Put It In Writing

| May 7, 2014

Claims against the Georgia DOT for increased material costs are denied due to failure to comply with claim-notice requirements.

hand holding gavel Contract provisions in most standard construction industry contracts include claims and notice procedures and requirements. These provisions often require contractors seeking a time extension or reimbursement for changed conditions provide prompt notice of any alleged change. This allows the owner to gather timely information and evaluate the proposed change.

The requirement that notice be promptly submitted is subject to various exceptions, including the owner’s waiver of the notice provisions, reasonable compliance and actual knowledge by the owner of the changed conditions. Nonetheless, notice requirements are often strictly construed in the owner’s favor.

In the recent case of Western Surety Co. v. Department of Transportation (March 28, 2014, Georgia Court of Appeals), a claim against the Georgia Department of Transportation (DOT) based on the increased cost of materials for asphalt and petroleum products was denied based on the failure to follow the contract’s notice requirements.

The Georgia DOT and Bruce Albea Contracting Inc. (BAC) entered into a construction contract for work on U.S. 27. Two co-sureties, Western Surety Company and Continental Casualty Company (Sureties), issued performance and payment bonds to the DOT, as obligee. The original completion date for the project was originally March 31, 2007, but was extended to Jan. 18, 2008.

During the project, BAC experienced an increase in material costs, particularly for asphalt and other petroleum-related products. As a result, BAC suffered financial difficulties. In December 2006, BAC notified the Sureties of its financial problems. Instead of allowing the project to “grind to a halt,” the Sureties provided funds to BAC from April to July of 2007. In exchange, BAC provided the Sureties with a letter from BAC to the DOT, dated April 18, 2007, stating BAC “could not perform the work and was voluntarily abandoning the Contract.” The letter was received by DOT in late June 2007. After receiving the letter, the DOT placed BAC in default and directed the Sureties to take over the project.

On Sept. 11, 2007, the Sureties sent two claim letters to the DOT. After a meeting, the DOT asked for more information. The Sureties chose not to respond to the DOT’s request and sued. The DOT moved for partial summary judgment, including on the Sureties’ claims for compensation for price inflation incurred after March 31, 2007, and compensation for price inflation incurred before the original completion date. The trial court granted the DOT’s motion, and the Sureties appealed.

On appeal, the Sureties acknowledged neither BAC nor they Sureties strictly followed the claim notice requirements set forth in the contract, particularly Section 105.13 of the specifications, which provides:

Notice of Potential Claim: In any case in which the contractor believes that it will be entitled to additional compensation, the contractor shall notify the engineer in writing of its intent to claim such additional compensation. Such notice shall be given in order that the Department can assess the situation, make an initial determination as to who is responsible and institute appropriate changes or procedures to resolve the matter.

a. Claims for Delay — The Department shall have no liability for any delay, which occurred more than one week prior to the filing of such written notice. Failure of the contractor to give such written notice in a timely fashion will be grounds for denial of the claim.

b. All Other Claims Except Acceleration and Delay — If the contractor does not file such written notice before beginning the work out of which such claim arises, the contractor hereby agrees he shall have waived any additional compensation for that work, and the contractor shall have no claim thereto.

The Sureties argued the DOT waived strict compliance with the notice and claims procedures in the contract. They argued a jury could conclude BAC and the Sureties reasonably complied with the notice and claims provisions. The Sureties also argued the DOT’s actual notice of changed conditions allowed them to avoid the notice requirements.

The Court of Appeal disagreed with the Sureties and affirmed the judgment. The Court ruled the DOT did not waive strict compliance with the notice and claims procedures in the contract. Despite evidence, BAC was “afraid to ruffle the feathers” of the DOT by filing a claim, there was no evidence the DOT did any affirmative act that would lead BAC to believe it was not necessary to give timely notice of a claim.

In addition, the Court found none of the communications by BAC or the Sureties to the DOT constituted reasonable compliance with the notice and claims provisions, and the Sureties intentional failure to provide additional requested information to the DOT was not “in the spirit” of the contract. The Court further found that to the extent the DOT had actual knowledge of a delay or price escalations with regard to the project, it did not leave the Sureties free to ignore the contract requirements regarding certification of a claim. The Court stated the following:

[i]f compliance with the Contract could be deemed waived or excused because the DOT was aware of a delay or of price escalations, which, as to the latter, would often be public knowledge, then the provision requiring timely written [notice of a potential claim] would be meaningless and superfluous.

The Western Surety case underscores the importance of thoroughly reviewing, understanding and complying with a contract’s notice requirements. Although exceptions do exist that allow contractors to “get around” contract requirements regarding notice of changed conditions and claims, it is risky to assume such exceptions will apply. To avoid this mistake, contractors should attempt to comply with each and every notice provision, or they run the risk of a similar result as in Western Surety, where the failure to comply with the contract’s requirements was fatal to the claim.

 

Attorney Brian Morrow is a partner in Newmeyer & Dillon, LLP and a licensed civil engineer specializing in construction law, including road and heavy construction. brian.morrow@ndlf.com

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