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 Washington Supreme Court Get it Wrong?
In court rulings which predate MMJ, enthusiastic readers of Washington case precedent will find a lack of support for the notion that an element of prejudice is not required to enforce the contract notice provision
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 5 to 4 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 Washington cases which specifically hold that strict notice provisions can be waived where the owner suffers no prejudice. These cases are all cited in my 1998 article “Notice in Washington Construction Contracts: Is Prejudice the Issue” 52 Washington State Bar News 4 (1998). Somehow, the idea of prejudice was swept under the rug in MMJ and forgotten in this confusing legal precedent mess.
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 Washington to increase. Contractors, to avoid unreasonable forfeitures of claims, have increased their job administration to provide the owner correspondence and estimates to avoid waiving otherwise meritorious claims. On the other hand, owners have made the notice and claim procedures so complicated that it takes flow charts to unravel the various intricacies required for compliance. To deal with the onslaught of notice correspondence requires that the owner also increase their project staff, and the cost of this administrative battle on a construction site is paid by all taxpayers.
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.