Legal Corner: Consider This Fair Notice

Imagine you are working as a subcontractor on a large, new construction project. The project is complex and involves many subcontractors; the high-profile job is scheduled to take more than a year to complete.

Your contract has been signed, and your submittals have been approved. In addition, you have scheduled your crew, supervisory personnel and equipment so work can begin as soon as the roofing portion is scheduled to proceed.

Two weeks before the scheduled start date, you visit the job site and notice the deck is nowhere near ready for roof system installation. The general contractor''s superintendent advises you to postpone work for a week or two. He says there is a problem with the deck subcontractor and uncertainty regarding the number and location of deck penetrations -- some design changes are pending. Your crew ends up starting the job a month later than originally scheduled.

Three or four months pass, and the project continues to slip further behind. You realize you will incur extra costs for labor, materials and overhead. You send a letter to the general contractor stating there might be additional costs incurred. The general contractor reminds you that the contract allows the construction schedule to be changed at his discretion and you need to increase your crew's production rate.

You then submit a proposal for your extra costs and request a time extension or more money to accelerate the job, hoping to make some profit or at least break even. The general contractor denies your claim. You finally complete the job after 10 months and seek to recover your last progress payment, retainage, several change orders that were not finalized and additional costs you incurred because of the delays.

You make several unsuccessful attempts to reach an agreement with the general contractor and eventually find yourself with no other option but to file a lawsuit. After a lengthy trial, you are shocked to discover that though you recovered your retainage and final payment, your entire claim for your additional costs caused by others' delays has been dismissed.

The most likely reason for such a ruling is that you failed to comply with your contractual notice provision, which is a clause in a contract requiring you to notify the general contractor, in writing within a short period of time (such as seven days), after a delay-causing event. Sometimes, such clauses are hidden in a general contractor's contract with an owner and incorporated into your contract by reference.

The purpose
Generally, the purpose of notice provisions is to inform a party of a delay and potential claim. This information is important because it gives a party an opportunity to rectify the problem before it gets worse; informs a party of potential financial liabilities; and, in some cases, allows either a general contractor to give timely notice to an owner or an owner to give timely notice to a lender. These objectives are important in some jurisdictions, and some courts require strict compliance with contractual notice provisions.

In many cases, noncompliance with such provisions leads to a complete forfeiture of a claim, regardless of the claim's merits. No matter how large a claim or culpable another party may be, all chances of recovery may be lost by failing to send a timely letter.

You should try to comply, whenever possible, with notice provisions. To do so, you first must find such provisions in contracts, and there may be several. (Although this article focuses on notice provisions for delays, there often are other notice provisions, such as claims for extra work, differing site conditions, discrepancies in documents or code violations. The same principles discussed in this article essentially apply to all these situations.) If you are working as a subcontractor, ask for a copy of the general contractor's contract with the building owner because you probably will be required to comply with those notice provisions as well.

You also must understand the provisions. The time limit for a letter to be written may be stated in a contract — seven days, 14 days, 30 days, etc. However, be careful to note when the "time" begins. For example, time may be measured from when a delay-causing event occurs or when damage from a delay occurs. But in some situations, you may not suffer any actual damages until after the original completion date when your labor and overhead costs have overrun. Some courts recognize this; however, some may not see the distinction or decide you incur damages the moment a delay occurs. To be safe, give notice immediately after a delay-causing event occurs.

Giving notice
Once you have determined when to give notice, you will need to determine how it should be done. Most contracts will require a written notice. Although daily reports, memos and meeting minutes are important, these may not satisfy a contract's requirements, and some courts may not deem these adequate. A specific letter addressed to the appropriate party should be used.

A notice provision also may require you to state that a delay will result in extra costs for which you will seek additional compensation. (Some courts may decide that the intent of a notice provision is not just to inform of a delay but that it will result in a claim for additional costs.)

Also, beware of any follow-up requirements. Some notice provisions may require detailed accounting of the time and cost effects within a certain time period. Although it sometimes is not possible to know the extent of a delay's overall effects until much later, be sure to try to comply with such requests. This may make it impossible to fully comply with a notice provision, but you can take some steps to protect yourself. For example, inform the appropriate party in writing that you do not yet have all the information to give a detailed accounting, give an estimate of when you will have the information and ask for a time extension.

A notice provision may not specifically state to whom a notice of delay should be sent. If in doubt, send the notice to the party with whom you contracted. This usually is fairly simple if you are a subcontractor working for a general contractor. If you have contracted directly with a building owner, there may be uncertainty as to whom a notice should be addressed. A contract may state the agent or representative who should receive notices. However, a contract often will not designate a representative, and some courts may not recognize an engineer, construction manager or architect as an appropriate party for notice requirements. Therefore, it probably is safest to address a notice to an owner or send a copy to that owner.

The courts
One common way some courts get around strict compliance with notice provisions is by reasoning that a provision's purpose is to inform. If the party to be informed had actual knowledge of a delay and/or claim, formal notice in strict compliance with the provision is not needed. This is where superintendents' daily reports, meeting minutes, notes of telephone conversations, letters, and memos from the general contractor or owner can be helpful. Such evidence can show the other party knew of the delays and possibly knew there might be a forthcoming claim.

However, in such cases, you may need to prove that a general contractor or owner had the actual knowledge, not just the construction manager, architect or engineer. Forwarding copies of meeting minutes to an absent owner or copying the owner on correspondence can help avoid such problems. Some courts will waive notice requirements for actual knowledge only if doing so is not prejudicial to a general contractor or owner.

Another way to avoid strict compliance is when the opposing party has waived its right to timely notice under the contract provisions. This may be done by the party either orally or in writing. For example, a general contractor may state in a meeting or letter that formal notice is not required or that notice in a reasonable amount of time is sufficient.

A party also may imply that he or she waives the requirements. For example, the party may pay for a change order involving costs associated with the delay or decline to invoke liquidated damages. But in some jurisdictions, this may be difficult to prove. Also, some contracts may include a clause that states that no terms or obligations of the contract can be waived or modified by any action other than a written change order. In fact, a federal court in Virginia refused to recognize any implied waiver in the face of such a clause.

What it means
Nearly every contract that you, as a subcontractor or prime contractor, will sign will include notice provisions. These provisions will require you to send written notices of delays and future claims within short time periods. If you do not comply with them, you may forfeit sizable, legitimate claims for damages caused by others. Although some courts are more lenient in waiving compliance in certain circumstances, other courts may require strict compliance with these contractual provisions.

It is in your best interest to make every effort to send adequate, specific, timely notices to appropriate parties in accordance with contracts anytime a delay-causing event occurs. But doing so can create a dilemma. On one hand, you can give formal notice along the course of a project and fully protect your right to any legitimate claims for additional costs. This often will result in a reputation as a "claims-oriented contractor" and cause adversarial relationships with other parties. But not giving formal notice when problems arise can result in the forfeiture of valid claims.

To make sensible decisions in such situations, you must know exactly what the notice provisions of every contract are and completely understand how courts treat these provisions in the states where you perform work. Finally, know the risks associated with noncompliance and keep good records of meetings, conversations and events to increase the chances of receiving a valid claim when notice is not properly given.

David Mura, a law student at the University of Georgia, worked this summer for the law firm Hendrick, Phillips, Schemm & Salzman, Atlanta.