Ahlers & Cressman Lawyers

American Safety v. City of Olympia: Supreme Court Affirms and Clarifies Mike M. Johnson

Ryan Sternoff — Wed, 02 Jan 2008 16:19:56 GMT

In the 2003 Mike M. Johnson decision the Supreme Court held that absent waiver, failure to strictly comply with claims procedures in construction contracts bars relief and that waiver by conduct "requires unequivocal acts of conduct evidencing an intent to waive." Mike M. Johnson, Inc. v. Spokane County, 150 Wn.2d 375, 391, 78 P.3d 161 (2003). American Safety successfully argued before the Court of Appeals that its case was distinguishable from Mike M. Johnson and sufficient to resist summary judgment because the parties engaged in continued negotiations and the City only reserved its right to demand compliance with the contractual claim provisions on three separate occasions.

The Supreme Court reversed, and emphasized that, at most, the City's actions constituted "equivocal" evidence of waiver. "Equivocal conduct by its definition cannot be unequivocal" as required by Mike M. Johnson. Because the City on occasion expressly asserted it was not waiving its contractual defenses no juror could find the City unequivocally did the exact opposite. The Court further affirmed Mike M. Johnson and held continued settlement negotiations will not establish waiver, as such a finding would frustrate the settlement process.

Mike M. Johnson Legislation Update

Brett Hill — Fri, 28 Dec 2007 18:50:56 GMT

A & C lawyers John Ahlers, Paul Cressman and Bruce Cohen have been working closely with the Association of General Contractors (AGC) on legislation to address the contractor notice forfeiture dilemma created by the Wa Supreme Court's decision in Mike M. Johnson. The Bill will be introduced in the next legislative session in January 2008. Significant ground work has been done by A &C to provide legislators and stakeholders with input on the legislative fix. The Mike M. Johnson case was previously discussed in this blog and generally holds that contractors must strictly comply with the notice and claim requirements in their contracts. Failure to do so can result in a waiver of the contractor's claim. The proposed legislation will be attached to this article shortly.

Henifin Constr. v. Keystone Constr.

Brett Hill — Thu, 03 Jan 2008 12:13:56 GMT

In Henifin Construction, 2006 Wash. App. LEXIS 2349 (October 23, 2006), the issue before the Division I Court of Appeals was whether the subcontractor, Henifin, could claim a lien on property owned by McDonalds for change orders authorized by the general contractor, Keystone, but not authorized by McDonalds. McDonalds successfully defeated the claim of lien at the trial court level. McDonalds argued that Henifin's work was not lienable because the work was not furnished "at the instance of the owner, or the agent or construction agent of the owner" under RCW 60.04.021. McDonalds did not authorize the extra work and it argued that Keystone was not its "construction agent".

The Court of Appeals disagreed and held that because McDonalds placed Keystone in charge of constructing its restaurant, Keystone was McDonalds' construction agent. McDonalds also argued that the extra work was not lienable because because it was not within the "contract price" as defined in RCW 60.04.011(2). The statue defines contract price as "the amount agreed upon by the contracting parties, or if no amount is agreed upon, then the customary and reasonable charge therefor." McDonalds argued the extra work sought by Henifin was not a part of the agreed upon price. The Court of Appeals held that the extra work was lienable because Keystone, McDonalds' construction agent, authorized the change orders.

American Safety v. City of Olympia

Brett Hill — Thu, 03 Jan 2008 12:14:36 GMT

In American Safety Cas. Ins. Co. v. City of Olympia, ___ Wn. App. ___, ___ P.3d ____ (June 27, 2006), the Division II Court of Appeals addressed the issue of an owner's waiver of contractual notice and suit limitation contract clauses. The suit arose out of the LOTT Southern Connection Pipeline public works project for the City of Olympia. The general contractor, Katspan, contracted with the City of Olympia to build a system of sewer lines in downtown Olympia.

The contract required Katspan to follow a set of specific procedures in order to make a claim for extra compensation. In addition, the contract stated that Katspan had 180 day from final acceptance of the project to file a lawsuit against the City. While the project was ongoing a dispute arose between the City and Katspan regarding whether Katspan should be entitled to additional time and compensation on the project. Katspan sent letters to the City notifying it that Katspan intended to seek additional time and money for its work on the project. None of Katspan's letters complied with the claim procedure in the contract.

Katspan completed the project and assigned its rights to American Safety pursuant to an indemnity agreement. The City accepted the contract as complete on September 10, 2001. Katspan then had until March 9, 2002 to file a lawsuit against the City, per its contract. In November 2001, American Safety made a request for equitable adjustment to the City. The City did not respond. In March 2002, American Safety contacted the City and the City's attorney requested addition information. The City stated that it would negotiate the claim if it had adequate backup from American Safety. In May 2002, American Safety provided more documents to the City, and the City requested more information. In January 2003, American Safety provided more information, which the City stated was inadequate. The City gave American Safety a deadline of May 2003 to provide the information requested by the City, or the claim would be denied. American Safety failed to meet the deadline.

In July 2003, American Safety, through its consultant, contacted the City regarding the information the City was seeking. The City's consultant stated that he had been given the authority to discuss the claim. The consultants proceeded to discuss the claim. In May 2004, American Safety notified the City that the information requested by the City was available. The City denied the claim because the 180 day suit limitation period had expired. The key issues for the Court of Appeals were (1) whether the City had waived the 180 day suit limitation clause and (2) whether the City had waived the notice of claim procedure. The Court relied heavily on the waiver analysis in the Mike M. Johnson case but reached a different result. The Court distinguished the Mike M. Johnson case because in that case the owner had requested that the contractor follow the specific claim procedures when the contractor made a claim that was not in compliance with the contract. In addition, in Mike M. Johnson, the owner repeatedly referred to the contract's provisions and repeatedly asserted its rights under the contract. By contrast, the City of Olympia did not repeatedly reserve its rights to assert compliance with the contract claim procedures. The City of Olympia also proceeded to negotiation the claim well after the 180 suit limitation period had expired, without reserving its right to assert compliance with the suit limiation clause. Due to this conduct, the Court held that a reasonable person could conclude that that the City had waived its right to assert compliance with the notice and suit limitation provisions of the contract.

Mike M. Johnson v. Spokane County - Contract Notice and Claim clauses are strictly enforceable

Brett Hill — Wed, 02 Jan 2008 17:47:58 GMT

In Mike M. Johnson, Inc. v. Spokane County, 150 Wn.2d 375, 78 P.3d 161 (2003), the Washington State Supreme Court held that actual notice is not an exception to compliance with mandatory contractual protest and claim provisions. The Court went on to hold that a party may waive such provisions for its benefit, but waiver by its conduct requires unequivocal acts or conduct evidencing an intent to waive. In April 1998, Spokane County awarded Mike M. Johnson, Inc. ("MMJ") contracts to construct two sewer projects, the Apple Valley Sewer Project and the Wolfland Project. The contracts incorporated WSDOT's Standard Specifications for Road, Bridge and Municipal Construction. Both the County and MMJ anticipated that MMJ would perform the projects in sequence. Construction of the Apple Valley Project was to begin on May 27, 1998, and be completed in 88 working days, and construction of the Wolfland Project was to begin on June 29, 1998, and last 70 working days. At the preconstruction conference on April 23, 1998, the County informed MMJ that a road improvement district project was in progress to redesign Seventh Avenue, a roadway in the Apple Valley Project. The redesign would not affect the sewer installation, but would double the width of Seventh Avenue and add gutters and curbs. MMJ began construction on the Apple Valley Project, starting on Fourth Avenue, with a plan to follow with Sixth Avenue and then Seventh Avenue. On June 4, 1998, the County submitted the revised design of Seventh Avenue to MMJ and issued Change Order 3 which required MMJ to widen Seventh Avenue and change the elevation and grade. The change order proposed to increase MMJ's compensation by $69,319, and add eight working days to the project. MMJ did not object or protest the design change, proposed compensation, or altered schedule, and began the work under Change Order 3. In late June, MMJ began subgrade preparations for the roadway on Seventh Avenue, and encountered buried U.S. West phone lines, which were not shown on the drawings furnished by the County. MMJ's work on Seventh Avenue came to a halt while the County and U.S. West worked out the utility conflict. Both contracts incorporated Standard Specification � 1-04.5 which required written notice of protest of work required by a change order, other written order, or oral order from the engineer before doing any work, and supplemental information within 15 calendar days providing: (a) the date of the protested order; (b) the nature and circumstances which caused the protest; (c) the contract revisions that support the protest; (d) the estimated dollar cost, if any, of the protested work and how that estimate was determined; and (e) an analysis of the progress schedule showing the schedule change or disruption if the contractor is asserting a schedule change or disruption. The contracts further provided that MMJ accepted all requirements of a change order by endorsing it, writing a separate acceptance, or by not protesting it as required by � 1-04.5. Failure to protest constituted "full payment and final acceptance of all claims for contract time and for all costs of any kind, including costs of delays, related to any work either covered or effected by the change." Standard Specification � 1-04.5. In addition, the contracts referenced Standard Specification � 1-09.11, which provided a mandatory formal claim procedure if � 1‑04.5 failed to resolve a dispute. Full compliance by MMJ with � 1-09.11 was a contractual condition precedent to MMJ's right to seek judicial relief. MMJ never filed a certified claim as required by � 1-09.11. MMJ did not file a written protest nor provide the supplemental information within 15 days as required by � 1-04.5. MMJ, by correspondence, did advise the County that it believed it was entitled to additional compensation. After MMJ struck the unanticipated buried phone lines in Seventh Avenue, the County verbally instructed MMJ to stop work until the County could redesign the project. This prevented MMJ from starting work on other streets during the approximately six weeks it took to complete its redesign. When MMJ sought to do work on other streets to try to keep on schedule, the County forced MMJ to quit. On August 7, 1998, the redesign was complete, and the County told MMJ to go back to work. However, a week later, on August 14, it was discovered that the County's design grades were erroneous. The County required MMJ to shut down again while the County corrected the problem. Daily and other periodic meetings took place between MMJ personnel and County personnel. MMJ later filed a lawsuit seeking compensation for its extra work. The County moved for summary judgment on the grounds that MMJ's claims for additional compensation were barred because MMJ failed to comply with the contractual protest and claim provisions. The trial court granted the County's motion and dismissed MMJ's clams. MMJ appealed and the Division Three Court of Appeals ruled in favor of MMJ on the ground that issues of fact existed regarding whether the County's "actual notice" of MMJ's claims excused MMJ from complying with the mandatory contractual protest and claim procedures. The County then appealed to the Washington State Supreme Court. Justice Madsen wrote the Court's five-to-four majority opinion. She was joined in that opinion by Justices Alexander, Bridge, Owens, and Fairhurst. The majority stated that "Washington law generally requires contractors to follow contractual notice provisions unless those procedures are waived," citing Absher Construction Co. v. Kent School District #415, 77 Wn. App. 137, 152, 890 P.2d 1071 (1995). 150 Wn.2d at 386. The majority went on and stated that: A party to a contract may waive a contract provision, which is meant for its benefit, and may imply waiver through its conduct. [Citations omitted.] Waiver by conduct, however, "requires unequivocal acts of conduct evidencing an intent to waive." Id. at 386. In rendering its decision, the majority addressed MMJ's contention that when an owner has actual notice of a contractor's protest or claim, that notice, in and of itself, excuses the contractor from complying with mandatory contractual protest and claims procedures, citing Bignold v. King County, 65 Wn.2d 817, 822, 399 P.2d 611 (1965). The majority disagreed, and with regard to Bignold stated: Rather, it was the owner's knowledge of the change conditions coupled with its subsequent direction to proceed with the extra work that evidenced its intent to waive enforcement of the written notice requirements under the contract. Id. at 388. The majority obviously found no direction to proceed from Spokane County to MMJ. The majority went on and found that the County had not waived MMJ's compliance with the contractual protest and claims provisions through its conduct. Important to the majority's conclusion in this regard was the fact that the County repeatedly asserted that it did not intend to waive any claim or defense or any contract provision. The Court rejected MMJ's contention that the County's continued negotiations evidenced the County's intent to waive MMJ's compliance with the contractual provisions. Justice Chambers provided an informative and vigorous dissent, which dissent was joined in by Justices Johnson, Sanders, and Ireland. Since this opinion was released there have been a number of attempts in the Legislature to create new law in response to this case, none of which have been successful. Posted in Change Orders, Claim/Notice Issues