• General Contractors & Subcontractors Beware -- Supreme Court Rules: Notice not an Exception
  • December 15, 2003 | Author: John P. Ahlers
  • Law Firm: Short Cressman & Burgess PLLC - Seattle Office
  • Contract Notice and Claim Procedures Strictly Enforced:

    On October 23, 2003, the Washington Supreme Court, in a 5-to-4 ruling, decided the case of Mike M. Johnson, Inc. v. The County of Spokane. The Contractor, Mike M. Johnson (a utility contractor) encountered a differing site condition. The Owner (the County of Spokane) was aware of the differing site condition, directed certain changes to accommodate the differing site condition; and the Contractor responded by "summarizing various project delays and their impact." The Contractor, at that time, did not indicate that reimbursement for the extra costs associated with the incident would be sought. The Contract contained strict notice requirements and a specific claim prosecution process. After the extra work was completed, the Contractor sought compensation. The Owner raised lack of notice and protest as a defense. The Court ruled that although the Owner was aware of the changed condition, since the Contractor did not provide notice of the "claim" (the Contractor's cost impact associated with the change), as required by the Contract clauses, and did not follow the protest/claim procedures set forth in the General Conditions, the Contractor forfeited its claim.

    Contractors who were surprised by the Court's strict adherence to the Contract notice provisions announced in Absher Constr. Co. v. Kent School Dist. No. 415 anticipated that the Washington Court would take the opportunity in Mike M. Johnson to announce a more workable solution to the notice issue. Where contracting officials have notice of the facts or problems that form the basis of a claim, and are able to perform the necessary fact finding and decision making with regard to that claim, the Owner is not prejudiced by the Contractor's failure to submit a precise claim at the time a change occurs or to follow the Contract's claim process. An Owner who has actual knowledge of events giving rise to a claim has suffered no prejudice, and should not be entitled to rely upon a technical breach of a notice or claim submission provision to defeat an otherwise meritorious Contractor claim.

    The Associated General Contractors (AGC) joined a number of contractor organizations (WUCA, NECA and SMACNA) in a "Friend of the Court" brief urging the Court to adopt a rule requiring that Owners who wish to deny claims based on technicalities bear the burden of proving that the Owner has actually been prejudiced by a Contractor's failure to follow the claim procedures. Such a rule would have avoided forfeitures and injustice, while elevating substance over form. Unfortunately, the Supreme Court, in a narrow decision -- the Contractor lost by a single vote -- favored the strict enforcement of the Owner's "procedural defenses" of lack of timely written notice and failure to follow Contract's claims procedures to defeat the Contractor's claims.

    Overview of the "Notice" Issue: Three (3) Hurdles to Clear

    In light of the Supreme Court's ruling, Contractors and Subcontractors should carefully read their Contract documents concerning notice and claims resolution procedures. Each Contract will vary, but generally most Contracts contain three (3) hurdles for the Contractor to overcome:

    1. The Contractor must give timely written notice of the event giving rise to the claim;
    2. The Contractor must timely follow the protest procedures contained in the Contract; and
    3. The Contractor must timely submit a written statement of the claim (the cost and time sought by the Contractor, together with an explanation of entitlement and quantum giving rise to the claim).

    Advice in a Nutshell

    If an Owner can show that the Contractor missed a step in the claim process, the Owner can defeat the Contractor's request for compensation and/or time on procedural grounds. By elevating form over substance, the Supreme Court has made the claim resolution process more complex, which will increase the chance that a Contractor will miss a step and forfeit its meritorious claim. A Contractor's only option in light of the strict enforcement of the notice provisions is to become intimately familiar with the Contract's requirements, and to faithfully comply with them.

    1. Before Bid. During the bidding process, a Contractor should carefully review the notice, protest and claims procedures, and assess the administrative complexity that will be required to comply with them. A Contractor should make an assessment as to the cost effect these requirements will have on its administrative costs for the project, and make appropriate adjustments to its bid price.

    1. Private Projects. Since contract terms for private projects are generally "negotiable," a Contractor, after assessing the cost impact of a particularly complex notice and claim procedure may want to advise the Owner of the affect these provisions are having on the cost of the project before bids are submitted. Prudent owners may opt to simplify the notice and claim procedures to receive a lower bid price.

    2. Public Projects. Since contract terms for Public projects are not "negotiable," it is unlikely that a Contractor will have many options but to assess what the cost impact of the notice and claim process will have on its administrative costs, and to make appropriate adjustments to its bid price. Public owners may be persuaded by contractors' letters addressing onerous claim procedures to make the notice and claim procedures more "contractor-friendly" on future projects.

    2. During Performance.

    1. Carefully Review the Contract Notice Provisions and Note the Time for Giving Notice. Know both the notice and claims requirements and when they must be submitted. Provide this information to your project personnel, and instruct them to follow the requirements to the letter.

    2. b. Chart the Claims and Protest Procedures at the Outset of the Project. The claims process can be very complex. It is recommended that a Contractor map this process out in the form of a flowchart, and make that chart available to the project personnel who are in charge of tracking and processing changes and claims. The project personnel should be instructed to follow that claim and protest procedure as written. A sample chart of the claim and protest procedures of the Standard Specifications utilized by the Washington State Department of Transportation and many other Washington public entities is attached.

      • "Heads Up" Letter. The Contractor, to preserve good relations with the Owner, may want to forward the chart of a complex notice and claim process to the Owner with an explanation that it is not the Contractor's choice, but that the Contract requires that the procedural steps be followed. The Owner should be advised to expect a flurry of paperwork because it is the Contractor's intention to follow the contract notice procedures to the letter. Giving the Owner advance notice of the process foisted on the Contractor by the Contract Documents may go along way to maintaining a good working relationship with the Owner, while at the same time protecting the Contractor's rights.

      • "Unless It Is In Writing, It Did Not Happen." The Contractor may also want to advise the Owner that the Contractor will not be able to perform an oral directive or work on a handshake basis because were the Contractor to do so, meritorious requests for contract adjustment could be jeopardized. If the Owner does request that the Contractor depart from strict compliance with the notice and claim process, the Contractor should insist that the Owner provide that waiver in writing.

      • "Do You Really Want This Hassle?" Another option for the Contractor might be to forward the claim resolution chart in the form of an RFI (Request for Information), and request that the Owner confirm that it desires the Contractor to follow the requirements to the letter. Such an eye opening RFI may prompt the Owner to modify the claim process in writing in a return response to the RFI. If the Owner does, however, seek to modify either the written notice or claim requirements, the Contractor should be sure that those revisions are in writing, and are clear.

    3. Supplement the Claim and Time Extension Requests as the Project Proceeds. After giving the Owner preliminary notice of an event giving rise to extra costs or additional time, as the costs and required time extension become more defined, supplement and update the claim as the project progresses. As fewer and fewer variables remain in the pricing formula and time impact of the claim event, advise the Owner by supplemental notices.

    4. Use of Forms. Provide your project personnel with simple forms created based on the requirements of the contract. Attached are sample forms developed for use in the Standard WSDOT Specifications (Notice of Protest and Claim Form). By using forms, the burden on project personnel will be lessened, and the chance of an omission of required data reduced.

    5. Overcome the Notion that Giving Written Notice will Spoil Your Working Relationship with the Owner. Explain to the Owner that the contract requires that the Contractor must provide written notice, obtain a written change order before performing extra work, or insist on written directives rather than oral ones. Remember, a Contractor can always withdraw a premature or incorrect notice, but cannot resurrect a missed notice deadline.

    6. Empower All Project Personnel to Identify Disputes Early. All project personnel should be empowered to identify disputes at the earliest stage. The Contractor should require that disputes be communicated to the decision makers as soon as possible. Once a dispute is identified, the appropriate contract notice and claim procedures should be instituted.

    7. The Contractor Should Establish a Strategy to Resolve Project Disputes Early in the Project. If the Owner's on-site personnel are unresponsive to resolution of the dispute, move to the next level of Owner personnel to seek resolution of the issues. At all times, though negotiations may be proceeding, continue to comply with the notice and claim requirements of the contract.

    8. Maintain Superior Records. Ultimately, Contractors that maintain superior records, including notice, protest, and claim records, end up prevailing in construction disputes. Routinely attending to the documentation of a project will ultimately prove invaluable in supporting and corroborating a Contractor's claims.

    9. Owner's Waivers of Notice and Claim Procedures Should be in Writing. Owner requests that the Contractor relax certain contract notice or claim procedures should be made in writing, and should precisely identify the provisions of the contract that the Owner is waiving. The Supreme Court of Washington has ruled that absent a written waiver which is clear and unequivocal, an Owner will not be deemed to have waived a contract requirement.

    10. Reservation of Rights On Change Orders. With regard to change orders, if the Contractor suspects any possibility that a change order may have a downstream effect on unchanged work or that indirect costs may be associated with the change order, the Contractor should reserve its rights. In the Mike M. Johnson case, the Court criticized the Contractor for failing to reserve its rights to additional compensation for a change order that was issued for a differing site condition. To avoid this trap, the reservation of rights should be made on the face of the change order. Suggested language is as follows:

      The compensation and time adjustment in this change order does not include any amounts for changes in the sequence of the work, delays, disruptions, rescheduling, extended overhead, acceleration, lost productivity, and/or impact costs, and the right is expressly reserved to claim for any and all of these and related items of cost and additional time prior to any final settlement of this contract.

    Choices for Contractors faced with strict notice and claims provisions are: (1) to not bid (it is difficult for Contractors to make money if they do not bid projects); (2) to put costs in their bids to account for the increased administrative costs associated with the notice and claims procedures (Contractors who put costs in their bids often find themselves in second or third place); or (3) to bid the project without putting any extra money in their bid prices, and hope that no claims events occur (exceedingly risky, since "claims" events of one sort or another appear on every project). Contractors have no choice but to live with this situation until a solution is found. More likely than not, the solution will have to come in the form of legislation promoted by the building and construction industry.