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Contract's Notice Requirements Strictly Enforced, Recovery Denied by Washington Supreme Court
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May 2, 2005
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By Laura Kent
Thelen Reid Brown Raysman & Steiner LLP
Mike M. Johnson, Inc. won two contracts from the County of Spokane to construct two sewer projects, which it planned to build sequentially. On the first project, the contractor's employees encountered buried telephone lines in two locations. Discovery of the unexpected utility lines delayed the project, and the contractor claimed it was damaged and delayed.
The contract provided that the contractor was required "to use mandatory notice, protest and formal claim procedures for claims of additional compensation, time extensions, and changed conditions." The contract explicitly required the contractor to give "a signed written notice of protest of work required" and then to provide specific follow-up information regarding the order within 15 days. The required information included date of the disputed order, factual circumstances, contract basis for the claim, estimated cost and analysis of schedule impact. The contract provided that failure to comply with these steps and to protest the order meant that the contractor accepted the terms of the order. In addition, the contract provided a formal claim procedure that required at least 10 items of specific information, including a notarized statement attesting to the truth of the claim. Under the contract, failure to comply constituted a waiver of claims. Full compliance was a condition precedent for a lawsuit.
The contractor failed to follow contractual procedures when it discovered the unexpected telephone lines. Instead, the contractor wrote several letters to the county asserting that it had been damaged and delayed but never provided all of the information required by the contract's protest provision or its claim provision. The county told the contractor that it had not complied with the contract's notice provisions and believed the contractor had no entitlement under the contract.
Even though it had not complied with the contract's requirements, the contractor sued for additional compensation. The county moved for summary judgment, arguing that the contractor had "failed to comply with mandatory contractual protest and claim provisions." The trial court granted the county's motion for summary judgment. The contractor appealed, and the Court of Appeals reversed, finding that an issue of material fact existed regarding whether the county's " 'actual notice' of [the contractor's] claims excuses [the contractor] from complying with the mandatory contractual protest and claim procedures." The Court of Appeals also held there was an issue of material fact as to whether the county impliedly waived the protest procedure when it engaged in settlement negotiations with the contractor. The Washington Supreme Court granted review and reversed the Court of Appeals. Mike M. Johnson, Inc. v. County of Spokane, 150 Wash.2d 375, 78 P.3d 161 (2003).
The contractor made two arguments to the Supreme Court. First, it argued that "when an owner has actual notice of a contractor's protest or claim, that notice, in and of itself, excuses the contractor from complying with mandatory contractual protest and claim procedures." Second, the contractor argued that the county waived the contractual requirements through its conduct.
The Supreme Court held that actual notice is not an exception to compliance with mandatory contractual protest and claim procedures. It cited a series of Washington cases holding that contractual procedural requirements must be enforced unless the benefiting party waived them or the parties modified the contract. The Supreme Court found that the contractor's letters did not provide the information required by the protest or formal claim provisions of the contract. To hold otherwise would render those contractual provisions meaningless.
In response to the contractor's waiver argument, the Supreme Court held that waiver by conduct of the benefiting party "requires unequivocal acts of conduct evidencing an intent to waive." Here, the county did not act as though it intended to waive the protest procedure. Rather, the county sent a letter stating it did not intend to waive any contractual rights. In addition, the Supreme Court refused to find a waiver simply because the county entered into settlement negotiations with the contractor about the buried telephone lines and other matters. To hold that the negotiations waived the county's contractual rights would put an end to all settlement discussions, which would be unrealistic and would detrimentally impact all parties, the court concluded.
The Supreme Court affirmed summary judgment against the contractor. Other issues in the case were left for a trial.
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For more information about the issues covered in this report, please contact Laura Kent in our San Francisco office at 415-369-7756 or at lkent@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2005 Thelen Reid Brown Raysman & Steiner LLP
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