LAW: THE CONTRACTOR'S SIDE: State-by-state verdict

July 12, 2013

Choice of law provisions and written notice of claim clauses are commonplace in most construction subcontracts today, and the manner in which both are enforced (or not) varies from state to state.

Choice of law provisions and written notice of claim clauses are commonplace in most construction subcontracts today, and the manner in which both are enforced (or not) varies from state to state.

The U.S. ex rel. Duncan Pipeline, Inc. v. Walbridge Aldinger Co., et al., 2013 WL 1338392 (S.D. Georgia) case involved a lawsuit filed by a utility pipeline subcontractor against a prime contractor and its payment bond surety on a U.S. Army Corps of Engineers project at Fort Stewart, Ga. The Corps decided that the specifications required bell restraints to counter thrust forces at all underground water-main valves, whereas the subcontractor contended that such restraints must be installed only at pipeline dead-ends.

Upon receiving the Corps’ interpretation from the prime contractor, the subcontractor proceeded with the work. Eight months later—and after discussions apparently ceased—the subcontractor provided written notice of its intent to file a claim. After the prime and its surety denied the subcontractor’s claim for payment, the subcontractor filed suit in federal court. Two issues the subcontractor and prime contractor submitted to the court for decision on motion were the enforceability of a choice of law provision in the subcontract that called for the application of Michigan law and whether the subcontractor had complied with relevant notice provisions of the subcontract.

The choice of law issues might have been resolved differently in some other states that have enacted statutes rendering void any provision in a construction contract that specifies the law of another state for projects constructed within the state. In Georgia, no such prohibition exists, and courts generally enforce choice of law provisions so long as they are clear and unambiguous. In this case, the court ruled that the provision, which stated, “this Subcontract shall be governed by the laws of the State of Michigan,” is clear and unambiguous. Unfortunately for the prime contractor, however, the subcontractor also filed tort claims, for which the court took a different view.  

Cases cited by the prime contractor in support of its position that the choice of law provision is enforceable involved provisions that specified the law of another state “for any and all claims arising out of or in connection with the contract.” This, according to the court, would apply to all types of claims—both contractual and tort-based. The court reasoned that the language in the subcontract before it applied the law of Michigan to “this Subcontract” was much narrower in application. In particular, the tort claims did not arise from the subcontract, but from common duties owed by everyone in society. Consequently, the court applied Georgia law to the tort claims and Michigan laws to the contract claims.

On the notice issue, the court ruled the subcontractor clearly failed to give notice of its intention to file a claim “promptly” and did not submit its pricing within 14 days as specified in the subcontract. To get around this, the subcontractor argued that it nevertheless complied because Clause 52.243-4 of the Federal Acquisition Regulations of the prime contract, which was incorporated by reference into the subcontract, does not require strict written notice if it can be shown that the prime contractor had actual notice of the subcontractor’s intention to file a claim. The court agreed that cases interpreting the Federal Changes Clause do, in fact, allow for actual notice as a substitute for written notice. However, the court ruled that it is the government that must have the actual notice, not the prime contractor. It thus ruled against the subcontractor.

The portion of the court’s decision on notice is contrary to what most might assume when it comes to interpreting prime contract clauses as between subcontractors and prime contractors. Although the choice of law decision was predictable, it illustrates the importance of knowing the choice of law rules of the states in which a contractor operates and the importance of using precise language. R&B

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