Construction Law Blog
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As discussed in previous blog posts, a Termination for Convenience (“TforC”) clause allows a party (generally, the owner or general contractor) to stop work for just about any reason without having to pay for anticipated profit or unperformed work. Read more here and here. Recently, the Washington Court of Appeals decided SAK & Associates, Inc. v. Ferguson Construction, Inc. in which the Court held that all that is required to trigger a TforC clause is a statement that termination is being invoked for the convenience of the terminating party. Read more here.
Washington Court Strictly Enforces Default Provision, But a Material Breach Can Still Excuse Performance
The Washington Court of Appeals strictly enforced a default provision requiring notice and the opportunity to cure, but found that the party who failed to provide the notice could still contend a material breach occurred that excused its performance. In DC Farms LLC v. Conagra Foods Lamb Weston, Inc., a food processor was not excused from providing a contractually-required notice of default and opportunity to cure because it maintained that a farmer’s breach was incurable. 179 Wn. App. 205, 317 P.3d 543 (Div. 3, January 30, 2014). Failure to provide the notice of default and opportunity to cure was a breach of contract by the food processor.
Many contractors now carry professional liability insurance in addition to their commercial general liability insurance because of the prevalence of alternative procurement delivery methods, such as general contractor/construction manager and design-build contracts. In the wake of the recent Washington Supreme Court decision in W.G Clark Constr. Co. v. Pac. Nw. Reg'l Council of Carpenters, ___ P.3d ___ (Docket No. 88080-8) (2014), a decision by the United States District Court of Western Washington may give general contractors who do not already carry professional liability insurance another reason to think about procuring such insurance. Read more about the W.G. Clark Constr. Co. decision here.
Washington Supreme Court Overturns 30-Year Law Protecting General Contractors From Trust Fund Liens on Public Works Projects
Under Washington’s Public Works Statutes (RCW 39.08 and 60.28), general contractors who perform public works are legally required to post payment bonds and have retainage withheld from progress payments. The purpose of these laws is to protect the public entity (owner) from subcontractor and supplier claims against the public project, while preserving the interests of mechanic’s lien rights (subcontractors and suppliers are provided bond claim and retainage rights, but have no lien rights in the public property).
This is the second post in a two-part blog addressing construction contract terminations. Read our previous post on "Terminations for Convenience" here.
Lien Claimants Have a Right to be Paid Directly from the Construction Loan on Private Projects. This process is commonly referred to as a "Stop Payment Notice."
Recent Unpublished Washington Court of Appeals Opinion Concludes that Absent Waiver Language, Failure to Comply with a Contractual Claim Procedure Will Not Result in Forfeiture
This blog has frequently addressed contractual notice and claim procedures and the Mike M Johnson[i] line of decisions (for example, see blog articles from January 2, 2008, February 15, 2011, July 10, 2012). A recent unpublished decision by the Division I Court of Appeals is noteworthy because it holds that if a contract has a mandatory procedure for resolving claims, but does not state that the failure to follow that procedure will operate as a waiver of such claim, then a forfeiture will not be found despite lack of compliance.
Shepler Construction, Inc. v. Leonard,[ii] involves a residential construction dispute over a project performed in 2000 with an incredibly long litigation history dating back to 2002. The decision that is the subject of this article is the Court of Appeals’ third decision in the matter!
In 2001, the Contractor (Shepler) sent the Owner (Leonard) a letter recommending that the Owner should initiate the contractual dispute resolution process with respect to the Owner's allegations of construction defects. The Owner admittedly failed to respond and did not initiate the contractual process. The Contractor then filed a lien and brought a foreclosure action. In 2008, the Contractor obtained a Summary Judgment Order precluding the Owner from asserting counterclaims for construction defects on the grounds that the Owner failed to initiate binding arbitration as required by the parties' contract in order to resolve allegations of construction defects. That order is the subject of the appellate decision that is the subject of this article.
In dismissing the Owner's claims for construction defects, the trial court was persuaded that the Owner's breach of the agreement by failing to seek arbitration required dismissal of all of the Owner's claims for construction defects that should have been arbitrated. The Contract clause at issue provided:
If a dispute arises between owner and contractor as to the performance of contractor's obligations under this agreement, such disputes shall be resolved as follows:
Each party shall employ a contractor of his or her choice to evaluate the work completed. The contractors then will select a third contractor to act as an impartial arbiter. This contractor shall, likewise, inspect the construction to determine if the work has been performed in accordance with this agreement, applicable building codes and in a good workmanlike manner as provided hereinabove. If two of the three contractors determine that the work is not in conformity with the provisions of this agreement, then they shall state in writing the work in need of repair or replacement and contractor shall undertake to perform same as soon as reasonably practical. Contractor shall be responsible for owner's fees and costs associated with this arbitration as well as the impartial contractor's fees and costs. If no remedial work is recommended by the contractors, then the owner shall pay for the costs of the arbitration. The owner shall forthwith pay the amounts due to the contractor as established by a majority of the arbiters.
The Contractor argued to the Court of Appeals that under Absher Const. Co. v. Kent School District,[iii] and Mike M. Johnson v. County of Spokane, that the Owner's admitted failure to arbitrate its construction defect claims operated as a waiver of those claims. Division One, however, disagreed, on the grounds that unlike the contract language at issue in Absher and Mike M. Johnson, the contract between the Contractor and Owner did not explicitly provide that the failure to follow dispute resolution procedures constituted a waiver of claims. Division One ruled:
Shepler relies on Absher and Mike M. Johnson, Inc. v. Spokane County. This reliance is misplaced. Absher and Mike M. Johnson are distinguishable from the contract at issue here, because the contracts in those cases explicitly provided that failure to follow dispute resolution procedures constituted a waiver of those claims.
In addition, Division One held that waiver of the right to arbitrate does not mean the underlying claims are waived:
...Washington courts have long held that the contractual right to arbitration may be waived through a party's conduct if the right is not timely invoked. The right to arbitrate is waived by conduct inconsistent with any other intention but to forego a known right. Simply put, a party waives a right to arbitrate if it elects to litigate instead of arbitrate. The [Owners] filed their counterclaims in 2002. [The Contractor] did not assert arbitration as a defense or move to dismiss the [Owner’s] arbitrable claims on that basis until 2008. Both parties waived the dispute resolution clause by conduct.
Comment: This unpublished case provides guidance that the failure to comply with a contractual claim procedure may not give rise to forfeiture of the underlying claim if the contract clause at issue does not include language stating that the failure to comply will operate as a waiver of the claim. In addition, the decision reinforces that a mandatory contract provision can be waived by the party it benefits, which is another basis to defeat an argument that the failure to comply results in forfeiture.
[i] 150 Wn.2d 375, 78 P.3d 161 (2003).
[ii] Shepler Construction, Inc., v. Leonard, 68227-0-I (unpublished 2013).
[iii] 79 Wn. App. 841, 917 P.2d 1086 (1996).
Force Majeure - Allocating Risks For Unforeseen And Uncontrollable Events - Are Raccoons A Force Majeure Event?
Generally, construction contracts require the contractor to perform work until completion, or face damages and possible termination. In the wake of events such as Superstorm Sandy, Hurricane Katrina, and September 11th, however, contractors are becoming aware that events beyond their control can have serious implications on their ability to perform. Contractors are not clairvoyant and sometimes "stuff happens." Hurricanes, tornados, droughts, wildfires, and floods seem to be more common and more intense. These events may cause damage to the worksite and require demobilization, as well as affect the prices of materials and the time required to complete the project. This post explores the legal doctrine of force majeure, which is one of a handful of legal doctrines that deal with the effects of these unforeseeable and uncontrollable events on a contractor's ability to perform its contract.[i]
The French term "force majeure" means "greater force" and describes an event or condition that can be neither anticipated, nor controlled. Although the concept originates in Napoleonic law, it was quickly adopted by English, German, and American courts. Traditionally, when there was an "Act of God or the King's Enemies," performance could not be completed and the promisor was excused. The doctrine of force majeure shares historical ties with other legal concepts such as "physical impossibility" and "frustration of purpose," which excuse performance obligations (breach of contract) where external events cause the performance to be impossible or undermine the purpose of the agreement.
By far, the most common force majeure event is a natural disaster, including earthquakes, hurricanes, wildfire, tornados, floods, and droughts. But, force majeure events also include "man-made" events such as strikes, terrorism, scarcity, and government regulations. These types of events typically cannot be anticipated by the parties while drafting their contracts, but can have significant effects on the outcome of a construction project. A force majeure event may prevent performance, in whole or in part, for a short time or permanently. For example, a hurricane may require complete demobilization of the project, or a flood may only limit access to the site for a short term.
Not all unexpected events or conditions, however, are situations that will excuse performance of a contractual obligation. To obtain relief under the force majeure clause the contractor must generally clear three hurdles: First, something unexpected must occur. Second, the risk of the unexpected occurrence must not have been allocated to either party by the agreement. Finally, the unexpected occurrence must render performance commercially impracticable. If a contractor fails to protect itself from a foreseeable contingency, it has assumed that risk. Furthermore, a contractor is expected to take measures to prevent the harmful effects of uncontrollable events whenever reasonable - known as "mitigation." Reasonable weather protection measures should be employed even if the contractor has no notice of a "freak" storm brewing.
When there is no force majeure clause in the contract, the risk of loss for any unexpected or unforeseen event generally falls on the contractor. Since force majeure events are generally acts of nature (or God), it is said "because the same rain falls on the owner's head as on the contractor's" both parties share the risk; therefore, the contractor is entitled to a time extension, but not compensation. Therefore, if the event causes a delay in performance, a contractor could be allowed to raise the doctrine of force majeure to obtain an extension of time without penalty and as a defense against assessment of liquidated damages. Nevertheless, the contractor will not normally be permitted to recover losses or damages resulting from that delay. Moreover, contractors typically bear the costs to demobilize and remobilize, or repair work caused by an "Act of God" event.
It is not uncommon, therefore, for parties to include a force majeure clause in their contracts to limit the risk that a future event will prevent them from performing and subject them to liability. Force majeure provisions serve two purposes: allocating risk and providing notice to the parties of events that may suspend or excuse performance. If an event that triggers a force majeure clause occurs, theoretically, the burden will be borne by the party that assumed the risk.
Parties seeking to limit their exposure to a force majeure event should be careful, however, to use specific and detailed language in defining the scope and effect of a force majeure clause. The traditional boilerplate language contained in most force majeure clauses is too general and vague for modern circumstances because courts tend to narrowly interpret such language and limit its application to the events specifically listed. These provisions should address important questions, such as: What events or conditions are considered force majeure? Who is allowed to invoke the clause? What is the appropriate remedy where the clause is invoked? Which contractual obligations are covered by the clause? How should the parties determine whether the event creates an inability to perform? A strong force majeure clause will address these questions and more to protect the contractor from exposure to unexpected liability.
Comment: Where the contractor is able to show a force majeure event produced an excusable delay (one for which the contractor is entitled to a time extension), simply obtaining a contract extension of time is a hollow victory because acts of nature are generally deemed to be "non-compensable" by traditional allocation of contract risk doctrines. Thus, the contractor is entitled to an extension of time to complete the construction and protected from liquidated damages, but is not entitled to money damages for any of the additional costs attributable to the force majeure event. There are, however, a number of legal theories under which "Acts of God," such as adverse weather, may form a basis of a contractor's claim for compensable damages:
- Prior owner caused delays causes the contractor to encounter adverse weather: The Owner's change orders push the contractor into later performance when the force majeure event occurs, and but-for the owner's upfront delay, the contractor would not have encountered adverse weather.
- Excusable weather delays caused accelerated performance to stay on schedule: If the owner, after the force majeure event occurs, directs the contractor to maintain the original construction schedule, despite the contractor being entitled to an extension of time, the contractor may be entitled to compensation for the consequent acceleration.
- Acts of God/weather interacting with physical site conditions causing differing site conditions: This type of event turning weather related delays into compensable claims occurs quite frequently in the Pacific Northwest, which is known for its moisture sensitive soils. Soils that are acceptable backfill materials for utilities and embankment in good weather, when wet, turn into unusable materials requiring the import of pit run. Again, turning a weather event into a compensable event.
- Raccoons - a force majeure event: By far the most amusing example of a force majeure event came to my attention through Tom Cole, the lead estimator at Lydig Construction. Tom sent me an article about raccoons that were found atop a Ballard tower crane that was being used to build a 304 unit apartment complex. Apparently, the two raccoons climbed 150 feet up into the crane and made a home around the crane's cab. The contractor (Rafn & Company) had to call in animal control, who attempted to catch the critters employing humane traps.[ii] In this instance, the prime mover's, the tower crane, immobilization caused delay to the project. Unless the force majeure clause of the contract provided compensation to the contractor for force majeure events, the contractor's delay, caused by these two curious nocturnal bandits, entitled the contractor to a time extension, however, not to any compensation for the extended overhead, etc., caused by the delay.
- GC/CM Contracts: Alternative procurement contracts, such as the commonplace GC/CM (general contractor/construction manager) contracts in which the owner and contractor "partner" to build a project are commonplace in public and private construction. Contingencies are reduced or shared and markups are cut to the bone, and thus often include provisions in which the force majeure events are indeed compensable. The AIA contract A102 (the GMP Contract (2007)), without modification, places the cost risk of a force majeure event squarely on the contractor for costs that exceed the GMP. Thus, contractors performing GMP work should consider revisions to the force majeure clause, particularly when the fees are significantly cut because a force majeure event can have a drastic effect on a contractor's profitability if the contractor obtains no extended overhead compensation for the delay associated with the force majeure event.
[i] Source: Bruner & O'Connor Construction Law § 7:229 (2013).
[ii] Daily Journal of Commerce, February 8, 2013 “Raccoons Found Atop Ballard Crane.”
Contractor Dodges 'Notice Bullet' (Forfeiture Of Claim) In Recent Unpublished Court Of Appeals Case - Is This Case An Indication Of Changes To Come?
Northwest Infrastructure, Inc. ("NWI") was the site work subcontractor to PCL Construction Services, Inc. ("PCL") on the Central Puget Sound Regional Transit Authority ("Sound Transit"), Federal Way Transit Center.[i] NWI's subcontract incorporated PCL's prime contract with Sound Transit. The prime contract contained 20 day written notice requirement and a provision that if the contractor failed to provide notice within that timeframe, its claim was deemed waived. The project involved considerable excavation. NWI, during performance of the subcontract, contended that the contract quantities (in the prime contract) were understated. NWI made a claim against PCL which PCL passed through to Sound Transit. Sound Transit, after investigation, agreed the quantities stated in the contract documents were inaccurate and that NWI was entitled to compensation. Sound Transit and NWI were unable to agree on the amount of compensation and Sound Transit issued NWI, through PCL, a unilateral change order. Dissatisfied with the amount of compensation in the unilateral change order, NWI filed a claim in accordance with the contract.
In the course of investigating the claim, Sound Transit asserted that it discovered that NWI did not in fact rely on the contract documents in formulating its bid (Sound Transit implied that NWI knew of the quantity discrepancy when it bid the project). Sound Transit demanded return of the significant amount of compensation it paid to NWI in the unilateral change order.
1. Trial Court Decision. As we have advised our readers in past posts (Written Notice Requirements Part I, Part II, and Part III, American Safety v. City of Olympia, Contract Notice and Claim Clauses are Strictly Enforceable) and articles (Construction Contract Draconian Notice Provisions), generally, if the contract contains a notice provision and forfeiture clause in the event notice is untimely, the contractor, irrespective of the fact that the lack of notice causes no harm to the owner, will be deemed to have waived its claim. That tenet was pronounced in the infamous Mike M Johnson case.[ii]
Here, the court, in reliance on the Mike M. Johnson case, held that NWI had forfeited any rights to further compensation under the contract because in its initial claim (not the claim based on the unilateral change order), because NWI failed to follow the notice requirements of the contract, to the letter. The judge ordered NWI to pay Sound Transit's attorneys’ fees. The Court went on to dismiss Sound Transit's claims against NWI for fraud and for violation of the Consumer Protection Act.
2. Appellate Court Decision. This decision by the Court of Appeals is "unpublished," which in simple terms means that it cannot be used as authority in a court case. Nevertheless, the decision can provide guidance to mediators, arbitrators, or Dispute Review Board panels.
- Notice: On appeal the court determined that, although NWI missed the 20 day notice requirement in the prime contract for its initial claim, when Sound Transit issued its unilateral change order, the notice clock started over and NWI timely filed its claim regarding the unilateral change order (within 10 days as required by the prime contract). Thus, the Court of Appeals overruled the trial court and remanded the matter for further proceedings.
The lessons learned from this case are: (1) when in doubt always follow the contract notice requirements; (2) even if the owner issues a unilateral change order, follow the claim notice requirements of the contract to the letter (in this instance NWI saved itself a lot of grief by timely objecting to the Sound Transit unilateral change order); and (3) perhaps this case is an indication of the judges' abhorrence and reluctance to imply a forfeiture when the owner is not prejudiced by the lack of notice and thus may be a welcome beacon for future contractor notice issues.
- Fraud: The Court of Appeals also reinstated the Sound Transit fraud claim and Consumer Protection Act (CPA) claim against NWI. These two counter claims were based on the fact that Sound Transit believed NWI had misrepresented what it relied on the contract quantities and realized that was a mistake in the contract quantities at the time it bid the project. Sound Transit confessed NWI took advantage of the error, covered the mistake in its bid price, and was seeking double recovery in a fraudulent claim. NWI had moved to dismiss Sound Transit's fraud claim on grounds that it was untimely (barred by the statute of limitations) and that Sound Transit's Consumer Protection Act did not affect the public interest (one element of a CPA claim is it must affect the public interest). The Court of Appeals ruled that the fraud claim was timely and that, because Sound Transit is a public agency performing projects for the benefit of the public with tax dollars, that its claim does affect the public interest. Therefore, a Consumer Protection Act was proper against NWI and the case was remanded to the trial court for disposition.
A lesson learned for the contractor is the willingness of owners to raise fraud and Consumer Protection Act claims to defend against contractor requests for compensation appears to be gaining popularity. Counter claims of this nature have a chilling effect on the contractor's willingness to proceed with requests for compensation even when entitlement and quantum are established. The cost of defending against fraud and Consumer Protection Act claims, in many instances, simply outweighs the benefit of any potential recovery that can be gained from valid claims. Owners aware of the leverage such counter claims can have on contractors’ willingness to settle meritorious claims are showing more inclination to draw this sword to force a resolution of the dispute
[ii] Mike M Johnson Inc. v. Spokane County, 150 Wn.2d 375, 386, 78 P.3d 161 (2003).
The previous post on this subject covered examples of owners' notice provisions and the three (3) common hurdles found in those clauses. Today's article will address the issue of what purpose written notice in construction contracts serves and explore whether it is equitable to nevertheless harshly enforce the forfeiture provision in those instances where the purpose for the notice rule does not exist.
1. Purpose of Notice in Construction Contracts:
Generally, there are various reasons and rationales cited for written notice requirements in construction contracts. In the Lindbrook Const. v. Mukilteo Sch. Dist., Wn.2d 539, 452 P.2d 1 (1969), the Supreme Court cited the following four purposes for written notice clauses in construction agreements:
- To keep the owner informed as to his costs;
- To protect the owners from having to pay for work he does not want;
- To ensure that the work has been ordered; and
- To constitute evidence that the work, in fact, was extra.
In essence, these rationales all follow a common theme: that notice both allows the owner to participate and be part of the event giving rise to the claim and permits the owner to explore cost reduction options to mitigate the event. Such a proposition follows good common sense. The owner does not want to be stuck with extra work with costs it could have mitigated had it been advised of that extra work before it was performed.
This purpose of written notice is particularly important to a public owner. The notice and opportunity of a public owner to decide whether it is to commit funds over and above the contract price is essential. Does it make sense to deprive the contractor of its otherwise meritorious claim if an owner is informed orally as to the conditions on the site (in the event of a differing site condition) and has the opportunity to participate in and be part of the effort to remediate the differing site condition, but the contractor fails to submit its written notice and claim in strict adherence to the contract? In other words, if the purpose of the written notice requirement is satisfied, that is, the owner has had the opportunity to participate in and be part of the cure, isn't it punitive and against the principals of equity to imply that the contractor's failure to provide written notice amounts to a waiver of the contractor’s claim? Such reasoning was cast aside by the Washington Supreme Court when it decided Mike M. Johnson, Inc. v. County of Spokane, 150 Wn.2d 375, 78 P.3d 161 (2003). The Washington Supreme Court disregarded any notions of the lack of prejudice to the owner and announced that contractors will be held to strict technical compliance with the contract notice and claims provisions. The penalty for not complying with the contract notice provision is forfeiture of the claim, regardless of the lack of harm caused the owner by the failure to provide compliant written notice. This is a return to the once prevalent view of courts that contract notice provisions were bargained for and should not be swept aside. So much for a kinder and gentler world.
2. Did the
In court rulings which predate MMJ, enthusiastic readers of
The idea that an element of prejudice is not required to enforce construction contract notice provisions strictly originated from Absher Constr. Co. v. Kent Sch. Dist. No. 415, 77 Wn. App 137, 145, 890 P.2d 1070 (1995). In Absher, the court relied on Sime Constr. Co. v. WPPSS, 20 Wn. App 10, 16, (1980). The Sime case, however, is a prejudice case. The court denied the subcontractor's claims because the owner was prejudiced by the contractor's failure to comply with the 15-day notice requirement. The Sime court indicated that the owner had lost the opportunity to balance the desirability of the design improvement against the increased cost, therefore the notice provision was strictly enforced. Contrary to the statements in Absher, prejudice was specifically considered and weighed by the court in Sime.
Regrettably, the Absher decision appears to have borrowed heavily from the dissenting opinion in the Lindbrook Const. v. Mukilteo Sch. Dist., 76 Wn.2d 539, 452 P.2d 1 (1969), case, which was a 5 to 4 split decision (a harbinger of things to come, Mike M. Johnson is also a split decision). It is therefore particularly pertinent to note the importance of prejudice to notice in Lindbrook. The court in Lindbrook specifically held that the requirement of written notice was waived when the owner could show no prejudice as a result of the lack of strict compliance with the contract notice mandates.
Thus, if you have been following this reasoning thread, here is how it unwinds: Sime is a prejudice case. The court in Absher relies on Sime and the dissent in Lindbrook (also a prejudice case), and somehow arrives at the conclusion that prejudice is not an element necessary to enforce a contract notice provision. That reasoning is carried forward into the Washington Supreme Court decision in Mike M. Johnson. Stated simply, the notion that prejudice is not an element to enforce the contract notice provision rests on a very shaky legal foundation. There are a host of
It is a fundamental notion of American justice that disputes be resolved based on merits, not on procedure or simply because it costs too much to go to court. Justice Chambers' dissent frames this issue in his dissent in MMJ strictly:
"Under the majority's holding today, an owner can demand additional work outside the scope of the original contract, observe the contractor perform that work, discuss the work with the contractor, and yet deny fair compensation for services rendered if, within 15 days, and before the owner's plans are even completed, the contractor fails to submit a written request for additional time for the demanded work or fails to produce an itemized invoice in precise technical format."
The MMJ holding is unreasonable and out of step with actual practice in construction and construction law prior to MMJ. MMJ has caused the cost of contracting in the State of
The next blog post will explore how many construction owners, who could take advantage of the MMJ decision, have opted to stay with the prejudice standard. They do not report experiencing a flood of construction claims as a result of not falling into the MMJ trap of ever-increasing strict notice and claim procedures. The conclusion I draw is that strict notice bodes poorly for both construction and taxpayers.