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Contract Notice Requirements & Quantum Meruit Claims: Is there hope for contractors who fail to strictly follow notice provisions?

Contract Notice Requirements & Quantum Meruit Claims: Is there hope for contractors who fail to strictly follow notice provisions?
October 4, 2016 dominick

On September 1, 2016, Division III of the Washington State Court of Appeals issued a decision which may, in limited situations, provide an avenue of recovery to contractors who fail to strictly follow contractual notice provisions. In General Construction Company v. PUD No. 2 of Grant County, the Division III Court upheld the strict notice standards set forth in Mike M. Johnson, while recognizing that certain claims may sidestep contract notice provisions if the contractor can demonstrate a valid quantum meruit claim for extra work falling outside the general scope of the contract.

General Construction Company (“GCC”) was hired by PUD No. 2 of Grant County (“PUD”) to construct a fish bypass ladder at Wanapum Dam near Vantage, Washington. The contract required written notice of claims. Specifically, the contract stated “all requests for damages must be submitted in writing within ten days, otherwise the damages are waived.”

The fish bypass ladder was designed with three separate slots. GCC anticipated that it would construct the first two slots simultaneously and it commenced work accordingly. During construction, the engineer ordered GCC to construct the slots sequentially, and this change delayed GCC and increased its performance costs. The engineer also directed GCC to make several other changes throughout the project. GCC failed to timely submit notice of damages for some of the changes. The parties managed to reach a partial settlement on a few of GCC’s claims, but the PUD ultimately denied payment for a significant portion of the damages claimed. GCC commenced litigation against the PUD for the claims that were not resolved in the partial settlement.

During litigation, the PUD filed a motion for summary judgment seeking to dismiss several of GCC’s damage claims for failure to strictly adhere to the notice provision in the contract. GCC defended against the PUD’s motion by asserting that the engineer had actual notice of all claims. GCC contended that the engineer instructed GCC not to file claims related to the changed construction sequence of the slots. Based on this assertion, GCC argued that the PUD had actual notice of the change and that it waived the notice provisions in the contract since the engineer told GCC it did not need to submit formal claims. Additionally, with regard to the slot change, GCC argued it provided timely written notice of the change on a PUD chalk board during the project. GCC also argued that to dismiss claims for untimely notice, the PUD had the burden to demonstrate it was prejudiced due to GCC’s failure to strictly adhere to the notice procedures.

The trial Court granted the PUD’s motion in part by dismissing several of GCC’s claims for failure to provide timely notice after determining the contract expressly denied the engineer power to modify the contract or waive the notice provisions on behalf of the owner. The Court also determined that a writing on the chalk board was insufficient to constitute written notice because the writing was only temporary and contrary to the intended meaning of “written notice.” GCC appealed the trial Court’s decision to dismiss GCC’s claims.

On appeal, GCC urged the Court to apply an actual notice/lack of prejudice standard used in many other jurisdictions in cases where the contractor can establish the owner was not prejudiced due to the failure to strictly follow contract notice and claim procedures. GCC argued that Bignold, a 1965 case involving a Seattle road construction project, created an “actual notice” exception to the enforcement of contract notice provisions. In Bignold, the contractor encountered changed subsurface conditions and King County refused to compensate the contractor after the engineer directed the contractor to remove and dispose of unsuitable materials. The contractor sued on a theory of quantum meruit and prevailed. The Washington Supreme Court affirmed the award. The Bignold Court recognized the County was fully aware of the changes encountered and directed the work to proceed. Accordingly, the Court reasoned that “under such conditions, the county cannot defeat recovery by a contractor even if no written notice was given.” The County also argued the contractor’s quantum meruit claim was not allowed in an action on a contract. The Court expressly rejected the County’s argument and held that quantum meruit is an appropriate basis for recovery “when substantial changes occur which are not covered by the contract and were not within the contemplation of the parties, if the effect is to require extra work and materials or cause substantial loss to the contractor.

In contrast, the PUD relied on Mike M. Johnson v. County of Spokane, a 2003 case which involved a sewer project in Spokane. The Mike M. Johnson case changed the legal landscape for construction contracts in Washington State. Mike M. Johnson (“MMJ”) encountered differing site conditions that led to an increase in the cost to complete the project and the County was fully aware of the increased costs and difficulty encountered by MMJ. However, MMJ did not provide timely written notice of the claims as required under the contract, and instead verbally discussed the claims throughout the project as issues arose. At the conclusion of the Project, the County refused to compensate MMJ for the claims on the basis that the MMJ failed to strictly follow the notice procedures. The trial Court granted summary judgment in the County’s favor and MMJ appealed. On appeal, MMJ argued that Bignold created an exception to contractual notice provisions in instances where owners have actual notice of the claim. In a 5-4 decision, the Washington Supreme Court held that contractual notice provisions are to be strictly enforced absent wavier or an agreement between the parties to modify the contract. Based on the Mike M. Johnson holding, the PUD claimed that the Court was required to strictly enforce the notice provision in GCC’s contract.

After considering the arguments advanced by each party, the Court determined GCC’s plight was factually similar to Mike M. Johnson and the Court focused its analysis on the contract notice provisions and GCC’s failure to give timely notice of its claims. The Court explained that the majority opinion in Mike M. Johnson made it clear that notice procedures will be strictly enforced unless there is evidence of waiver from the party benefitting from the notice provision and it determined that GCC’s claims were barred for its failure to strictly follow the contract. This result is not surprising in light of the clear holding of Mike M. Johnson.

However, the Court went on to explain that Bignold remains good law for what the Court viewed as the actual holding of the Bignold case—that quantum meruit has a place in litigation arising from a construction contract. As far as Division III is concerned, both Bignold and Mike M. Johnson remain good law and can be read in harmony with one another. The Court seemed to indicate that while notice provisions must be strictly adhered to for work falling within the scope of the contract, a contractor may nonetheless bring quantum meruit claims for work outside of the contract. In essence, contractors may bring quantum meruit claims for work to which the contract does not apply. Unfortunately for GCC, the Court determined that the claims at issue on appeal fell within the scope of the contract and were therefore subject to the notice and claim procedures. This is the crux of the problem—convincing a Court that the work is “extra” rather than “changed.” Washington Courts have never provided a working definition for “work on the contract” and “work outside the contract.”

Under the right circumstances, quantum meruit claims can provide an avenue of recovery for changes that arguably are not governed by contractual claim provisions. Quantum meruit is a common law remedy which allows an aggrieved party to recover a reasonable amount for the work performed “in the absence of a contract [or] where substantial change not within the contemplation of the parties occurs with a resulting benefit to one party and expense to the other.” Heaton v. Imus, 93 Wn.2d 249, 253-54 (1980). In other words, quantum meruit is a remedy available regardless of the existence of a contract. The difficulty lies in determining what work falls outside the general scope of the contract. Indeed, the dissent pointed out that “distinguishing between work within the contract terms and outside the contract is sometimes difficult and nonsensical” and that “recovery should not be based on magic Latin words employed in the complaint.”

Other jurisdictions have grappled with determining what work falls outside the general scope of the contract and unfortunately, there is no easy answer and each case is fact specific. More often than not, courts determine that work falls within the “general” scope of the contract and that such work is remediable under the contract change provisions. The most common way to demonstrate that work falls outside the contract is to demonstrate that the work is a “cardinal change.” A cardinal change is not governed by the changes clause and cannot be remedied under the contract because the change is so substantial that it alters the nature of the bargain between the contracting parties. As a result, the contractor may pursue common law damages resulting from the change without following contractual claims procedures. Courts consider the following factors when determining whether a cardinal change exists:

  • whether there is a significant change in the magnitude of work to be performed;
  • whether the change is designed to procure a totally different item or drastically alter the quality, character, nature, or type of work contemplated by the original contract; and
  • whether the cost of the work ordered greatly exceeds the original contract costs.

Becho, Inc. v. U.S., 47 Fed. Cl. 595, 601 (2000). Essentially, the contractor must show that the changes to the contract are so great that the party directing the change is in material breach by ordering something beyond what the parties bargained for.

The General Construction Company holding underscores the importance of adhering to written notice provisions. However, it also provides hope for contractors who fail to strictly adhere to contract notice deadlines in situations where substantial changes occur which drastically alter the duties the parties bargained for. In instances where notice deadlines are missed, quantum meruit claims may provide a supplemental means of recovery.

 

Tyler S. Waite

twaite@ggd.72b.myftpupload.com

(509) 455-7100