Legislators Are Considering Adding Another Station in the Gauntlet of Contractor Change Order Recovery

Now, to further increase the difficulty on contractors of recovering meritorious change order requests, a draft bill is circulating in the halls of the Washington Legislature which would impose severe civil penalties on contractors who file claims.

As most AHLERS & CRESSMAN blog readers are aware (a subject of many rants in the past), in 2003, in the case of Mike M. Johnson, Inc. v. County of Spokane, the Washington Supreme Court enforced contractual notice provisions that resulted in a waiver of a contractor’s otherwise meritorious claims because they were not submitted timely, even though the owner was not prejudiced by the notice being late. Valid change order requests can be forfeited if the contractor fails to strictly comply with the letter of the contract in providing the owner notice of the claim and the claim itself within the time limits proscribed in the contract. That ruling has resulted in the most stringent enforcement of contractual notice provisions in the country, and public owners have not hesitated to take advantage of it by inserting unreasonably short deadlines for contractors’ claims into their contracts for public works jobs. The short timeframes in those provisions often force contractors to submit claims to public agencies based on nothing more than rough guesses as to magnitude.

Senators Kline and Pflug have introduced legislation to enact a false claims act in the state of Washington modeled on the federal False Claims Act. The law would impose civil penalties of up to $10,000 and three times the amount of the government’s damages on anyone who “knowingly” makes a demand or request for payment to the government that is false or fraudulent. The act gives whistleblowers a percentage of the government’s recovery, and, if the attorney general declines to pursue an allegation, private litigants are empowered to do so in the name of the state, for an even bigger percentage of the recovery. The act allows the government or private plaintiffs to recover their fees if they prevail, but it only allows defendants to recover their fees only if the claim is shown to be frivolous–an almost impossible standard to meet. The main targets of the legislation appear to be Medicaid cheats, but as drafted, it encompasses claims by contractors on public works projects as well, and that creates a unique problem in Washington.

Time limits that require contractors to submit claims before they can be fully investigated and developed collide with the proposed False Claims Act’s definition of “knowingly”. The act specifically states that it does not require proof of specific intent to defraud but includes claims submitted “in deliberate ignorance of the truth or falsity of the information.” This definition would encompass almost every claim a contractor is required to submit under a Mike M. Johnson deadline. So the contractor is faced with either (1) waiving its claim by failing to submit it on time, or (2) submitting it on time, but in deliberate ignorance of its truth or falsity, in violation of the false claims act.

To provide an example as to how difficult it will be for contractors to comply both with the Mike M. Johnson notice deadlines and the False Claims Act consider the situation of an owner proposed/directed change to the contractor’s work. Most public contract provisions require that the contractor provide the owner both the notice of the event and notice of the claim (dollar and time impact) within a very short period of time. Contractors have no difficulty providing notice of the event because placing the owner on notice that the directed change will cause the contractor to incur extra money and time is straight forward. The difficulty arises in placing the owner on notice of the “claim” itself. Until the design is completed the contractor has no ability to provide a specific “knowing” accounting of the time and cost impact of the owner directed change. Mike M. Johnson requires that regardless, the contractor must provide an estimate to the owner of what it believes the cost and time impact to be; otherwise the contractor will forfeit its claim rights. The False Claims Act definition of “knowing” is so broad that the contractor’s estimate could be found to be a violation of the False Claims Act, resulting in penalties against the contractor file the claim. Taken to its logical end, Mike M. Johnson and the False Claims Act together could virtually preclude the contractor from ever recovering a meritorious claim (change order request) on a construction project.

In order to remedy this impossible situation, the AGC has suggested that contractors be exempted from the statute, or, in the alternative, that claims subject to Mike M. Johnson time limits be excepted. The latter approach would give public agencies the choice of either short time limits on claims, or false claims remedies for inaccurate ones, but not both. Given that no other jurisdiction with a false claims act has notice and claim requirements as strict as those in Washington, it would be manifestly unfair for the legislature to copy such laws without addressing the unique burden the Mike M. Johnson decision continues to impose on Washington contractors.

Douglas R. Roach & John P. Ahlers of the AHLERS & CRESSMAN PLLC firm have been working with the AGC to provide language changes to the suggested False Claims Act which would exempt construction from the Act altogether. Douglas Roach testified against the bill before the Washington Senate Judiciary Committee (the Legislature sub-committee) considering the False Claims Act on February 4, 2011. This statute is one of extreme concern to construction lawyers, contractors, owners and other construction industry stakeholders. Taxpayers do not benefit from legislation of this nature; misguided statutory efforts of this sort simply increase the cost of public works construction in the long run.

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