CONSTRUCTION CONTRACT NOTICE PROVISIONS - SUBCONTRACTOR WINS ON TECHNICALITY

We often write of the unfairness of the losses suffered by contractors and subcontractors due to contract notice provisions of various types. Notice of claims, notice of damage calculations, reservation of claims in mechanics lien waivers, and even notice of delay and impact-causing events, are all now land mines for the unwary. These notice requirements can be as absurd as requiring notice within twenty-four hours. Certainly such urgent contractual notice could hardly be necessary. But necessity is not why these provisions are put into subcontracts. The driving reason for most, if not all, such provisions is to impose a COFED (i.e., Contractor Forfeiture Enhancement Device) and to, thereby, create a windfall for the particular owner/developer or general contractor involved. Worse yet, these unreasonable provisions have been routinely enforced by the courts on a strict "you signed it, you eat it" basis.

However, one recent appellate case in New York discussed below indicates that, occasionally, the Courts will attempt to carve out an exception to these harsh COFEDs; just don't count on it. You must redouble your efforts to fastidiously comply with contractual notice provisions until legislative relief from COFED forfeitures can be obtained. (There will be more on steps being taken now to establish a statewide "prejudice rule" as an antidote to COFEDs in upcoming articles.)

In this outlier, appellate case, a residential tower was being constructed in Brooklyn. The plaintiff subcontractor was installing the concrete superstructure. It sued for $3.5 million to recover for "certain additional work" directed by the owner and for "delays attendant to the work."

The owner contended that the plaintiff waived any recovery by: (1) failing to comply with the notice of claim procedures set forth in Article 8 of the General Conditions of the contract, and (2) executing a mechanic's lien waiver.

Generally, where a construction contract contains a "condition-precedent" type notice provision, setting forth the consequences of a failure to strictly comply, strict compliance will be required in New York. Article 8 of the General Conditions of this particular project's subcontract contained such a "condition-precedent" notice provision, providing that the plaintiff's failure to give written notice of a claim and detailed statements, including damages, of the claim within the times specified, shall constitute a complete waiver of such claim.

Interestingly, the plaintiff contractor in this case conceded that it did not strictly comply with the notice provisions of Article 8. It contended, however, that its claims for extra work and delay damages were claims for "work ordered pursuant to Article 4" of the contract, dealing with "claims for additional compensation or delay based on changes in the work." Allegedly, "nothing in Article 8 indicated that the failure to give proper notice with regard to claims for changes in the work, are subject to waiver." Thus, change orders were not subject to the specific (and harsh) notice requirements, unlike the general waiver provisions of Article 8, which was the "claims" provision of the subcontract.

Furthermore, the contract required that changes to the work be authorized by the owner by written change order. However, under New York law, oral directions to perform extra work, or the general course of conduct between the parties, may modify or eliminate contract provisions requiring written authorization or notice of claims. As the court observed, provisions requiring written authorization for extra work are waived where "the conduct of the parties demonstrates an indisputable mutual departure from the written agreement and the changes were clearly requested by the owner and executed by the contractor."

In this case, the owner failed to submit evidence concerning the party's course of conduct pertaining to written work change orders. Accordingly, it failed to meet its burden of establishing that the strict notice of claim provisions of Article 8 were consistently enforced, and, therefore, applied to the subject claims.

Alternatively, the owner/developer contended that, even if Article 4's change order provision applied to the subject claims, the subcontractor had waived them by failing to comply with the notice of claim provision in Article 4 itself. Significantly, in this subcontract, the notice of claim provision in Article 4 was not a severe condition-precedent type notice requirement setting forth the consequences of a failure to strictly comply. Thus, mere "substantial compliance" with such a notice provision would suffice.

Substantial compliance will be found where, for example, there is sufficient correspondence between the parties to give the owner actual notice of the claims. The owner failed to meet its

burden of establishing that it did not have timely notice of the plaintiff's claims sufficient to satisfy the more "relaxed" notice of claim provision in Article 4.

Should a $3.5 million claim rise or fall based upon such a subtle distinction? Clearly not, but "a win, is a win."

Lien Waiver Provision

The owner/developer's second "waiver" argument involved the lien waiver forms utilized on this project. It's surprising, with the law being so well settled in this regard, that some owners/developers and general contractors are still attempting to assert that the waiver language in typical mechanic lien waivers routinely submitted with every periodic payment requisition are actually a waiver of claims. While, again, you must be careful to actually list and reserve all claims in lien waivers, most courts today recognize that the "waiver" is really utilized to acknowledge amounts actually received to date (like a "receipt") and are "not intended to encompass or preclude claims that the plaintiff subsequently presented to the defendants for additional work." The party receiving a lien waiver must prove that the parties treated the lien waiver other than as a receipt.

G&C Commentary

The "good guys" won this one. But don't rely on it. The reasoning in this holding, while laudatory, is far too tenuous a rationale to depend on to protect a valuable claim. The concrete subcontractor in this case was able to exploit an inconsistency between Article 8 ("Claims") and Article 4 ("Changes") of its subcontract. This loophole, however, could be all too readily nullified by simple contract draftsmanship. You can be certain that the owner/developer in this case will not make this mistake, or leave this opening, again. Always carefully comply with all notice provisions. COFEDs are there to hurt you; do not let them.

Also, do not rely on the sloppy and imprecise concept of "substantial" compliance. What, after all, is that? Always strictly comply with contract notice provisions. It has to become a religion, part of your company's culture. Do not listen to owner/developer CM's or project managers telling your field staff to "stop sending all those letters to the job trailer!" I don't want to hear the excuse that you have to work with them for two more years. Do your job!

As indicated, the STA is already working on legislation that will attempt to level the playing field state-wide regarding these one-sided COFEDs. Legislative protection is needed since they often cannot be "negotiated out" of subcontracts; not if you want the work that is. We will be discussing the "prejudiced rule" antidote to COFEDs in future articles. For now, give the required notice!

Henry L. Goldberg may be contacted by email, hlgoldberg@goldbergconnolly.com or by telephone, 516-764-2800.

©Goldberg & Connolly 2015

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