October 04, 2018
Author: John S. Finn
Organization: Benjamin, Bain, Howard & Cohen, LLC
A. General Notice Issues for Claims
Notice clauses in construction contracts are an extremely important consideration for all of the contraction professionals included on a project. Notice clauses are intended to provide the owner, general contractor, subcontractor or design professional with information associated with changes to the construction project, claims for additional contract time or contract cost, differing site conditions, extra work, events that may affect contract performance as well as notice prior to a party taking action with respect to contract termination or supplementing the workforce of a contractor. A typical notice clause with respect to claims and disputes is as contained in the AIA A201-2007 at Paragraph § 15.1.2. That section states as follows:
§ 15.1.2 NOTICE OF CLAIMS. Claims by either the Owner or
Contractor must be initiated by written notice to the other party and to the
Initial Decision Maker with a copy sent to the Architect, if the Architect is
not serving as the Initial Decision Maker. Claims by either party must be
initiated within 21 days after occurrence of the event giving rise to such
Claim or within 21 days after the claimant first recognizes the condition
giving rise to the Claim, whichever is later.
This is just one of many specific clauses in the AIA A201-2007 document referring to notice. In fact, the index to the AIA A201-2007 document contains more than 19 references to the term "written notice" relating to the various events which might occur during a construction project. The form also then references specific requirement for both claims for cost and claims for time.
§ 15.1.4 CLAIMS FOR ADDITIONAL COST. If the Contractor wishes
to make a Claim for an increase in the Contract Sum, written notice as
provided herein shall be given before proceeding to execute the Work.
Prior notice is not required for Claims relating to an emergency
endangering life or property arising under Section 10.4.
§ 15.1.5 CLAIMS FOR ADDITIONAL TIME
§ 15.1.5.1 If the Contractor wishes to make a claim for an increase in the
Contract Time, written notice as provided herein shall be given. The
Contractor's Claim shall include an estimate of cost and of probable effect
of delay on progress of the Work. In the case of a continuing delay, only
one Claim is necessary.
A notice provision provides the construction professional with two distinct elements which are essential for it to manage its project. The notice provision provides the construction professional with information that an event has occurred which may change the contract requirements and will, therefore, affect the project. The second aspect is that the notice provision may provide the owner, general contractor, subcontractor or design professional with knowledge that another party with whom it is contracting will seek additional time or money as a result of events which have occurred on the project. This second aspect of all notice provisions allows the party that may be responsible for additional costs or a delay to the project to participate in the decision as to how best to approach whatever circumstances are changing in the construction process.
Often times, a subcontractor or general contractor will argue that the owner knew of the event which may result in changes to the contract thereby minimizing the need for a formal written notice. It is, however, a much different analysis for the owner or contractor to know that a change event has occurred and is simply going to change the method by which the project will proceed or that a change has occurred and one of the parties will be seeking additional money or additional time. Differing site conditions is a prime example since a differing site condition may be something that a contractor will simply deal with using a different piece of equipment or method or it may be something that the owner will need to address in revised plans and specifications. To the same extent in instances of contract termination or a decision to supplement a contractor's work force, a formal written notice distinguishes between the mountain of paperwork exchanged between the parties relating to the day to day matters which need to be addressed by the various construction entities versus a clear understanding that unless a party takes immediate action, the contract relationship may end or a contracting party may be asked to be responsible for significant additional costs which will be incurred by the party providing notice.
Unfortunately, notice clauses in many construction contracts have taken on a second purpose unrelated to the above valid reasons for notice clauses. Many construction contracts contain notice provisions which are so onerous or difficult to comply with that the purpose of the notice clause is not to assist the various entities in managing the project, but rather, to eliminate claims or time extension no matter how valid they may be, thereby eliminating changes to the contract time or contract price. These types of contract notice provisions unnecessarily increase the stress level of all parties to a construction project, take advantage of the less sophisticated parties whether owners or contractors and certainly needlessly add to project paperwork.
For example, a contract clause that requires notice within 24 hours of the occurrence of any event possibly leading to additional time or additional money, may actually force a contractor to provide almost daily notice to an owner that events have occurred and that it is impossible at that point in time to determine whether additional time or additional money will be required but notice is one the less being given for fear that latter is the process a party to the project may deny a claim based on lack of notice. The best approach is the approach contained in the A201-2007 document which provides a longer period of time to identify a changed event and provide notice while not allowing a contractor or owner to go an indefinite period of time before advising the other party on items which may require changes to the contract time or contract money. It is important to note that many notice clauses in standard contract forms place an equal obligation on contractors and owners to provide notice of claims.
In negotiating notices clauses, the owner, general contractor, subcontractor and design professional, should be aware of the realities of the construction process, as well as an understanding of the needs of the various parties to control costs and the schedule, as well as take a proactive approach to the inevitable changes during the construction process. With this in mind, the parties should agree on a reasonable period to provide notice of events which will not unduly create project paperwork but will maintain open lines of communication as to potential events during the construction project which will affect all of the parties. Many notice clauses require both a notice of the happening of an event, as well as requirements to submit backup information to support claims within a second, longer period of time. Those clauses should similarly take into account the fact that changes to the contract may require a contractor to obtain additional bids, seek information as to the availability of materials and effectively plan the changed work within the project schedule.
From a contractor's perspective, the contract clauses should be strictly complied with and every project manager should, at the beginning of a project, highlight all of the time requirements contained in the construction documents in order that they are in a position to answer the question on a daily basis whether events have occurred which require the contractor to provide notice to the owner, a design professional or other contractors of any tier according to the contract language. The danger of not doing so is tremendous and the explanation that the contractor failed to provide required notice because they did not want to create animosity on the project site, is often no excuse when timely notice is not provided.
Litigation with respect to excuses for failure to provide timely notice deal with issues of waiver and estoppel, actual knowledge, lack of prejudice, impossibility of performance and bad faith. A waiver has been defined in 13 Williston on Contracts, Section 39:28 as a clear, unequivocal and decisive act of a party who is claimed to have waived its rights, so consistent with an intention to waive that no other reasonable explanation is possible. See also, Department of Health v. Donahue, 690 P.2d 243 (Colo.1984), Grimm Construction Co., Inc. v. The Denver Board of Water Commissioners, 835 P.2d 599 (Colo. App. 1992), Transpower Constructors v. Grand River Dam Authority, 905 F.2d 1413 (10th Cir. 1990).
Estoppel relates primarily to the actions of another party which would make it inconsistent for them to argue at a later date that it had not agreed to whatever changes or modifications to the contract the opposing party is asserting. The Colorado Jury Instructions at 30:25 define the concept of estoppel in the context of a claimed breach of contract:
1. The claimant by its words or conduct or by remaining silent when it had a duty to speak and protest the actions of the other party represented to the other party that it was waiving, excusing or forgiving the other party’s breach of contract.
2. The other party reasonable relied on that representation.
3. The other party materially changed their position; and
4. The change was to the other party’s disadvantage.
Obviously, the parties are better off strictly following the contract terms and conditions than in relying on defenses to an assertion that a party failed to give proper notice.
B. Notice of Termination
Most standard construction contracts include provisions allowing either party to the contract to terminate upon certain designated defaults. An example of this type of provision is the Termination for Cause provision found at Paragraph 14.2 of AIA Document A201-2007. Paragraph 14.2.1 of this provision states:
The Owner may terminate the Contract if the Contractor:
§ 14.2.1 The Owner may terminate the Contract if the Contractor
.1 repeatedly refuses or fails to supply enough properly skilled workers or proper materials;
.2 fails to make payment to Subcontractors for materials or labor in accordance with the respective agreements between the Contractor and the Subcontractors;
.3 repeatedly disregards applicable laws, statutes, ordinances, codes, rules and regulations, or lawful orders of a public authority; or
.4 otherwise is guilty of substantial breach of a provision of the Contract Documents.
In the absence of a provision like this, the common law will allow a party to terminate a contract for a variety of things including failure to make contractually required payments and for a material breach of the contract. The Practitioner’s Guide to Colorado Construction Law 10-7 (Robert E. Benson et al. eds., 2003) (citing Johnson v. Bovee, 574 P.2d 513 (Colo. App. 1978) and Carfield & Sons, Inc. v. Cowling, 616 P.2d 1008 (Colo. App. 1980)).
The Court of Appeals in Carfield & Sons addressed the issue of what constitutes a material breach. In that case the Court of Appeals found that a breach of contract does not terminate the obligations under the contract unless that breach is a major breach going to the essential condition of the contract. Carfield at 1010. Paragraph 14.2.1.4 of the AIA Document shown above requires that there be a substantial breach of the contract for a termination to take place. Although the document does not define substantial breach, the courts will look to a definition such as the discussion presented in Carfield. In the event that an owner does terminate for cause, it has several courses of action available to it under AIA document A201-2007. These include taking possession of the site and all materials, equipment, tools, and construction equipment of the contractor (see Paragraph 14.2.2.1), accepting assignment of subcontracts (see Paragraph 14.2.2.2), and finishing the work by whatever reasonable method the owner may deem expedient (see Paragraph 14.2.2.3). If the owner finishes the work under the contract and the costs of finishing are less than the unpaid balance of the contract sum, than the excess shall be paid to the contractor, but if the costs are higher the contractor is liable to the owner for the difference. See AIA Document A201-2007 ¶ 14.2.4.
An important aspect of a contract termination is the notice requirement. With respect to contract termination by an owner, the pertinent paragraph of AIA Document A201-2007 reads as follows:
14.2.2 When any of the above reasons exist, the Owner, upon certification
by the Initial Decision Maker that sufficient cause exists to justify such
action, may without prejudice to any other rights or remedies of the Owner
and after giving the Contractor and the Contractor’s surety, if any, seven
days’ written notice, terminate employment of the Contractor and may,
subject to any prior rights of the surety:
.1 Exclude the Contractor from the site and take possession of all
materials, equipment, tools and construction equipment and
machinery thereon owned by the Contractor;
.2 Accept assignment of subcontracts pursuant to Section 5.4; and
.3 Finish the Work by whatever reasonable method the Owner
may deem expedient. Upon written request of the Contractor, the
Owner shall furnish to the Contractor a detailed accounting of the
costs incurred by the Owner in finishing the Work.
If a contract incorporates this document or a similar termination provision, an owner or contractor will be well advised to read the language closely and follow the procedure established in the provision. Failure to provide proper notice as outlined in a contract termination provision might render the termination invalid. This could result in the owner or contractor that was attempting to terminate the contract, being held liable for their own beach of the contract. This contract also distinguishes termination from supplementing the Contractor's Work force. In that case, an Owner must provide a notice and right to cure. See Paragraph 2.4:
§ 2.4 OWNER'S RIGHT TO CARRY OUT THE WORK
If the Contractor defaults or neglects to carry out the Work in accordance
with the Contract Documents and fails within a ten-day period after
receipt of written notice from the Owner to commence and continue
correction of such default or neglect with diligence and promptness, the
Owner may, without prejudice to other remedies the Owner may have,
correct such deficiencies. In such case, an appropriate Change Order shall
be issued deducting from payments then or thereafter due the Contractor
the reasonable cost of correcting such deficiencies, including Owner's
expenses and compensation for the Architect's additional services made
necessary by such default, neglect or failure. Such action by the Owner
and amounts charged to the Contractor are both subject to prior approval
of the Architect. If payments then or thereafter due the Contractor are not
sufficient to cover such amounts, the Contractor shall pay the difference to
the Owner.
Compare this language to the language contained at paragraph 7.2.1 of the AIA A-401-2007 contract between a contractor and subcontractor. This clause states:
§ 7.2 TERMINATION BY THE CONTRACTOR
§ 7.2.1 If the Subcontractor repeatedly fails or neglects to carry out the
Work in accordance with the Subcontract Documents or otherwise to
perform in accordance with this Subcontract and fails within a ten-day
period after receipt of written notice to commence and continue correction
of such default or neglect with diligence and promptness, the Contractor
may, by written notice to the Subcontractor and without prejudice to any
other remedy the Contractor may have, terminate the Subcontract and
finish the Subcontractor's Work by whatever method the Contractor may
deem expedient. If the unpaid balance of the Subcontract Sum exceeds
the expense of finishing the Subcontractor's Work and other damages
incurred by the Contractor and not expressly waived, such excess shall be
paid to the Subcontractor. If such expense and damages exceed such
unpaid balance, the Subcontractor shall pay the difference to the
Contractor.
This paragraph contains not only a notice provision, but a right to cure by commencing and continuing correction of any default or neglect with diligence and promptness. The notice and right to cure provisions are critical to both contractors and owners and provides a key element in the construction context that the notice letter being forwarded by the party claiming a default considers the current issue to be one which could result in termination of the contract or a party leaving the project site.
The notice must generally be specific with regard to the deficiencies that exist in the work performed and it is recommended that the language of the notice inform the breaching party that the purpose of the notification is to terminate or exercise other contract rights established in the default clause. As with all contracts in Colorado, a notice and right to cure clause will be read in the context of the implied duty of good faith and fair dealing. New Design Construction Company, Inc. v. Hamon Contractors, Inc., 213 P.3d 1172 (Colo. App. Div 2, 2008). Care must be taken in determining when a cure has been undertaken even if the complete cure is not completed during the applicable designated period.
In Blaine Economic Dev. Auth. v. Royal Elec. Co., 520 N.W.2d 473, (Minn. App. 1994) the parties entered into a construction contract requiring the owner to provide written notice and seven days in which to cure before termination. After problems arose on the project relating to Royal’s performance, Blaine held a meeting to discuss these problems. Blain provided Royal with a notice that its attendance was required at the meeting. At the meeting, Royal was presented with a written agenda of issues to be discussed. Approximately a week and a half after receiving the notice to attend the meeting, Royal was ordered to stop work and leave the job site. Blaine filed suit against Royal for breach and Royal counterclaimed that it was wrongfully terminated. With respect to the wrongful termination claim, Blaine argued that the notice to attend the meeting and the written agenda constituted the notice that Royal was required to provide.
The Court of Appeals disagreed and stated that “a provision in a contract for the termination thereof upon certain conditions can be enforced only in strict compliance with the terms of those conditions…The contract cannot be arbitrarily terminated.” Blaine at 476. The Court of Appeals held that the notice and agenda only described problems on the site and failed to direct Royal to take any action to cure. Id. at 477. It’s also important to note that the AIA termination provision requires that the Contractor’s surety also be provided notice of the termination. This is important, as courts in some jurisdictions have ruled that failure to provide notice to a surety will release the surety from liability. See City of Whitehall v. Southern Mechanical Contracting, Inc. and Highlands Insurance Co., 599 S.W.2d 430 (Ark. App. 1980) (no basis for judgment against surety when it was not provided notice as required by the express terms of the contract.); See also Winston Corp. v. Continental Casualty Co., 508 F.2d 1298 (6th Cir. 1975) (the court held that a mere technical breach of a surety contract, not resulting in damage or prejudice to the surety, will not release it from its obligations.) Just as the AIA A-401-2007 document provides for termination by the contractor, it also provides a clause for termination by the subcontractor at paragraph 7.1.1. This paragraph reads as follows:
§ 7.1 TERMINATION BY THE SUBCONTRACTOR. The
Subcontractor may terminate the Subcontract for the same reasons and
under the same circumstances and procedures with respect to the
Contractor as the Contractor may terminate with respect to the Owner
under the Prime Contract, or for nonpayment of amounts due under this
Subcontract for 60 days or longer. In the event of such termination by the
Subcontractor for any reasons which is not the fault of the Subcontractor,
Sub-subcontractors or their agents or employees or other persons
performing portions of the Work under contract with the Subcontractor,
the Subcontractor shall be entitled to recover from the Contractor payment
for Work executed and for proven loss with respect to materials,
equipment, tools and construction equipment and machinery, including
reasonable overhead, profit and damages.
A topic that often comes up in discussing standard subcontract forms as between a general contractor and a subcontractor relates to whether it is advisable for the general contractor to include a specific notice and right to cure clause that the subcontractor must follow similar to the clause governing the general contractor's rights. Regardless of whether a contract clause exists relating to the subcontractor's rights to terminate the subcontract for breach, the subcontractor would have such rights and the court would apply the case law as to whether a material breach existed entitling the subcontractor to terminate the subcontract agreement. With this in mind, it is difficult for a general contractor to argue that the insertion of such a termination clause is not advisable in a subcontract agreement since it clearly provides a mechanism for both parties to address perceived breaches of contract before the parties get to a stage of terminating the contract and ending up in court or in an arbitration proceeding to determine whether a material breach occurred during contract performance.
C. How to Provide Notice
A contract clause that often works together with the notice and right to cure clause is a general contract clause relating to how notices are provided pursuant to the terms and conditions of the contract. It is common in construction contracts for there to be a separate clause defining the manner in which notice is provided and setting forth the effective date of the notice.
If parties to a construction contract are at the point where a specific written notice is being provided, they are well advised to be certain that the notice clause is carefully followed and fully complied with. It is equally important that if notice is being provided by facsimile or other electronic means, that the parties maintain permanent records establishing that the notice in compliance with the notice clause was effectively given. An example of a notice clause which covers all of the various methods of delivery of notice is as follows:
All notices which may or are required to be given by either party to the
other shall be in writing and shall be deemed received, (a) the day of hand
delivery; (b) the day of receipt of a facsimile, (c) three (3) business days
after sending by United States Mail, postage prepaid, or (d) the date of
transmission by e-mail to the address established by Section ___ and
authorized by Section ___.