LESSONS LEARNED FROM CONSTRUCTION CLAIMS AS THEY RELATE TO NOTICE REQUIREMENTS IN DELAY CLAIMS

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

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