September 27, 2018
Author: Jeremy T. Fitzpatrick
Organization: Kutak Rock LLP
I. Notice of Claims
A. Written and Timeliness Requirements for Claims
A construction claim is “a demand or assertion by one of the parties seeking, as a matter of right, payment of money, or other relief with respect to the terms of the contract.”1 Construction contracts frequently require parties to make claims in writing and within a specified time frame after the event giving rise to a claim. For example, the AIA A201(2007) General Conditions § 15.1.2 requires that claims must be made within twenty-one (21) days after the occurrence of the event giving rise to the claim or 21 days after the claimant first recognizes the condition giving rise to the claim, whichever is later. Other construction form documents contain similar claim notice requirements.
B. Failure To Comply With Notice Requirements
Failure to follow the contractual claims process can be fatal to a claim. For example, in Cameo Homes v. Kraus-Anderson Const. Co, the Eighth Circuit Court of Appeals barred a contractor’s claim for additional payment because the contractor had not provided contractually required notice of its claims, even though the contractor had submitted change-order requests during the course of the project that were rejected by the owner. 2
Cameo Homes was hired by the City of East Grand Forks, Minnesota to perform concrete work on four projects. The contracts between the City and Cameo incorporated AIA General Conditions that required any modifications be in writing.3 The General Conditions further required Cameo to present written notice of any claim to the architect within 21 days of the event giving rise to the claim.
Disputes arose between Cameo and the City during the course of the projects.4 Cameo proceeded with the work without obtaining signed change orders covering the cost of the work.5 Following the completion of the projects, Cameo filed suit against the City, despite the fact it did not give the contractually mandated notice to the architect.6 Cameo sought damages for breach of contract as a result of the failure of the City to pay it for additional expenses, as well as other claims. The trial court granted a motion to dismiss filed by the City because it found Cameo had failed to give proper notice of its claims as required by the contract.7
Cameo appealed, arguing that the parties had adopted a practice that allowed change order requests to be submitted through the construction manager on the project after work had already been performed, rather than to the architect. Cameo also argued that submitting change order requests was the same as submitting a claim under the contract.8 The Eighth Circuit disagreed, finding Cameo failed to demonstrate that its “submission of change order requests to [the construction manager] was effectively equivalent to submission of claims to the architect.” The Eighth Circuit found the contract between the parties “provided for amendment only by written modification” and that the parties had not amended the claims process in writing.9 The Eighth Circuit accordingly found that Cameo’s claims were barred because Cameo had not followed the notice provisions in the contract:
Cameo failed to give written notice to the architect of its breach of contract claims
against the City as required by the contract . . . [Cameo] is therefore contractually
barred from bringing them [now].10
See also Commonwealth of Virginia et al. v. AMEC Civil, LLC (finding “actual notice cannot satisfy the [statutory] written notice requirement” governing claims against the state)11; Hartford Cas. Ins. Co. v. MDI Const., L.L.C. (“The law of the contract is clear: Any claim relating to the Contract must be initiated by written notice to the project architect and the other party within twenty-one days after occurrence of the event giving rise to the claim (or within twenty-one days after the claimant first recognizes the condition giving rise to the claim).”).12
C. Waiver of Contractual Notice Provisions
On the other hand, Nebraska construction cases recognize that formal contractual requirements can be waived by the conduct of the parties. For example, in Griffin v. General Industries, Inc., the Nebraska Supreme Court held formal change requirements that were a condition precedent to additional compensation under a contract were waived when a party “knew about the additional work . . . and its conduct indicated approval and authorization for the work to proceed” without requiring written authorization for the change.13 The court found that “where the parties ignore . . . a provision in the contract [requiring prior approval of a quotation for additional work] it will not furnish a defense to a claim for compensation for the additional work performed.”14
The Nebraska Supreme Court later confirmed its holding that formal change order requirements can be waived in D.K. Meyer Corp. v. Bevco, Inc.15 D.K. Meyer involved the construction of a church. Meyer served as subcontractor, installing a roof-support structure on the project.16 When the roof support structure did not fit, “[a]ll parties to the . . . project agreed that modifications were necessary for the completion of the project, which modifications were performed by Meyer.”17 The court found that it was “apparent . . . that the parties, including Meyer and [the general contractor] inferentially agreed to the modifications.”18 The general contractor, however, later refused to pay for the modifications because Meyer had failed to “first receiv[e] a written change order” as required by its contract with the general contractor. The Nebraska Supreme Court found that the general contractor had waived its ability to enforce the written change order provision because “the parties herein ignored the provision of the contract requiring a written change order prior to the modification of the project.”19
Other courts and commentators recognize that written change order requirements can be waived by the parties. As described by one commentator:
Under many circumstances, the enforcement of [a written change-order clause]
would work injustice and result in the unjust enrichment of an owner at the
expense of a contractor. Legal doctrines of waiver . . . estoppel . . . abandonment
. . . novation . . . and separate contract . . . are employed by courts to avoid the
requirement that extra work orders be in writing.20
However, relying on a court to find claim-notice requirements have been waived is risky. It also is expensive, given the amount of discovery typically needed to make a case for waiver. Parties would be well advised to follow any contractual notice requirements to the maximum extent possible as a practical matter.
D. Waiving Claims Through Change Orders
Parties also should be aware of the potential for change orders to extinguish claims outside the scope of the direct costs of the change orders, such as claims for delay or extended general conditions costs. Under Nebraska law, an accord and satisfaction is “a discharge of an existing indebtedness by [1] the rendering of some performance different from that which was claimed as due and [2] the acceptance of such substituted performance by the claimant in full satisfaction of the claim.”21 To constitute an accord and satisfaction, “there must be (1) a bona fide dispute between the parties, (2) substitute performance tendered in full satisfaction of the claim, and (3) acceptance of the tendered performance.”22 “The key element of accord and satisfaction is the intent of the parties, which, although as a general rule presents a question of fact, becomes a question of law when the evidence creates no conflict as to intent.”23 Contractors and designers executing change orders should be wary of potentially waiving claims not reserved in the change order, because “an executed bilateral contract modification that contains no reservations” can constitute an accord and satisfaction of a claim.24 Therefore, “[a] common controversy that arises is whether executed change orders cover the increase in costs associated with the effects of numerous changes on the unchanged work . . . sometimes referred to as impact or cumulative impact costs.”25 Owners frequently seek language in change orders that expressly “limit[s] their liability [through] contractor waivers.”26 On the other hand, contractors “frequently seek to limit change order negotiations to address only the ‘direct cost’ of the changed work, and to reserve their rights to pursue later additional claims for disruption impact damages ‘when the full extent of the impact becomes known.’”27
Contractors and designers therefore should carefully scrutinize the language of change orders they are presented to ensure that the change orders only cover the items for which they are being compensated. Failure to do so can result in waived claims.
On the other hand, even express release language in change orders may not affect an accord and satisfaction of all claims. In Axion Corp. v. U.S., decided by the Court of Federal Claims in 2005, the parties entered into a series of change orders that expressly provided that they “constitute[d] a full and final disposition of all matters relating to this contract” and were “a full release and accord and satisfaction of any and all claims, demands, or causes of action . . . related to the contract to date.”28 Despite this language, the court found that summary judgment was inappropriate for the released party because the releasing party “may have agreed to the modifications based on its mistaken belief as to the scope of the release.”29
II. Role of the Initial Decision Maker/Architect
Under Nebraska law, “[g]enerally, the courts have held that parties to a contract may agree that classification, quantity and quality of work done or things furnished shall be left to the judgment of a third person and his estimate or decision shall be final” and that the decision of “one so authorized” would be binding upon the parties absent fraud, gross mistake or a failure to exercise an honest judgment.30 In cases where the parties have designated such a third person, the judgment of the third person will not be disturbed unless their decisions are based on gross mistakes as would imply bad faith; where there is not a reasonable basis for the architect’s decisions or they are patently erroneous.31
The AIA General Conditions provide the Initial Decision Maker (commonly the architect) will render an “initial decision” as to the claims between the parties.32 (General Conditions § 15.2.5). The A201 also provides that such “initial decision shall be final and binding upon the parties but subject to mediation and, if the parties fail to resolve their disputes through mediation, to binding dispute resolution.” The A201 further provides that if parties elect to pursue binding dispute resolution following an initial decision with which they did not agree, the binding dispute resolution would then be the final decision in the matter.33
The default AIA language is somewhat imprecise as to the intent of the parties with respect to the deference due to the Initial Decision Maker related to claims read in the context of whether Radec deference is required by a reviewing court or arbitrator. Out of an abundance of caution and to make the issue clear, the AIA language should be revised to make clear that the “but subject to” language is an indication that a reviewing court or arbitrator will conduct an independent review of the issues involved in a claim and will not defer to the Initial Decision Maker’s determination. Parties also should be aware that contract language which provides that a third party shall have final decision-making authority in an issue between the parties likely will be upheld and enforced.
III. Claims for Consequential Damages
The availability of consequential damages, or their waiver, can be one of the most significant issues in a construction contract. Consequential damages “do not arise directly according to the usual course of things from the breach itself; rather, they occur as a consequence of special circumstances known or reasonably supposed to have been contemplated by the parties when the contract was made.”34 They are “[l]osses that do not flow directly and immediately from an injurious act but that result indirectly from the act.”35 As stated in the Nebraska Jury Instructions, consequential damages are “the actual result of the specific injury suffered, but not the necessary result of the kind of injury suffered.”36
As a practical matter, the determination in a particular dispute of what is a consequential damage as opposed to a direct damage can present some difficulty. See DaimlerChrysler Motors Co., LLC v. Manuel (“Despite the vast number of cases purporting to define ‘consequential damages’ by repeating the same time-honored but general definitions and distinctions between consequential and direct damages, the meaning remains elusive.”).37 Examples of consequential damages identified in Nebraska cases include loans that were required to be carried for longer than planned due to a fire on a construction project; the loss of crops after an herbicide was applied to them; and loss in milk production caused by a dairy farmer’s use of a cattle feed supplement.38
Consequential damages waivers are enforceable under Nebraska law. See 9th Street Apt. L.L.C. (examining the consequential damages and loss-of-use waivers at issue in this case and finding, “We conclude that the parties’ waiver of consequential damages is valid and that public policy favors enforcement of the waiver . . .”). 9th Street involved the involved a building in Omaha which was damaged by fire during its conversion into and commercial complex. The owner and the contractor had entered into a contract with the same consequential damages and loss-of-use waivers (barring consequential damages, including, but not limited to, damages for “losses of use” and “rental expenses” and barring “all rights of action against [the contractor] for loss of use of the Owner’s property.”). At issue in 9th Street was whether the consequential damages waiver in the contract barred the Owner’s claims for, among other things, several loans which the plaintiff was required to carry on the building for a longer period of time than it would have as a result of a fire, and repayments the Owner had to make to an investor for historic tax credits the building would have produced without the fire. The Court affirmed the trial court’s finding that those loan carrying costs and tax credit liquidation costs were barred consequential damages which “did not flow directly from the fire, but rather, . . . resulted indirectly from the fire and the destruction of the . . . [b]uilding.”39
IV. Insurance
As a practical matter, significant claims on a project may be difficult to resolve without the benefit of insurance to pay for the costs involved with the claims. Unfortunately, one of the most overlooked issues in drafting construction contracts is a discussion among the parties about what insurance is available for the project, what are the restrictions on such insurance coverage, and whether the proper steps have been taken to extend that coverage to the required parties on the project. Addressing those issues before a contract is signed can reduce many problems after claims for which insurance may be available develop.
For example, the additional insured endorsement in a project participant’s CGL policy may restrict the coverage limits available to the additional insured to only those required in the contract between the parties. Such a provision can result in situations where the additional insured is provided with less coverage than actually is available on the primary insured’s policy. Similarly, a CGL policy’s additional insured coverage also may be restricted to ongoing or completed operations, or have other restrictions. Taking these and other provisions into account, and adjusting them as possible before a project begins will greatly ease the ability to deal with the inevitable claims that arise on a project when they do occur.
V. Claim Resolution
The promise of arbitration as a quicker and less expensive to litigation too rarely holds true in the context of construction disputes of any significance. Therefore, as a practical matter, parties seeking to circumvent the costly and extended process of resolving the claim disputes that arise on construction matters should consider not waiting until the project is concluded to address their disagreements.
Options for resolving claims during the pendency of a project vary from holding periodic hearings with formal dispute review boards to engaging a mediator to hold regular sessions with the parties on a regular basis to review outstanding issues. Whatever method is chosen, hiring an individual (or individuals) with dispute resolution experience at the outset of the project and making those individuals familiar both with the terms of the contract between the parties as well as the disputes that occur on the project as they are happening in real time can, depending on the circumstances, provide a real opportunity to resolve disputes before lawsuits and scheduling conferences and e-mail discovery and the like become an often much more expensive way of achieving that resolution.
1 AIA A201(2007) § 15.1.1.
2 Cameo Homes v. Kraus-Anderson Const. Co., 394 F.3d 1084 (8th Cir. 2005).
3 Id. at 1084.
4 Id. at 1086.
5 Id.
6 Id. at 1086-1087.
7 Id. at 1087.
8 Id. at 1087-1088.
9 Id. at 1088.
10 Id.
11 Commonwealth of Virginia et al. v. AMEC Civil, 280 Va. 396, 699 S.E.2d 499 (Va. 2010).
12 Hartford Cas. Ins. Co. v. MDI Const., L.L.C., 2012 WL 4970210 (E.D. La. 2012).
13 Griffin v. Geneva Industries, Inc., 193 Neb. 694, 697, 228 N.W.2d 880, 882 (1975).
14 Id.
15 D.K. Meyer Corp. v. Bevco, Inc., 206 Neb. 318, 292 N.W.2d 773 (1980).
16 Id. at 320, 292 N.W.2d at 774.
17 Id.
18 Id..
19 Id. at 321, 322, 292 N.W.2d at 775.
20 James Acret, Construction Litigation Handbook 2d § 6:4 (2006).
21 Lone Cedar Ranches, Inc. v. Jandebeur, 246 Neb. 769, 775, 523 N.W.2d 364, 369 (1994).
22 Simons v. Simons, 261 Neb. 570, 575-76, 624 N.W.2d 36, 40 (2001).
23 Mahler v. Bellis, 231 Neb. 161, 164, 435 N.W.2d 661, 664 (1989).
24 C&H Commercial Contractors, Inc. v. United States, 35 Fed. Cl. 246, 252 (Fed. Cl. 1996).
25 Philip L. Bruner and Patrick J. O’Connor, Jr., 2 Bruner & O’Connor on Construction Law § 7:153 (2006).
26 Jean M. Boylan and Barbara R. Gadbois, The Abandonment-of-Contract Doctrine in Construction Disputes, Los Angeles Lawyer (January 2002).
27 Philip L. Bruner, Disruption of Work, Construction Briefings, No. 2001-11 (2001).
28 Axion Corp. v. United States, 68 Fed. Cl. 468, 472 (Fed. Cl. 2005).
29 Id.
30 Radec Construction, Inc. v. School District No. 17 of Douglas County, 535 N.W.2d 408, 411 (Neb. 1995).
31 Id.
32 AIA A201(2007) § 15.2.5.
33 AIA A201(2007) § 15.4.2.
34 Adams v. American Cynamid Co., 1 Neb. App. 337, 353, 498 N.W.2d 577, 588 (Neb. Ct. App. 1992).
35 9th Street Apt. L.L.C. v. DRA Anderson Constructors Co., 2009 WL 3260661 at *6 (Oct. 6, 2009) (unreported).
36 NJI2d Civ. 4.59.
37 DaimlerChrysler Motors Co., LLC v. Manuel, 362 S.W.3d 160 (Tex. Ct. App. 2012).
38 See 9th Street, 2009 WL 3260661 at * 6; Shotkoski v. Standard Chemical Mfg. Co., 195 Neb. 22, 29, 237 N.W.2d 92, 97 (Neb. 1975); Adams v, American Cyanmid Co., 1 Neb. 337, 498 N.W.2d 577 (Neb. Ct. App. 1992).
39 9th Street, 2009 WL 3260661 *8.