|January 8, 2014|
Previously published on January 3, 2014
Any contractor considering submitting a bid for a lump sum contract to rebuild a military-grade runway in the tropics during the rainy season with unproven aggregate sources and inadequate preliminary engineering is advised to read this case first: Nippo Corp./International Bridge Corp. v. AMEC Earth & Environmental, Inc., 2012 U.S. Dist. Lexis 47232 (E.D. Pa. April 1, 2013). The subcontractor suffered $25 million in cost overruns on a $30 million contract.
However, the court’s analysis of contractual notice requirements will be valuable to all contractors, subcontractors and owners. The subcontract in this case had a fairly typical notice provision providing that the subcontractor would waive its claims unless it gave formal notice within 7 days of discovery of conditions giving rise to the claim. This is sometimes viewed as a forfeiture clause. The notice of claim(s) also had to specify the precise dollar value of the claim. The subcontractor in this litigation rarely satisfied these requirements but, as this court explained, did not necessarily forfeit its damages.
Constructive Notice Sufficient
The subcontract contained a choice of law provision, which provided that the subcontract would be interpreted pursuant to Nevada law. The subcontract also incorporated the substantive provisions under the Federal Acquisition Regulation, in particular the Changes clause. Consequently, the court reviewed both Nevada case law and federal common law interpreting notice requirements. In the court’s view, both bodies of law favored substantive compliance with notice clauses rather than literal adherence to the provisions of the subcontract terms. Concluding that the federal approach was consistent with Nevada’s approach, the court also looked to the federal common law for guidance. (Note: the law in other states varies and some states strictly uphold notice requirements.)
This court explained that notice provisions are liberally construed under federal common law, with compliance determined by whether the notice given satisfies the purpose of the provision. The purpose is to provide notice of the conditions underlying the claim and an opportunity to investigate. Consequently, a court interpreting notice provisions under federal common law may allow otherwise untimely claims when the late notice has not prejudiced the other party. In addition, the court declined to enforce the requirement of stating the dollar value of the claim as that required “prognostication.”
Despite the liberal interpretation, one example of inadequate notice pertained to the quality of the base course material under the existing runway. The material was not fast draining, which the subcontractor alleged led to rainwater ponding and paving delays. Although the poor quality of material was immediately apparent to the subcontractor upon handling it, the subcontractor did not give notice within seven days or contemporaneously with the work; it waited until months after the affected work was complete to mention these concerns in any context. This notice was provided too late for the owner to investigate or mitigate so the claim was denied.
Notice is also inadequate when the owner is made aware of difficulties but is not held responsible for damages. The subcontractor believed that the prime contractor and owner’s concerns about paving during hard rains were unreasonable but became ambivalent about paving in rain out of fear that the work would be unreasonably rejected. The court characterized such delays as “voluntary” and, although the subcontractor had corresponded about the delays, it did not blame the prime contractor or declare it would seek delay damages. Again the purpose of the claim provision was not satisfied so the court did not find constructive notice was provided.
In contrast, the court found constructive notice with respect to delays caused by the prime contractor’s failure to notify the subcontractor which paving work required remediation. The subcontractor, although not within 7 days of the prime contractor’s failure, clearly notified the prime contractor of its breach in letters expressing frustration with the prime contractor’s delays. Combined with the court’s findings that the prime contractor’s delays were in bad faith, this constituted sufficient constructive notice.
The court also found constructive notice where the prime contractor had specifically directed extra work that was undisputedly outside of the subcontract scope of work. Constructive notice exists when clearly out-of-scope work is directed and the directing officer “knows the likely outcome.”
The subcontractor prevailed over significant weather and supply-chain challenges and completed construction, but did little to comply with notice requirements so it failed to preserve potentially valid claims worth millions. Understanding notice requirements and how they are enforced is necessary to be compensated for all of the work that is performed. Although the subcontractor may have been disappointed with this outcome, the owner or prime contractor is entitled to be informed of potential claims that they may have to pay.
On the other side, the prime contractor may have been surprised that it did not win across the board. Under the law in many forums, an owner or prime contractor is not immunized from claims by a contractor’s or subcontractor’s failure to strictly comply with a stringent notice requirement. Therefore it is important for owners to act in good faith to fulfill their duties to contractors and to meaningfully investigate and mitigate possible claims, despite less than literal compliance with notice requirements.