Almost every construction contract provides for a contractor to get more time or more money under certain circumstances. In addition to requiring justification for the change in the contract terms, contracts generally require one thing: notice to the owner. While the time period for notice varies from one contract to the next, the importance of meeting that deadline does not vary. This article examines the differences in notice provisions in several standard contracts, discusses what a notice provision should do, and looks at how a couple of important court decisions—most notably the Ohio Supreme Court’s Dugan & Meyers opinion from earlier this year—enforce these important provisions.
The Importance of Notice
“N-O-T-I-C-E” is a six-letter word that can mean a six-figure difference to a contractor or to an owner. The importance of following the contractual procedures for claims cannot be overstated, especially for public owners who have multiple demands on their budgets. With a limited source of funds, school districts, for example, are confronted daily with the problem of managing their risks, especially on a construction project.
A school district enters into a construction project with a finite amount of funds. It cannot spend money it does not have, so its biggest risk is often that the project could cost more than it has in the budget. What can any school district, or owner for that matter, do to reduce this most important risk while the project is being constructed? The answer is it can require prompt written submission of claims. This is where notice comes in.
Paying off or fighting a claim should not be the only two options available to an owner. Given notice of a potential cost increase immediately, an owner has a choice of one or more of the following remedies:
- Investigation. The owner may investigate a claim underlying delay and interference, including taking statements from witnesses, taking photographs relevant to the delay, and obtaining early and contemporaneous documents.
- Evaluate. The owner may evaluate the claim and attempt to resolve the issues to the claimant’s satisfaction.
- Withhold payment. Generally, construction contracts permit an owner to withhold payment from any contractor who may be the cause of claims filed by other contractors.
- Self-perform. Generally, construction contracts authorize the owner to perform any or all of the work of a contractor in default.
- Terminate for convenience. To mitigate its losses, an owner can terminate a claimant’s contract for convenience and re-bid the work.
- Value engineer. Many owners have the opportunity to value engineer a project (re-examine project details and economize through substitutions, deletions, and re-design) to offset the cost of claims they cannot mitigate otherwise.
- Control discretionary spending. Sometimes it is possible to mitigate losses by calling a halt to the issuance of discretionary Change Orders as soon as notice of a claim is received.
When a contract’s claims provision requires timely notice of a claim, the owner should have any or all of the options outlined above. However, if that notice comes late, the owner may lose control of how much a project is going to cost and may be required to indemnify a claimant for damages over which the owner had little control.
What a Notice Provision Should Do
In general, a properly drafted notice provision should accomplish three things. First, at a minimum, it should require the contractor to provide the owner with prompt written notice of any demand or assertion for additional money or additional time.
Second, an effective notice provision should require that a contractor provide the owner all the information needed to investigate the situation to verify or counter the contractor’s claim. The owner may need the contractor’s estimate and job cost reports, for instance, in order to make an early determination that the amount of the claim is or is not valid.
Third, as exemplified in the recent Ohio Supreme Court decision of Dugan & Meyers, a proper notice provision should bar all claims that fail to comply with it, as such failure prejudices the owner’s rights.
Notice Provisions Differ
Construction contracts are project-specific, and the claims procedure within each contract may also be project-specific. Therefore, parties should not assume all claims procedures are the same.
Examples can be found in the standard form construction documents produced by the American Institute of Architects, the Associated General Contractors, and the Engineers Joint Contract Documents Committee.
The AIA A201 – 1997 document, for example, establishes a 21-day time limit for initiating a claim. Under Paragraph 4.3.2, the AIA document sets forth the time limit in which a claim must be brought:
Time limits on claims. Claims by either party must be initiated within 21 days after occurrence of the event giving rise to such Claim or within 21 days after the claimant first recognizes the condition giving rise to the Claim, whichever is later. Claims must be initiated by written notice to the Architect and the other party.
The EJCDC’s form C-700 document, on the other hand, establishes a different process for filing a claim on a project. The EJCDC document requires the following:
Written notice stating the general nature of each claim shall be delivered by the claimant to Engineer and the other party to the Contract promptly (but in no event later than 30 days) after the start of the event giving rise thereto.
Under the EJCDC document, if notice is provided after 30 days, the contractor will be precluded from bringing its claim.
Finally, the AGC’s standard document provides different language, another claims procedure, and a different deadline for notice. Paragraph 6.3.1 of AGC’s Document No. 200 first creates a right to an equitable settlement in either time or money for delays not caused by the contractor:
If the Contractor is delayed at any time in the commencement or progress of the Work by any cause beyond the control of the Contractor, the Contractor shall be entitled to an equitable extension of the Contract Time. In addition, if the Contractor incurs additional costs as a result of such delay, the Contractor shall be entitled to an equitable adjustment in the Contract Price subject to [the mutual waiver of consequential damages provision.]
Paragraph 6.3.1 goes on to list examples of causes that are beyond the control of the contractor, and therefore entitle the contractor to an equitable settlement. Then, under Paragraph 6.4, if a contractor requests an equitable extension of time and/or money, it shall give the owner written notice of the claim in accordance with Paragraph 8.4:
The Contractor shall give the Owner written notice of the claim within fourteen (14) days after the occurrence giving rise to the claim or within fourteen (14) days after the Contractor first recognized the condition giving rise to the claim, whichever is later.
From this it would seem that a contractor would be precluded from bringing a claim if written notice of the claim is provided outside of the 14-day window. However, the AGC document entitles the contractor to an equitable contract adjustment after certain delays (listed in Paragraph 6.3.1) that are not the contractor’s fault. Must a contractor give notice within 14 days if the delay was caused by one of the causes listed in Paragraph 6.3.1? Although there may be some reason for conflict here, the only safe procedure for a contractor is to give notice within the 14 days, regardless.
As the three standard contracts show, contractual notice procedures are hardly uniform. It is important that an owner review the procedures in the contract before letting its project out to bid. An owner may wish to modify the claims procedure, and modifications can only be made before the contract is signed. After the contract is signed, an owner should follow the contract’s claims procedure when bringing claims against a contractor. Otherwise, the owner may be precluded from pursuing claims.
A Recent Example: Dugan & Meyers
The Ohio Supreme Court’s recent decision in the Dugan & Meyers case is a prime example of just how important it can be to follow the notice provisions in a contract. That decision, Dugan & Meyers Construction Co. v. Ohio Department of Administrative Services (April 25, 2007), 113 Ohio St.3d 226, 2007-Ohio-1687, taught some valuable lessons about notice.
As regular readers of this newsletter know from reading about this case in our April 2007 issue, the dispute involved a claim by Dugan & Meyers for nearly $3.4 million for cumulative impact damages and other delay damages. The contract had an express provision for requesting extensions of time through change orders, and the Ohio Supreme Court ruled that this provision governed the dispute.
The contractor’s claims arose out of the construction of three buildings that comprised Phase II of the Fisher College of Business on the Ohio State University campus. Dugan & Meyers, initially the lead contractor, issued numerous requests for information (more than 700, according to the Complaint) and received much advice from the architect as to how to interpret the plans. According to the contractor, the numerous questions delayed the project, putting it behind schedule.
In July 1999 the State relieved Dugan & Meyers of its lead contractor duties. When the project was finished six months later, the owner assessed liquidated damages against the contractors. The former lead contractor responded by filing a claim seeking, among other things, reversal of the liquidated damages and extra amounts attributed to its alleged delay damages.
The contractor had one significant problem with its claims, however: The contract contained a specific claims procedure, and Dugan & Meyers had not followed it. That procedure called for notice within 10 days of learning that there would be a delay. It also provided consequences if such notice were not given:
Failure to timely provide such notice to the [architect] shall constitute a waiver by the Contractor of any claim for extension or for mitigation of Liquidated Damages.
Had Dugan & Meyers followed this procedure? No. It had submitted requests for information, even before the change orders, but these requests had noted possible delays of only four days. (In effect, it was telling the owner that any delay would be minimal.) Instead of giving notice of delays as soon as it became aware of them or within 10 days, it had waited until the end of the project to request more time or money, alleging that these were necessitated by the “cumulative impact” of the numerous change orders.
Dugan & Meyers argued that it need not comply with the contractual claims procedure because the State already knew about the problems. Failure to provide the notice was a harmless error, according to the contractor. Neither the Court of Appeals nor the Supreme Court agreed.
According to the Supreme Court,
Dugan & Meyers has not convinced us that its failure to request extensions was harmless to OSU. To the contrary, Dugan & Meyers agreed that the contract language stated that failure to provide written notice “shall constitute a waiver by the Contractor of any claim for extension or for mitigation of Liquidated Damages.” The court of appeals correctly concluded that Dugan & Meyers “has not demonstrated that it was entitled to disregard its obligations under that part of the contract and to claim . . . that OSU unreasonably withheld liquidated damages for delay in completing the project.”
As you can imagine, this decision has caused much debate within the construction industry. Owners tend to agree with the Court that specific change order provisions should be strictly enforced and, not surprisingly, contractors believe that the Supreme Court went too far in refusing to apply the Spearin Doctrine (which is a topic covered in our April 2007 discussion) to the facts of the case.
In a competitive bidding situation, as existed in Dugan & Meyers, strict enforcement of contract terms may be especially important. If courts were to rewrite a contract to eliminate restrictive notice terms, they would be giving the bidder who got the job a competitive advantage—a contract that was more favorable than the one on which other contractors bid. Such a change after the fact would seriously undercut the competitive bidding process, as it would be unfair to the unsuccessful bidders, all of whom based their bids on the original contract and therefore had to include costs associated with complying with the original notice requirements.
While the decision may have temporarily polarized the construction industry, it should have at least one positive effect: Both contractors and owners may dust off their contract documents to re-read the specific claims provision governing their projects.
Is Constructive Notice Enough?
Is the owner’s actual notice of the facts giving rise to a claim enough to save a late claim when the contractor failed to comply with the written provisions of the contract? Contractors who miss the deadlines in contractual notice provisions often argue that such deadlines were not important because the owner knew about the problems all along. In other words, the owner had “constructive notice” and so did not require actual notice—regardless of what the contract said—because the owner was not prejudiced. Here, however, it is important to distinguish between the owner’s notice of the facts giving rise to a claim and notice by the contractor that it is indeed making a claim based on these facts.
Even before Dugan & Meyers, such an argument was not likely to succeed. Consider the case of Moraine Materials Co. v. Cardinal Operating Co. (Montgomery App. 1998), 1998 Ohio App. LEXIS 5387.
In Moraine Materials a ready-mix concrete supply company contracted to haul and dispose of fly-ash generated by two power plants. The contractor was to be paid for each ton of fly-ash it hauled. However, the production of fly-ash fell way short of the anticipated quantities, resulting in a profit shortfall of $996,000 to Moraine.
The contractor sued and won its breach of contract claim, but a jury found that it was not entitled to damages because it failed to follow the contract’s claims procedure, which required notice of a claim within 10 days.
On appeal, the court agreed that the contractor, by failing to follow the claims provision in its contract, was precluded from recovering damages. The appellate court said that “the notice provision in the contracts operated as a condition precedent to [the contractor’s] right to claim any damages from default by the [owners].” A contractor who failed to give the required notice, therefore, had no right to make a claim at some later date.
But the contractor in Moraine Materials had made a number of complaints to both power companies regarding the low levels of ash being produced. Didn’t these provide notice to the power plants? The contractor argued that they did, as the power plants clearly knew about the shortfalls of the ash quantities during the contract term.
The appellate court was not convinced. It refused to substitute this actual notice of the facts underlying a potential claim for notice of an actual claim achieved by following the claims procedure. The court said that “even if the [the power plants] were aware of the conditions underlying [the contractor’s] claims, without notice, they were unaware that [the contractor] intended to seek compensation in excess of the unit price that it was already receiving. Earlier notice of the claims in this case would have presented [the power plants] with a number of different remedies to avoid liability for the [claim.]”
The same argument was equally unsuccessful in Dugan & Meyers. There the contractor argued that the owner had actual knowledge of the circumstances related to the claim. It almost worked. The Court of Claims used the owner’s knowledge of the facts giving rise to the claim to excuse the contractor’s failure to request additional time pursuant to the procedure required by its contract.
But that was not the end of the story. Neither the Court of Appeals nor the Ohio Supreme Court was willing to substitute the owner’s actual knowledge of circumstances that might lead Dugan & Meyers to file a claim for the contractually required notice of the claim itself.
These two decisions make one thing clear: An owner’s constructive knowledge of facts will not suffice to waive the requirements of a notice provision in a contract. To escape from such a requirement in a contract, a contractor must prove waiver, and that will be an uphill battle all the way.
Our mantra has always been, “Read the Contract.” The Ohio Supreme Court’s Dugan & Meyers decision underlines just how important it is to know what your contract says and to do what your contract says you must do within the time limits the contract provides.