Contractor Dodges 'Notice Bullet' (Forfeiture Of Claim) In Recent Unpublished Court Of Appeals Case – Is This Case An Indication Of Changes To Come?
- Posted by John P. Ahlers
- On March 21, 2013
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).