Notice procedures should mitigate conflict and aid resolution

Jan. 6, 2021

This column published as "Take Notice" in January 2021 issue

Contract provisions related to changes, claims, protests, or disputes typically include notice requirements.

The importance of properly following such notice procedures, and with an attention to detail, cannot be overstated. Generally, the purpose of giving notice in the required form and format is to elevate an issue to a level above the day-to-day so that all parties can better mitigate damages and delays. With so many daily document transmittals, submittals, and e-mails, it is easy to overlook some more important information that notice provisions are designed to highlight. Proper notice should also make it more likely that an issue may be resolved short of a formal dispute. 

When proper and timely notice is not provided, some jurisdictions follow a “no harm/no foul” protocol. For example, if the detailed, written notice was not provided in a letter delivered by regular mail, but the proper parties knew about the issue through a progress meeting, schedule update, or otherwise and were able to mitigate the problem, then failure to follow the formalities will not be forgiven. In many jurisdictions, however, only proper procedure prevails, as in the case of Scarsella Brothers, Inc. v. Flatiron Constructors, Inc., Wash. Ct. App., Case No. 68543-5-1 (September 28, 2020). 

In 2012, the Washington State DOT contracted with a prime contractor to widen and add express toll lanes to a segment of I-405 from Bellevue to Lynnwood. In July 2012, the prime subcontracted about $15 million for earthwork, retaining wall, and drainage construction. From August 2012 to January 2015, monthly payment applications were prepared, supported, discussed, adjusted, submitted, and paid with little fanfare. 

In November 2014, the prime began withholding all payments to the sub. From the prime’s perspective, the sub was improperly maintaining documentation to substantiate pay apps and force account billings. The prime also alleged the sub delayed the project. In response, the sub provided some, but not all, of the necessary documentation. After a lengthy trial without a jury, the trial court held the sub did not comply with notice and claim provisions, finding the sub’s documentation supporting its work and claims was inconsistent and unreliable. On all issues, the appellate court agreed with the trial court. 

By general reference, the subcontract incorporated the terms and conditions of the prime contract. Under the subcontract, the sub “assum[ed] towards [Prime] all obligations that [Prime] assume[d] toward Owner, insofar as applicable to the Work to be performed under this Subcontract.” This is a standard and broad incorporation-by-reference clause obligating the sub to the prime as the prime is obligated to the owner. Some courts will not construe such a broad clause to require subs to follow notice and claim requirements, reasoning that “the Work” is for the completion of the project and actions not “applicable” or “relating” to “the Work” (i.e., claims and disputes) are not assumed by a sub under such a broad clause. A general and broad incorporation clause may not necessarily incorporate duties unrelated to the completion of a project.

This court, however, construed this clause as all-encompassing and held that this clause obligated the sub to follow the same notice provisions in the prime contract. So, the sub had to provide written notice of “protest . . . of any determination” by the prime “immediately” and “before doing the Work.” The sub also had to supplement the initial notice with supporting documentation within 30 days and continue to supplement the supporting documentation “monthly until the protest is resolved.” Depending on a myriad of factors, the level of effort by the sub may seem onerous to comply. But applying the general purpose for notice, such documentation was deemed necessary to help all parties mitigate damages and delays.

While the sub lost all its claims against the prime, the court held the prime actually delayed the project, not the sub. Thus, although the court held the prime had a good faith basis to withhold the remaining subcontract balance, the prime was ordered to pay that balance, which was separate from the changed/claimed work.

Notice and documentation provisions can be strong defenses for owners and prime contractors and seemingly onerous administrative work for both prime and subcontractors. Hopefully, though, they are applied and enforced in the interest of elevating an issue to mitigate damages instead of shirk responsibility.

About The Author: Straw is a partner with Kraftson Caudle, PLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction. Straw can be contacted via e-mail at [email protected].

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