Failure to Comply With Written Claims Notice Requirements in
Construction Contracts May Be Costly

A recent Indiana Court of Appeals case, Weigand Construction Co., Inc. v. Stephens Fabrication, Inc., illustrates that legitimate claims may be waived if contractual notice provisions are not strictly followed and provides other important lessons for construction project participants.

The Facts

In Weigand, Stephens Fabrication entered into a written subcontract with Weigand Construction to perform structural steel work. The subcontract contained a flow down provision that incorporated the terms and conditions of Weigand Construction's contract with the owner. The Weigand Construction-owner contract stated:

"Claims by either party must be initiated within 21 days after occurrence of the event giving rise to such Claim or within 21 days after the claimant first recognizes the condition giving rise to the Claim, whichever is later. Claims must be initiated by written notice to the Architect and the other party."

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"If the Contractor wishes to make a Claim for an increase in the Contract Sum, written notice as provided herein shall be given before proceeding to execute the Work."

The Weigand Construction-owner contract also stated that any "claim for an increase in the Contract Sum … be given before proceeding to execute the Work," except in the case of certain emergencies. These claim provisions are from the American Institute of Architect's (AIA) A201-1997 edition, and the language of the claim provisions in the AIA's current A201-2007 edition is substantially similar. The AIA A201 is a commonly used form construction contract document.

In June 2002, the architect issued revised drawings that included several changes to the design of the steel trusses. Stephens Fabrication received the revised drawings on June 13, 2002, and sent them to its detailing subcontractors. Stephens Fabrication's detailing subcontractors had a meeting on July 11, 2002, and in this meeting the subcontractors discussed that the revisions would require substantial changes. According to Stephens Fabrication, the subcontractors did not communicate the changes at that time.

On April 22, 2003, Stephens Fabrication orally informed Weigand Construction that the design changes would cause extra work and expense for Stephens Fabrication. On May 28, 2003, Stephens Fabrication provided a written claim to Weigand Construction for the extra work. Weigand Construction submitted Stephens Fabrication's claim to the owner for resolution, but the owner rejected the claim as untimely. Stephens Fabrication ultimately filed a complaint alleging it was owed over $100,000 for the extra work.

The Rulings

The Court held Stephens Fabrication waived its ability to assert a claim for the extra work for two reasons. First, the Court determined Stephens Fabrication waived its claim because it failed to submit its claim within 21 days "after occurrence of the event giving rise to" the claim. According to the Court, it was undisputed that at the very latest Stephens Fabrication was actually aware on April 22, 2003, that it would be making a claim for additional payment, but it did not make its claim in writing for more than a month after this realization. The Court indicated but did not specifically hold that the knowledge of Stephens Fabrication's subcontractors was sufficient to commence the 21 day written notice period, stating it was Stephens Fabrication's "responsibility to require adequate communication with its sub-contractors."

Second, the Court determined Stephens Fabrication's failure to submit the claim before commencing the extra work waived its claim. Stephens Fabrication had not commenced fabricating the steel before submitting its claim; however, its subcontractors had already performed the engineering services for the extra work and had submitted invoices to Stephens Fabrication for these services. The Court stated engineering services were clearly within the scope of Stephens Fabrication's work, and thus the subcontractors' engineering services constituted Stephens Fabrication proceeding to execute the work, rendering the claim untimely.

The Practical Implications

There are numerous lessons from this case:

· Pay attention to what is incorporated by reference into your contract. Make sure you have a copy of and have carefully reviewed all applicable documents so you know what constitutes the agreement.

· Become familiar with all claims notice provisions at the outset of the project. When changes are mandated or unforeseen conditions are encountered, check the contract again and strictly comply with all notice provisions.

· If a contract says notice must be in writing, then provide notice in writing. Do not rely on oral notifications, even if the party you provide the oral notice to states oral notice is sufficient. Similarly, if a contract requires written notice of a claim for additional compensation prior to performing the work at issue, then be sure to provide such written notice prior to you or any of your subcontractors performing any of the work at issue.

· If a subcontractor knows something, then it is likely the law will presume the general contractor knows it as well. Similarly, if an architect knows something, then it is likely the law will presume the owner will know it as well. Make sure your contracts obligate your subordinates to notify you of potential claims and other important matters that bear on the project.

The severe consequences of failing to comply with contractual claims notice requirements are also shown by an earlier Indiana Court of Appeals case, Starks Mechanical, Inc. v. New Albany-Floyd County Consol. School Corp.). In Starks the mechanical contractor made a claim of over $1,000,000 for what it termed engineering deficiencies. Although the mechanical contractor promptly notified the construction manager of the condition through written Requests for Information (RFIs), the RFIs did not specifically request additional compensation for the deficiencies, and the mechanical contractor did not make its claim for additional payment until nearly two years after it recognized the alleged deficiencies. The Court deemed the claim waived.

Many jurisdictions strictly enforce notice provisions in contracts much like the Indiana Courts in Weigand and Starks. However, there are some courts, including federal courts, interpreting the Federal Acquisition Regulation's requirement that the contractor must assert its right to an adjustment within 30 days after the contracting officer makes changes to the work, that have issued more lenient decisions, only enforcing the claims notice provision if prejudice has resulted from the delay in asserting the claim. But, even if your project is in a lenient jurisdiction, there is no reason to take this risk. When a potential claim is encountered, the prudent approach is to strictly and timely comply with the contractual notice provisions to avoid waiver.

For more information regarding this article, please contact Nate Uhl or Steve Jones. For more information regarding time limitations applicable to construction claims, read, "Indiana Court of Appeals Clarifies Statutes of Limitation Applicable in Construction Matters."

Sept. 15, 2010

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.