconsistent conduct during the project. See id. (citing Tupelo
Redevelopment Agency v. Gray Corp., Inc.,972 So. 2d 495 (Miss.
2007)).
Substantial
Compliance
Some courts have held that
“substantial compliance” with a notice provision is sufficient. This
notion is basically just an amalgamation of excuses already discussed.
For example, one court held that a contractor’s slightly imperfect letter of
notice could be acceptable where it did not prejudice the owner. See
id. (quoting Okee Indus. Inc. v. National Grange Mut. Ins. Co.,623
A.2d 483 (Conn. 1993)). Of course, how a court will apply the doctrine of
substantial compliance depends upon precedent and the language of the notice
provision.
Conclusion
Owners and contractors can avoid
notice disputes by drafting clear and reasonable notice provisions and putting
in place procedures to timely comply with notice requirements. If
disputes over notice do develop, owners and contractors should consult with a
construction lawyer and consider the issues raised in this post.
Construction
Contract Notice of Claim Provisions are Generally Strictly Enforced in Ohio
Strict enforcement of notice provisions
in construction contracts can be devastating to a contractor’s claims arising
during construction. Owners and higher tier contractors routinely raise
alleged failures of strict compliance with notice provisions in their attempts
to defeat contractor claims which may otherwise have great merit.
Typically, in cases where the contractor did not provide the exact notice
required, the contractor makes two arguments: (1) the owner had actual notice
and therefore was not prejudiced by the lack of formal notice; and (2) the
owner “waived” the notice requirement. In this article, I will address
the first argument under Ohio law. I will address the second argument in
a subsequent article.
A recent article in the American Bar
Association’s publication, Construction Lawyer (Volume 32, Number 1,
Winter 2012), well addressed this matter generally, noting that in federal
cases, the courts do not always strictly enforce notice provisions, “where
‘fairness demands.’” The author, Douglas S. Oles, noted that federal
courts have refused to strictly enforce these provisions where, e.g.,
the contracting officer had actual or constructive notice of the facts giving
rise to the claim or where the notice would have been useless. As Mr.
Oles further noted, some states follow this rule and others strictly enforce
the notice requirements. He includes Ohio among the states that decline
to strictly enforce such notice provisions. That conclusion respecting
Ohio law merits a closer analysis.
As a general matter, Ohio law is quite
clear: absent waiver, courts will enforce the express terms of contracts as
written, even if the result is harsh on one of the parties. In Dugan
& Meyers Construction Co., Inc., v. Ohio Department of Administrative
Services, 2007 -Ohio- 1687, 113, Ohio St. 3d 226, 864 N.E.2d 68, e.g., in
considering a contractor’s substantial delay claim, the Ohio Supreme Court held
that the contractor’s failure to request an extension of time in writing was
conclusive that the contractor was not entitled to an extension.
Notwithstanding the millions of dollars in claimed delay damages and evidence
that the owner clearly knew of the delays on the project due to errors in the
owner’s plans and specifications, the failure to request an extension of time
in writing was fatal to the contractor’s claim. Similarly, in a more recent
case, where a subcontractor was demanding damages for labor inefficiencies and
loss of productivity, an Ohio appellate court held that the claim was
completely barred by a subcontract clause requiring written notice of claim
that included “a brief statement of the impact to the [subcontractor’s]
Work.” Maghie & Savage, Inc. v. P.J. Dick Inc. (Franklin Co.),
2009 -Ohio- 2164. Since the subcontractor did not refer to labor
inefficiencies or loss of productivity in its written notice, it was thereafter
barred from making a claim for those kinds of damages.
In the older case relied upon in Mr.
Oles’ article (Roger J. Au & Son, Inc. v. Northeast Ohio Regional Sewer
District (Cuyahoga Co. 1986), 29 Ohio App.3d 284, 504 N.E.2d 1209), the
court held that since the owner had ample actual or constructive notice of
differing site conditions, largely from written communications from the
contractor, the contractor’s claims were not barred despite a lack of a more
formal and explicit written notice. Moreover, the court went on to
explain that it was significant that the contract also gave the contractor up
until the time of final payment to submit its claim, i.e., the stated
basis for additional compensation and the amount of compensation the contractor
was claiming. The clear implication is that the result would have been
different if the contract had required a prompt submittal of the claim.
Most construction contracts of significance today require notice not only of
the facts giving rise to the claim, but information about the claim
itself. Under the current state of Ohio law, a contractor acts at his or
her peril if he or she does not comply with the exact terms of the notice
required.
Thus, the first argument that a
contractor usually makes in response to a claim that it failed to comply
strictly with written notice provisions generally does not stand up in
Ohio. The fact that the owner has actual or constructive notice of the
problems or claims generally will not relieve the contractor from responsibility
for providing the required written notice.
I do not address in this article the
second key argument contractors often make in response to a failure of notice
defense, i.e., that the owner waived the notice provision. This is
a very different argument than the one addressed here and is heavily dependent
on the facts of the situation. That will be the subject of my next
article. Suffice it to say here, contractors should take the notice
provisions in their contracts very seriously. The result of the enforcement
of such provisions to deny claims can be draconian.
A
"Stark" Reality for Indiana Contractors Who Do Not Strictly Comply
with Contractual Claim Notice Provisions
Strict contractual claim notice
provisions, which owners persistently include in contracts, present a recurring
trap for Indiana contractors. Indiana contractors must remain mindful of
these provisions as work proceeds and be prepared to strictly comply with these
requirements. As Indiana courts are quick to find, a contractor who fails
to strictly comply with contractual notice requirements may find itself unable
to recoup additional project costs or to secure additional time.
To avoid getting tripped up by a
contractual notice requirement, before beginning work, an Indiana contractor
should know (and remain mindful of) the answers to the following
questions: (1) Is there a contractual time limit for providing notice of
a claim? and (2) If so, does it apply equally to claims for additional costs and delays?
Contractors frequently encounter
contracts which include notice provisions, such as the following:
"Claims must be made within 14 days after occurrence of the event giving
rise to such Claim or within 14 days after the contractor first recognizes the
condition giving rise to the Claim." For example, in Starks Mechanical, Inc. v. New Albany-Floyd
County Consolidated School Corp., 845 N.E.2d 936 (Ind. Ct. App.
2006), the court strictly interpreted such a contractual notice provision
concerning submission of claims for additional payment, rejecting as untimely a
contractor's change order that sought recovery of more than one million dollars
attributed to "engineering deficiencies."
In Starks, the contractor had entered into a contract with
a school corporation to provide mechanical and plumbing services for the
expansion and renovation of a school building. Early in construction,
Starks discovered "a number of alleged material defects in the design,
specifications and plans provided by the School." Id. at 937. After this
discovery, Starks sent a Request for Information (RFI) to the construction
manager "to provide notice of the design defects and accompanying delays
and to request time extensions and change orders." Id. at 937-38. The contractor
also requested a time extension in the initial RFI and submitted additional
RFIs as construction progressed. The owner was aware of the contractor's
concerns, but directed the contractor to proceed with construction and to
correct the design defects. The contractor hired an engineer to review
the design specifications and plans, and to provide recommendations to the
contractor regarding changes.
Unfortunately for the contractor,
although the RFIs included reference to the design defects and associated
delays, the contractor did not include redesign costs in the many RFIs it
submitted to the construction manager. Nearly two years after the
contractor first identified alleged design defects, it submitted a payment
application, which included an "engineering deficiencies" line item
for $1,342,593.88. A few days later, it submitted a change order in the
same amount. The School rejected the change order request.
Litigation ensued.
Paragraph 4.7 of the contract (using
the Standard AIA A201 General Conditions) in Starks
required that all claims be made in writing within 14 days of the occurrence
giving rise to the claim. The contract required that claims associated
with a "continuing delay" be updated weekly with estimated associated
costs. Critically, the contract also required that claims relating to
time (e.g. delay damages) be made in accordance with Paragraph 4.7. The
contractor in Starks
argued that its RFIs constituted timely written notice. Although the RFIs
made it clear that the contractor was impacted, the RFIs did not suggest that
the contractor was putting the owner on notice of a claim for additional
payment. As a result, the RFIs were not sufficient notice pursuant to the
contract documents. The owner contended that the contractor's claim,
submitted 21 months after the contractor first noticed the design defects, was
untimely. The trial court agreed and the Court of Appeals affirmed.
The Starks court did
acknowledge that "[i]t may very well be true that Starks incurred
substantial additional cost because of engineering deficiencies and the
School's insistence that Starks solve any problems and proceed with
construction as scheduled." Id.
"But to preserve its right to recover those costs, Starks was required to
submit a Claim within 14 days and to submit weekly updates
thereafter." Id.
It is instructive to compare this
result with the earlier decision in Osolo
School Buildings, Inc. v. Thorlief Larson & Son of Indiana, 473
N.E.2d 643 (Ind. Ct. App. 1985), where the court had interpreted a similar, but
distinguishable, contract provision in the context of a claim for delay
damages. The contract in Osolo
required that "a claim for an increase in the Contract Sum [be made in
writing] within 20 days after the occurrence of the event giving rise to [the]
claim." However, the contract was silent with respect to notice for delay claims. The Osolo court refused to assume that
the parties intended to treat delay claims as subject to the same stringent
notice requirements applicable to claims for additional costs, drawing an
important distinction between "additional cost" and "delay
damages."
The contractor in Starks had unsuccessfully attempted
to rely upon Osolo, contending
that because its claim was also one for "delay damages" (rather than
"additional costs"), the claim was not subject to the 14 day notice
requirements. However, the contract in Starks
was clear that "claims relating to time (e.g. delay damages) ... be made
in accordance with the applicable provisions of paragraph 4.7 (i.e. within 14
days of the occurrence giving rise to the claim)." Therefore, the
court in Starks rejected
the contractor's argument.
As a project progresses, an Indiana
contractor must remain mindful of the notice hurdles included in its
contract. Where the contract requires written notice within a specified
timeframe, a contractor hoping to secure compensation or additional time is
well advised to strictly adhere to this requirement. Raising an issue
verbally during a weekly project meeting most likely will not suffice nor will
vague correspondence or RFIs which do not include specific reference to the
event giving rise to the claim, a description of the additional work or
additional time resulting from the claim, and a statement of the costs
associated with the claim. Where the contractor cannot immediately
calculate its actual costs, it is well advised, at a minimum, to provide an
estimate of costs, along with a reservation of the right to amend or supplement
its claim later. Indiana contractors must remain vigilant in adhering to
contractual notice requirements, even in situations where the owner has in
essence instructed the contractor to proceed with work which will be the
subject of a later claim for additional compensation by the contractor.
Be
careful what you bargain for- Texas courts strictly enforce construction
contract provisions
In three recent decisions, Texas
courts have shown an increasing eagerness to preserve the freedom of contract
by strictly enforcing provisions in construction contracts, even where the
result may be harsh. The following cases exemplify how a contractor’s failure
to consider the provisions of its own contract can cut off the contractor’s
rights to recover under that contract. The basis of these holdings is the
principal that “Parties to a contract are masters of their own choices and are
entitled to select what terms and provisions to include in or omit from a
contract. Specifically, the parties are entitled to select what terms and
provisions to include in a contract before executing it. And, in so choosing,
each is entitled to rely upon the words selected to demarcate their respective
obligations and rights. In short, the parties strike the deal they choose to
strike and, thus, voluntarily bind themselves in the manner they choose.”
In Cajun Constructors, Inc. v. Velasco Drainage Dist., 380
S.W.3d 819 (Tex. App.—Houston [14th Dist.] 2012, review denied), the contractor
and the owner entered into a construction contract which included a provision
that required the contractor to provide written notice of each claim, dispute,
or other matter to the engineer and required the contractor to give notice to
the engineer and to the owner of its intent to appeal the engineer’s decision
prior to filing suit for breach of contract. As construction was underway,
disputes arose among the parties and eventually the contractor filed suit
against the owner for breach of contract. However, prior to the contractor
filing suit, the contractor did not give the required notices to the owner or
to the engineer of its intent to file suit.
At trial, the owner moved for
summary judgment on the bases of the contractor’s failure to provide the
engineer and the owner notice of its intent to file suit, as required by the
contract. The contractor argued that the notice provision was not a condition
precedent to filing suit against the owner for breach of contract and
therefore, its failure to comply with the provision did not bar its claim. The
trial court granted the owner’s motion for summary judgment on the basis that
the contractor failed to comply with the notice provisions, a condition
precedent to bringing suit for breach of contract.
The Court of Appeals stated
“[b]ecause [the contractor] did not comply with [the contractual] notice
requirements, particularly the requirement that it notify both the engineer and
[the owner] of its intent to appeal the engineer’s decision, it failed to
satisfy the conditions precedent to suing [the owner] for breach of contract.”
Therefore, the court held that the contractor’s failure to comply with the
notice provision barred its suit for breach of contract against the owner.
In Port of Houston Auth. of Harris County v. Zachry Const. Corp.,
377 S.W.3d 841 (Tex. App.—Houston [14th Dist.] 2012, pet. filed), the Houston
Court of Appeals held that a “no damages for delay” clause contained in a
construction contract barred the contractor’s recovery of damages caused by
delays attributed to the owner’s actions. The contract contained the following clause:
The Contractor shall receive no
financial compensation for delay or hindrance to the Work. In no event shall
the Port Authority be liable to the Contractor or any Subcontractor or
Supplier, any other person or any surety for or any employee or agent of any of
them, for any damages 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. The Contractor’s sole remedy in
any such case shall be an extension of time.
During construction, the Port
Authority’s actions caused delays in construction and the contractor sought to
recover the resulting increased costs from the owner. However, because the
contractor unambiguously agreed that it would perform the contract without the
benefit of delay damages, even if the delay was caused by the owner’s breach of
contract, negligence, or other fault, none of the common law exceptions to the
enforcement of the no damages for delays clause could be relied on by the
contractor to recover damages for delays. The court noted that it could not
rewrite the provision without depriving the Port Authority of the benefit of
the bargain the parties reached when they executed the contract. Therefore, the
court concluded that the no damages for delays clause in the construction
contract precluded the contractor from recovering delay damages against the
owner.
In El Paso Field Services, L.P. v. MasTec N. Am., Inc.,
389 S.W.3d 802 (Tex. 2012), the Texas Supreme Court held that a provision in a
construction contract in which the contractor “assumed all risks in connection
with conditions pertaining to the work” barred the contractor’s claim for
damages against the owner caused by differing site conditions. In the pipeline
construction contract, the contractor asserted that it had visited the site,
familiarized itself with the locale and site conditions and correlated its
observations with requirements of the contract. In regard to potential site
conditions, the owner “assumed[d] full and complete responsibility for any such
conditions pertaining to the work, the site of the work, or its surroundings
and all risks in connection therewith.” All of this was agreed to
“notwithstanding” “anything in any of the Contract documents or in any
representations, statements or information made or furnished by the owner or
its representatives.” The contract recited that the owner had used due
diligence in previously locating "foreign crossings" over the right
of way.
As construction was underway, the
contractor discovered many foreign crossings that were not located by the
owner, which substantially increased the cost of the work. When the contractor
sought to recover the extra costs associated with the foreign crossing from the
owner, the owner denied payment on the bases that the undiscovered foreign
crossing were within the contractor’s scope of work because the contractor had
accepted the all risks. The contractor argued that its acceptance was limited
by the owner’s affirmation that it had used "due diligence" to find
and disclose foreign crossings on the right of way.
The Texas Supreme Court concluded
that the contract clearly placed the risk of undiscovered foreign crossings on
the contractor and accordingly, the contractor could not recover the extra
costs from the owner. The Court emphasized Texas’ strong public policy in favor
of preserving the freedom of contract. The court stated that if it were “to
hold in [the contractor’s] favor, and conclude that [the owner] must bear the
risk of unknown underground obstacles under this contract, we would render
meaningless the parties risk-allocation agreement and ultimately prohibit
sophisticated parties from agreeing to allocate risk in construction
contracts.”
RECOMMENDATIONS
BASED ON THE ABOVE CASES
·
Identify
all notice and claim deadlines.
·
Determine
whether the contract contains any special notice requirements.
·
Identify
any special procedures or cost limitations imposed on change order work.
·
Determine
whether the contract contains any unusual risk-shifting clauses that your
project documentation system should consider.
·
Determine
whether you need the input of legal counsel on documentation practices in light
of any contract risk-shifting provisions.
·
Based
on the reevaluation of your company’s project documentation system, your
documentation system can then be adapted to the particular project’s
requirements. Standard forms and procedures can be adopted and modified
as necessary. You should prepare notice checklists and standard form
letters, specifically tailored for use on the new project.
·
In
particular, it is essential to identify all notice requirements using a
checklist approach. Your project-specific notice checklist should list and
address each contract provision containing any notice requirement. The
checklist should identify the specific contract clause containing the notice
requirement, the subject matter of the required notice, the time requirements,
the form of notice including whether the notice must be in writing, and the
stated consequences for failing to give notice. Company management should
not simply draft the notice checklist and then hand it to the project staff.
Instead, the notice checklist should be prepared by those project staff
members responsible for giving timely notice. Having the responsible
project staff prepare the notice checklist will force the project staff to
review carefully the contract documents so that the project staff become
intimately familiar with the critical contractual notice requirements.
Once completed, it is also a good idea to keep copies of the notice
checklist in convenient locations such as on your computer’s electronic desktop
and at the front of the project manual.
·
While
organizing and maintaining the project paperwork can sometimes be burdensome,
once you have been awarded a contract on a construction project, it is
essential that you maintain a complete, accurate and organized project record.
Consistent, complete and accurate project documentation should not be
reserved for “problem” jobs. Carefully, consistently and meticulously
organizing and maintaining a complete and accurate project record is the key to
managing risks, avoiding disputes, and successfully asserting or defending
against claims. If you fail to maintain adequate documentation from the
start to finish of the project, the circumstances giving rise to a dispute
often will go unrecorded and perhaps even unnoticed.
·
At
the inception of any new project, you should evaluate the adequacy of the
project’s documentation system. If your company already has an
established “standard” project documentation system, it should be reevaluated
in light of the specific requirements and needs of each project. When reevaluating
your company’s project documentation system, you should do the following:
·
Identify
and review every document that will be part of the contract.
·
Review
the contract to determine if modifications to your “standard” project
documentation system are required.
·
Determine
if the contract imposes specific cost accounting requirements.
·
Determine
if the contract defines recoverable direct or indirect costs and make sure that
you have a system in place to accurately track such costs.
·
Identify
all notice and claim deadlines.
·
Determine
whether the contract contains any special notice requirements.
·
Identify
any special procedures or cost limitations imposed on change order work.
·
Determine
whether the contract contains any unusual risk-shifting clauses that your
project documentation system should consider.
·
Determine
whether you need the input of legal counsel on documentation practices in light
of any contract risk-shifting provisions.
·
Based
on the reevaluation of your company’s project documentation system, your
documentation system can then be adapted to the particular project’s
requirements. Standard forms and procedures can be adopted and modified
as necessary. You should prepare notice checklists and standard form
letters, specifically tailored for use on the new project.
·
In
particular, it is essential to identify all notice requirements using a
checklist approach. Your project-specific notice checklist should list
and address each contract provision containing any notice requirement.
The checklist should identify the specific contract clause containing the
notice requirement, the subject matter of the required notice, the time
requirements, the form of notice including whether the notice must be in
writing, and the stated consequences for failing to give notice. Company
management should not simply draft the notice checklist and then hand it to the
project staff. Instead, the notice checklist should be prepared by those
project staff members responsible for giving timely notice. Having the
responsible project staff prepare the notice checklist will force the project
staff to review carefully the contract documents so that the project staff
become intimately familiar with the critical contractual notice requirements.
Once completed, it is also a good idea to keep copies of the notice
checklist in convenient locations such as on your computer’s electronic desktop
and at the front of the project manual.
·
The
system and procedures to be followed for project documentation must be in
writing. While the length and level of detail of the written procedures will
vary with the size and complexity of the project, it is important that the
required procedures be clear and specific. Once your standard and
project-specific documentation system is in place, it must be followed rigorously.
Avoid selective enforcement of the written procedures and do not allow your
project staff to use their own personal record keeping and filing systems.
Review and discuss the written procedures with all levels of personnel who will
be responsible for implementation to ensure that the procedures are understood,
used, and enforced. Throughout the life of the project, continue to
emphasize the critical importance of complete and accurate project
documentation. Periodically audit the project record to confirm that your
project staff are implementing and rigorously following the project-specific
documentation system.
·
Your
standard procedures and project-specific documentation system should require
that certain basic information be maintained and organized in separate files,
including the following:
·
The
contract, including all its component contract documents, and all change orders
or amendments;
·
A
bid or original set of project plans and specifications;
·
All
documents, worksheets, and forms associated with the original bid estimate and
subsequent revisions;
·
Subcontractor,
material supplier, equipment supplier, and vendor files, including bids,
quotes, subcontracts, or purchase orders, together with changes and
correspondence;
·
Project
schedules, including the original (“baseline”) schedule, progress reports, all
schedule updates, and near-term, look-ahead schedules;
·
Insurance
requirements and information related to your contract; and Insurance
requirements and information related to all subcontracts and supplier or vendor
purchase orders.
·
Your
standard procedures and project-specific documentation system should also
address the creation, maintenance, and orientation of certain specific types of
documentation, including correspondence, email, meeting notes, meeting minutes,
job-site logs or daily reports, standard forms, status logs, project
photographs and project videotapes. Your standard procedures and
project-specific documentation system must include the means for providing,
eliciting, recording, and tracking the massive amount of project data so that
it can be used during the course of the job and efficiently retrieved if later
needed to assert or defend a claim
Metropolitan Engineering, Consulting &
Forensics (MECF)
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Consulting Services
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