It is widely accepted in the construction industry that contracts are an important tool for establishing rights and protections for all parties involved. In fact, there is perhaps no industry in which they are utilized more for that purpose than construction. Essentially all construction projects from large multi-million dollar public infrastructure jobs to small private home renovations always generally involve at least a simple contract.
Despite that, it is less common to see companies invest significant time and effort into making sure they follow and comply with all of the provisions in their contracts. One of the key problem areas for many contractors is notice provisions. Frequently contractors simply do not have sufficient controls in place to insure that claims for additional time or money are promptly submitted. Notice issues can be critical in other areas as well. For example, some contracts require contractors to dispute notices they receive within a specified time, or to invoke certain other rights within a certain time frame.
Traditionally many contractors have operated under the assumption that as long as they substantially comply with notice provisions, or if the party they have a contract with directed extra work or knows a delay claim is on the way, they have done enough to preserve their claims. However, a growing body of case law is beginning to require strict compliance with contractual notice provisions, and to impose results that can be harsh on contractors who fail to meet the actual obligations.
The Traditional Majority View
Traditionally, many lawyers and contractors have viewed contractual notice provisions as generally not requiring strict compliance. As a federal court in Hawaii recently wrote:
Many states, as well as federal contract law, have adopted a purpose based interpretation of such contractual notice provisions. Under this liberal approach, notice provisions are typically not strictly enforced absent evidence that the party claiming no notice was materially prejudiced by not receiving it.
As described by a leading legal treatise, the policy behind this interpretation is to protect contractors who perform extra work or suffer delays, while making sure that parties against whom claims are being made have a fair opportunity to:
(1) [A]ssess the implications and potential liability that may be created; (2) investigate whether the claimed item truly is “extra” to the original contractual undertaking; (3) document costs incurred in performance of the extra work; and (4) fairly adjust the contract price before memories fade, documents are lost and the facts recede into the “construction haze.”
Put simply, under this approach so long as the party evaluating the claim knew it was coming and was able to sufficiently investigate what occurred and why, courts have generally believed it unfair to allow one party to receive a benefit it did not pay for, whether that be extra work, changed work, or not having to pay for delays the contractor suffered but did not cause.
Some Courts Are Rejecting The Majority View In Favor Of Strictly Applying Notice Claims
Some courts have retreated from this view, believing instead that parties should be held to the literal terms to which they contract. One example is the Washington Supreme Court, who issued the 2003 Mike M. Johnson, Inc. v. County of Spokane opinion that shocked many in the construction industry. In that case, Mike M. Johnson (“MMJ”) was the general contractor on two sewer contracts for Spokane County. Both contracts contained mandatory procedures for claims for additional sums or time.
On one of the contracts, MMJ encountered delays due to buried telephone lines. Although MMJ sent the County a letter indicating that it was being delayed and incurring additional costs, it did not strictly follow the claim procedures in its contracts.
As a result, the County refused to pay MMJ for its claimed extra costs or time despite having attempted to negotiate a time extension. MMJ then sued. The trial court dismissed MMJ’s claim for failure to follow the mandatory claims procedures. Although the Court of Appeals reversed the decision, the Washington Supreme Court reinstated it.
In making its decision, the Washington Supreme Court made several observations. First, it held that: “Washington law generally requires contractors to follow contractual notice provisions unless those procedures are waived.” It went on to rule that: “A party to a contract may waive a contract provision, which is meant for its benefit, and may imply waiver through its conduct…. Waiver by conduct, however, “requires unequivocal acts of conduct evidencing an intent to waive.” The court went on to hold “that ‘actual notice’ is not an exception to contract compliance.”
The court expressly rejected prior case law more in line with the majority view, which had held that:
[T]he [owner] became immediately aware of the changed conditions as soon as they developed and ordered the contractor to perform the changes and extra work involved … [u]nder such conditions, the county cannot defeat recovery by a contractor even if no written notice was given.
In August of 2017 the Michigan Court of Appeals reached a similar decision in Abhe & Svboda Inc. v. Michigan Department of Transportation. There, the contract had specific provisions for requesting time extensions. It also provided for “liquidated damages in the amount of $3,000.00 a day for each calendar day by which completion of the project was delayed.”
Ultimately, Abhe & Svboda delivered the project significantly late, and the Michigan Department of Transportation (“MDOT”) imposed liquidated damages for 644 days. Abhe & Svboda then filed suit against MDOT, arguing that it encountered significant delays outside its control, including among others MDOT’s “failure to approve a prerequisite to work in a timely manner.” Abhe & Svboda argued that:
[I]t and MDOT “engaged in numerous discussions throughout the project which led ASI to believe that MDOT would fairly and equitably address these issues at the end of the project;” and plaintiff specifically asked MDOT, in writing, by telephone, and in person, to waive the liquidated damages.
The trial court dismissed Abhe & Svboda’s claims on the basis that it failed to comply with the mandatory process for claiming a time extension. The Michigan Court of Appeals then affirmed the dismissal, observing that:
Because plaintiff [Abhe & Svboda] did not make a timely request for an extension of time, defendants [MDOT] did not breach the contract by declining to grant any such request. Likewise, because there is no persuasive indication that defendants [MDOT] did not take the contract seriously, there is no reason to believe that defendants [MDOT] waived the liquidated damages provision.
Given this ruling, Abhe & Svboda lost both the ability to request an extension of time, and to argue against MDOT’s imposition of $3,000.00 a day in liquidated damages.
While cases such as these are not the rule, they have occurred in other courts as well, such as Virginia and New Hampshire, and contractors should keep them in mind when administering contracts.
Contractors Should Carefully Review Notice Provisions Of Force Majure and Related Clauses
The notice provisions in force majure clauses may become the subject of substantial litigation in the near future. Given, among other issues, the significant impacts caused by Hurricane Harvey in Texas, Hurricane Irma in Florida, and other storms faced this year, it is clear that many construction projects across a wide swath of states have and will suffer from significant damage and delays not caused by contractors or owners. What is less certain is who will pay for such delays and related impacts.
Force majure is a Latin term that means “superior force.” Force majure clauses, which are commonly found in construction contracts, operate to free both parties from their obligations, as well as liability from failing to meet their obligations, where an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, or an event described by the term Act of God – typically considered to be hurricanes, floods, earthquakes, volcanic eruptions, and the like – prevents one or both parties from fulfilling their contractual obligations. Generally, such clauses do not excuse a party like a contractor from completing a project, but do provide for reasonable time extensions. Because force majure clauses involve extraordinary circumstances very rarely encountered, parties frequently neglect to take the time to understand how they work. And even when parties do, the impacts of an event like a hurricane often divert attention to other more immediate issues.
However, force majure clauses frequently contain language requiring a party like a contractor to provide timely notice that a force majure event has occurred, and even to include a reasonable estimate of the anticipated delay. Failure to timely provide notice of a force majure event, even where everyone involved knows of the event, could cause a contractor to become liable for delays associated with the event.
Contactors with notice provisions in their contracts would be well-advised at the beginning of each project they perform to take their contract, make a checklist of all notice obligations and their related deadlines, and to designate a project manager or other similar person to be in charge of monitoring the project and making sure timely notices are given. Although doing so can certainly create more work, the downside of failing to provide adequate notice can, as some contractors have found, result in multi-million dollar losses.