This is the story of a highway contractor who likely had a valid claim, but who relied on verbal representations by the engineers and filed its claim too late. As a result, the Court ended up denying the contractor’s claim on grounds of untimely notice, which serves as a great reminder that failing to adhere to the contract’s notice provisions – particularly when the contract contains a forfeiture clause – is oftentimes fatal to the contractor’s successful prosecution of an equitable adjustment.
In JEM Contracting v. Morrison Maierle, Inc., 373 Mont. 391, 318 P.3d 678 (2014), a contractor was hired by two Montana counties to build a 3.6 mile stretch of road. On the first day of the project, the contractor encountered what it asserted were subsurface conditions that differed significantly from the plans and specifications on which it had bid. The contractor discussed the discrepancy with the counties’ on-site representatives (an outside engineering firm). Some of the engineers agreed with the contractor that differing site conditions had been encountered; however, the contractor proceeded with the work and did not provide written notice to the county of the alleged differing site conditions until eighteen (18) days later. The contractor alleged that the engineers had promised that it would be paid for the increased costs due to the differing site conditions if the contractor could find savings on the rest of the project to complete the job within the contract price. Specific dollar amounts were not discussed.
The contractor continued work on the project and submitted a claim for additional costs the following month. The county reviewed the claim, but determined that the contractor had not provided sufficient evidence to support its claim and that it had failed to follow the appropriate notice procedures in the contract. The contract required the contractor give notice of the differing site conditions within five (5) days of discovery and the contract contained a forfeiture clause that read, in part, as follows:
[N]o claim for an adjustment in contract price … will be valid for differing subsurface or physical conditions if procedures of this paragraph … are not followed.
The contract also contained a provision that required the contractor to carry on work and adhere to the project progress schedule during all disputes or disagreements with the owner. After the claim was filed and the contractor completed its work, the contractor found savings to pay for the differing site conditions. Nevertheless, the county denied the contractor a change order.
The contractor then filed a lawsuit against the county and the engineers alleging breach of contract (against the county) and fraud by inducement (against the engineers). The engineers moved for summary judgment (a dismissal of the case without a trial) arguing that the contractor’s claim of fraud by inducement was barred because the assurance of payment was nothing more than an agreement to agree, and the claims were contradicted by the clear terms of the contract. The trial court granted the engineer’s motion, dismissing all claims against it.
On appeal, the Supreme Court of Montana affirmed, holding that the contractor had failed to submit its claim in accordance with the contract notice requirements for differing site conditions. The Court also decided in favor of the engineers on the fraud in the inducement claim on grounds that the contractor could not prove that it had been harmed by the engineers’ alleged representations. The contractor was required by contract to continue work during the dispute, and the engineers’ promise to pay the contractor a change order if savings were found amounted to “an agreement to agree” rather than a clear unambiguous promise.
Comment: The lesson learned from this case is one that we seem to encounter over and over again. Regrettably, in today’s litigious environment, verbal agreements and handshakes, which used to be the stock and trade of honest and forthright business people, are no longer the reliable norm in commercial transactions they used to be. In this case, the engineers appear to have agreed with the contractor. The engineers’ behavior likely induced the contractor to continue work and not follow the strict contract notice procedures, which ended up being the contractor’s undoing in court. Providing timely written notice of claims and written confirmation of agreements will generally not spoil a good business relationship if the parties are dealing with each other honestly, but they will avoid the type of trap the contractor was ensnared by in this case.