July 2018
by Masaki James Yamada, Ahlers Cressman & Sleight, PLLC
The majority of construction contracts contain a notice provision detailing how and when the contractor must give notice of a claim or change. Increasingly common in these notice provisions is also a “forfeiture clause,” which states that if a contractor fails to strictly comply with the notice requirements, the contractor waives or forfeits its ability to recover the costs associated with the change or claim. For instance, a common notice provision requires a contractor to provide immediate oral notice of the event, followed by written notice within seven days of the event, identifying in detail the basis for the claim. Then, within 30 days of the event, the contractor must provide a written breakdown of all the elements and sub-elements of the claim, including the total increase in the contract amount or contract time being sought. The contractor’s failure to strictly comply results in a forfeiture or waiver of its claim (irrespective of the claim’s merit). These notice clauses serve a number of purposes, but the general rationale is that providing prompt and timely notice allows the owner to be involved in the claim and change process (i.e., remediation efforts) from the very beginning rather than to be informed after the additional costs/delays are incurred.
Although, the notice provision seems like yet another contract provision that contractors can ultimately overcome by performing its work, the landmark case of Mike M. Johnson, 150 Wn.2d 375, 400, 78 P.3d 161 (2003) (“MMJ”) drastically changed the landscape of written notice in Washington construction contracts. MMJ likely made Washington State the strictest in the nation when it comes to written notice requirements in construction contracts. Under MMJ, the Washington State Supreme Court held that the notice requirements and claim forfeiture provision are strictly enforced, regardless of whether the claim has merit. In MMJ, Johnson encountered buried phone lines, which disrupted its work until the utility conflict was resolved. The contract contained a detailed written notice provision, which included a forfeiture clause. Although the Court found that Johnson did submit several letters claiming it was owed additional compensation, Johnson did not submit a formal “claim” as required in the contract. Ultimately, the Court upheld dismissal of the case on a summary judgment motion. The Court noted that as a general principal of contract law, procedural contractual requirements must be enforced absent either waiver by the benefiting party or an agreement between the parties to modify the contract. The Court rejected the contractor’s argument that, when an owner has actual notice of a contractor’s claim, the contractor is excused from compliance with mandatory contractual claim provisions. Rather, the Court held that, unless the party benefiting from the provision waives compliance, actual notice is not an exception to contract compliance.
While the MMJ holding may seem to make sense on its face (the parties must comply with the terms of their contract), the dynamic and schedule-driven nature of construction projects often makes these notice requirements anything but straightforward. Contractors regularly find themselves in situations where 1) the parties dispute whether an “event” triggering the notice requirements has even occurred, 2) the number and magnitude of the changes on a project make it administratively impossible to meet the notice time requirements, or, most commonly, 3) the owner has yet to provide the contractor with the information necessary to meet the requirements in the first place. In many instances, strict enforcement of the claim notice provisions is inequitable. The owner is in the best position to control the risk of a change (particularly a design change), yet it is the contractor who is saddled with the burden of fully assessing the time and cost impact of the change, and if it fails to do so, it forfeits an otherwise valid equitable adjustment to its contract. The dissent in MMJ foresaw this dilemma. While the dissent in MMJ agreed that actual notice is not an exception to contract compliance, it was reluctant to decide in favor of the county when the county had actual notice plus gave Johnson direction to proceed. The dissent believed this amounted to compliance with the contract by the contractor. Confirming the dissent’s fear, today the first step in analyzing a construction claim has moved from the merits of the claim to the threshold issue of whether the contractor strictly complied with the often intricate notice provision. MMJ illustrates why so many states and entities have chosen to adopt the prejudice standard. However, the complexities of a prejudice standard are not the topic of this article. Rather, this article is a reminder as to why giving proper and timely notice is the key to preserving claims and why provisions in the contract that involve notice deserve a closer look, not during the project, but before entering into the contract. The following are practical tips during contract negotiations to help avoid dealing with notice issues after it is too late.
Strike Forfeiture Language. While it is not unreasonable for the general contractor to require early notice and an opportunity to address potential change orders and claims with reliable information, it is not reasonable to strip a subcontractor of an otherwise valid claim for extra time or compensation simply because the subcontractor has not strictly complied with the often complex, overly technical, overlapping, and sometimes conflicting provisions governing written notices and claim documentation. To avoid this result, a subcontractor should search for and strike terms such as “strict compliance,” “condition precedent,” “waive,” and “forfeit,” and consider adding a provision such as the following:
Notwithstanding anything to the contrary, a party’s failure to provide any notice strictly in the time and form required shall not result in a waiver of an otherwise valid right or claim unless, and only to the extent that, the party entitled to receive such notice demonstrates actual harm resulting from such failure.
Require Executed Change Orders for Extra Work. A strict pre-work Change Order requirement protects the general and owner against claims for extras after the work is completed. It also protects the subcontractor from being directed to perform extra work without prior agreement on the cost and time adjustments. However, it can also be a trap where the subcontractor performs time-sensitive extra work in good faith based on clear direction, but the contractor later denies the requested Change Order. As a subcontractor, this means it is important for you to be firm in requiring signed Change Orders before you perform any extras. If you cannot agree on your entitlement or cost, demand a formal Change Directive.
Include a Clear “Change Directives” Procedure. A good “Change Directive” process will require a written Change Directive when Change Order terms cannot be agreed, specify how interim compensation will be determined, and dovetail with the Claims provision. Again the key for you as a subcontractor is to demand that the general follow its own procedures and issue a formal directive before you commence any extra work.
Remove Advance Change Order Limitations. Does a signed Change Order automatically waive all related rights and claims? What about cumulative impacts, which might only arise or are only identifiable when change orders become excessive? Is there any limitation on the time or money you may receive for certain types of changes? As a subcontractor, you should any such advanced limitations in the subcontract documents where possible, and instead address specific issues in the individual Change Orders to be issued during the work.
The aforementioned changes to your subcontract should help ease your attempts to comply with your subcontract’s notice requirements.
Masaki James Yamada is a partner at Ahlers Cressman & Sleight PLLC. His practice focuses on matters involving complex construction claims, construction contracts, construction L&I issues, construction defects, and related insurance matters. His practice also includes commercial real estate and communications law (i.e. cell towers). Yamada regularly represents general contractors, subcontractors, developers, business and property owners, and design professionals. He can be reached at (206) 529-3015 or masaki.yamada@acslawyers.com.
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