The previous two blog posts (Part I and Part II) examined elements of common written notice clauses and the purpose of written notice. This post will address why the largest public owners, who procure the greatest volume of construction work throughout Washington and the world, have opted to include the prejudice standard of written notice in their construction contracts, the MMJ decision notwithstanding.
After the Mike M. Johnson case was published, owners raced to “tighten up” contract written notice procedures to include forfeiture clauses as the punishment for tardy notice. In some instances, this enthusiastic rewriting process resulted in an almost incomprehensible series of written notice and claim requirements virtually impossible to comply with. In the heat of that “arms race,” some of the biggest procurers of construction work in the state have decided to keep the prejudice standard in their construction contracts and report no resulting adverse impact.
1. Washington State General Administration: Prejudice Standard
General Administration has a 2011 construction budget of $586,440,601.00. Its contract notice requirement reads as follows:
“A request for an equitable adjustment Contract Sum shall be based on written notice delivered to the Owner within 7 Days of the occurrence of the event giving rise to the request. For purposes of this part, “occurrence” means when Contractor knew, or in its diligent prosecution of the Work should have known, of the event giving rise to the request.” General Conditions § 7.02 A 2.(a).
Failure to give such written notice shall, to the extent Owner’s interests are prejudiced, constitute a waiver of contractor’s right to an equitable adjustment. 7. 02 A 2.(b) [emphasis added]
An entity with a half-billion dollar excess of construction work on its books has opted for a fair standard, and will forfeit a contractor’s claim only to the extent that the lack of written notice prejudiced the owner’s interest in some manner. The MMJ decision provided General Administration with a road map regarding how to craft its specifications and take advantage of a contractor’s lack of written notice. General Administration resisted the temptation to cash in on such a short-sighted opportunity. General Administration’s refusal to jump on the MMJ bandwagon was not born from some sort of altruism but instead is based on sound economic consideration. By keeping its specifications evenhanded, General Administration reasons that it will attract more bidders on its projects and will not spend money on unnecessary administrative expenses associated with managing the paperwork nightmare caused by harsh, unreasonable notice provisions.
2. University of Washington: Prejudice Standard
University of Washington’s construction budget for 2011 is $106,072,000.00. The University of Washington uses the General Administration’s general conditions for its construction work. Unless there is demonstrated prejudice to the University of Washington, a contractor’s right to an equitable adjustment is not waived simply because the contractor failed to comply with the written notice requirements. The economic long term consequences of forfeiture notice clauses simply do not justify the short term advantage of beating a contractor’s claim on procedural notice oversight reasons.
3. Federal Government: Prejudice Standard
The federal government’s construction budget for the Corps of Engineers, Department of Defense and FHWA combined is $22,614,000,000.00. As federal contractors are aware, strict enforcement of written notice requirements depends on the government’s ability to show it was prejudiced by the contractor’s tardy notice:
“The delay in assertion of a claim by a contractor inevitably causes some degree of prejudice to the government; however, the existence of prejudice resulting from the dilatory notice usually serves to increase the burden of persuasion facing the contractor asserting its claim for equitable adjustments rather than to bar its claim entirely.“
Mingus Constructors, Inc. v. United States, 812 F.2d 1387, 1392 (1987) (emphasis added). Remarkably, the largest purchaser of construction work in the world does not resort to the expeditious but unfair practice of simply imposing forfeiture on the contractor’s claim in the event of late notice. Rather it will only deem a contractor’s claim waived for lack of notice if the federal government can show it was prejudiced by the contractor’s tardy notice. Prejudice is also the standard in government contracts.
4. Washington State Department of Transportation:
The Washington State Department of Transportation (WSDOT) construction budget is $5.4 billion. WSDOT takes an interesting approach to the forfeiture issue. Its standard specifications outwardly indicate that failure to comply with the notice requirements results in a waiver of the contractor’s claim (See WSDOT Standard Specification 1-09.11 (2) 2010). The notice provisions in the MMJ case were based on the WSDOT specifications. However, WSDOT officials and Assistant Attorney Generals who represent the WSDOT on construction cases are quick to point out that WSDOT has never strictly enforced the forfeiture clause in the event of a contractor’s failure to comply with the written notice requirements of the contract. In other words, although the WSDOT has the ability, they have never used that contract provision as a defense to a contractor’s claim. I am unaware of WSDOT ever enforcing these specifications to forfeit a contractor’s claim for untimely notice, despite the clear contract language permitting such a result.
General Administration, University of Washington and WSDOT perform the majority of construction work in the State of Washington. To err on the side of equity and fairness, these public owners have decided not to fall into the MMJ trap of strictly construing the notice provisions when no purpose for enforcement of the forfeiture provision exists.
Employing the prejudice standard avoids harsh results and forfeitures of otherwise valid contractor claims. If the owner can show that it was prejudiced as a result of the contractor’s late notice, the contractor will lose their claim. The forfeiture standard, therefore, protects owners. “Prejudice” determines whether the claim is barred; not some wooden adherence to procedural compliance that renders fairness meaningless.
Sophisticated owners, such as General Administration, University of Washington and WSDOT, who frugally administer public projects, do not employ forfeiture unless a prejudice due to the lack of notice exists. This question then arises: why do port districts and school districts cling so jealously to harsh notice clauses when these provisions ultimately increase the cost of public projects? Contractors have no opportunity to “negotiate” a public contract before it is bid. A public contract is a “take it or leave it” document (sometimes referred to as a contract of adhesion). In such harsh economic times, therefore, it is particularly disturbing that public owners would insert overreaching clauses in projects funded by taxpayers (contractors pay taxes too) to take advantage of desperate contractors.
If change orders arise on public projects, it is only appropriate that contractors are fairly and equitably compensated for the extra work. For projects with harsh notice provisions in place, should a contractor miss the notice deadline, the knee-jerk reaction from the owner’s representatives is to forfeit the claim. When margins are already tight, the inevitable reaction from the contractor will be to engage in a paperwork battle on the project to the detriment of the quality of the work performed. Owner representatives confident in the strength of their contract clauses fight notice issues to the overall detriment of the construction project. The issue eventually ends up in a court where resources are further wasted, and due to the intransigence of each side’s legal position, in a battle that may end up in front of the Supreme Court at a huge cost to society.
In my opinion, such harsh notice clauses cause more litigation and unnecessary administration, and instead of resolving disputes on the merits, create more disputes on construction projects. Taxpayers lose in two ways: first, projects become more expensive to administer. Secondly, bidders who submit prices on projects with forfeiture clauses increase their prices to account for compliance with exacting written notice and complicated claims provisions – a huge administrative burden.
In the end, everyone loses. The owners of the largest construction projects in the state and the nation have realized that forfeiture comes with a price. It is time for other owners to jump on the same bandwagon and put societal resources into the construction of quality projects and not into the resolution of unnecessary disputes.