This blog has frequently addressed contractual notice and claim procedures and the Mike M Johnson[i] line of decisions (for example, see blog articles from January 2, 2008, February 15, 2011, July 10, 202). A recent unpublished decision by the Division I Court of Appeals is noteworthy because it holds that if a contract has a mandatory procedure for resolving claims, but does not state that the failure to follow that procedure will operate as a waiver of such claim, then a forfeiture will not be found despite lack of compliance.
Shepler Construction, Inc. v. Leonard,[ii] involves a residential construction dispute over a project performed in 2000 with an incredibly long litigation history dating back to 2002. The decision that is the subject of this article is the Court of Appeals’ third decision in the matter!
In 2001, the Contractor (Shepler) sent the Owner (Leonard) a letter recommending that the Owner should initiate the contractual dispute resolution process with respect to the Owner’s allegations of construction defects. The Owner admittedly failed to respond and did not initiate the contractual process. The Contractor then filed a lien and brought a foreclosure action. In 2008, the Contractor obtained a Summary Judgment Order precluding the Owner from asserting counterclaims for construction defects on the grounds that the Owner failed to initiate binding arbitration as required by the parties’ contract in order to resolve allegations of construction defects. That order is the subject of the appellate decision that is the subject of this article.
In dismissing the Owner’s claims for construction defects, the trial court was persuaded that the Owner’s breach of the agreement by failing to seek arbitration required dismissal of all of the Owner’s claims for construction defects that should have been arbitrated. The Contract clause at issue provided:
If a dispute arises between owner and contractor as to the performance of contractor’s obligations under this agreement, such disputes shall be resolved as follows:
Each party shall employ a contractor of his or her choice to evaluate the work completed. The contractors then will select a third contractor to act as an impartial arbiter. This contractor shall, likewise, inspect the construction to determine if the work has been performed in accordance with this agreement, applicable building codes and in a good workmanlike manner as provided hereinabove. If two of the three contractors determine that the work is not in conformity with the provisions of this agreement, then they shall state in writing the work in need of repair or replacement and contractor shall undertake to perform same as soon as reasonably practical. Contractor shall be responsible for owner’s fees and costs associated with this arbitration as well as the impartial contractor’s fees and costs. If no remedial work is recommended by the contractors, then the owner shall pay for the costs of the arbitration. The owner shall forthwith pay the amounts due to the contractor as established by a majority of the arbiters.
The Contractor argued to the Court of Appeals that under Absher Const. Co. v. Kent School District,[iii] and Mike M. Johnson v. County of Spokane, that the Owner’s admitted failure to arbitrate its construction defect claims operated as a waiver of those claims. Division One, however, disagreed, on the grounds that unlike the contract language at issue in Absher and Mike M. Johnson, the contract between the Contractor and Owner did not explicitly provide that the failure to follow dispute resolution procedures constituted a waiver of claims. Division One ruled:
Shepler relies on Absher and Mike M. Johnson, Inc. v. Spokane County. This reliance is misplaced. Absher and Mike M. Johnson are distinguishable from the contract at issue here, because the contracts in those cases explicitly provided that failure to follow dispute resolution procedures constituted a waiver of those claims.
In addition, Division One held that waiver of the right to arbitrate does not mean the underlying claims are waived:
…Washington courts have long held that the contractual right to arbitration may be waived through a party’s conduct if the right is not timely invoked. The right to arbitrate is waived by conduct inconsistent with any other intention but to forego a known right. Simply put, a party waives a right to arbitrate if it elects to litigate instead of arbitrate. The [Owners] filed their counterclaims in 2002. [The Contractor] did not assert arbitration as a defense or move to dismiss the [Owner’s] arbitrable claims on that basis until 2008. Both parties waived the dispute resolution clause by conduct.
Comment: This unpublished case provides guidance that the failure to comply with a contractual claim procedure may not give rise to forfeiture of the underlying claim if the contract clause at issue does not include language stating that the failure to comply will operate as a waiver of the claim. In addition, the decision reinforces that a mandatory contract provision can be waived by the party it benefits, which is another basis to defeat an argument that the failure to comply results in forfeiture.
[i] 150 Wn.2d 375, 78 P.3d 161 (2003).
[ii] Shepler Construction, Inc., v. Leonard, 68227-0-I (unpublished 2013).
[iii] 79 Wn. App. 841, 917 P.2d 1086 (1996).