Title: An act relating to claims under a construction contract.

Brief Description: Changing provisions concerning limitation of claims under a construction contract.

Sponsors: Representatives Lantz, Springer, Williams, Rodne and Moeller.

Hearing Date: 2/9/07

Staff: Bill Perry (786-7123).

Background:

Construction contracts sometimes contain various provisions, including mandatory protest and claim clauses, covering unanticipated situations that may arise during the course of construction. Such protest and claim clauses generally require the contractor to follow specific notice requirements when seeking additional payment for extra work done and increased expenses incurred. Such clauses may be found in public works contracts as well as private contracts.

In a five-to-four 2003 decision, Mike M. Johnson, Inc. v. Spokane County, 150 Wn.2d 375, the state supreme court construed such a protest and claim clause to require strict adherence to a notice requirement. In Mike M. Johnson, a contract for sewer construction authorized the project owner, Spokane County, to order work changes within the general scope of the contract. The contract also provided that the contractor bore all risks associated with any mistakes in the location of utilities as shown on the construction project plans. The county submitted revised design plans and change orders, including proposed increases in the contractor's compensation and extensions of the construction deadlines. The contractor did not object to these changes. When the contractor began work under the change order, however, it encountered buried phone lines that caused delay. The contract contained specific and detailed procedures for the contractor to follow in making a claim for additional compensation for the delay caused by the underground phone lines. The contractor did not provide the required written notice and documentation, although it did send a letter stating that the phone lines were causing the contractor to incur additional expenses. The county notified the contractor that the letter did not satisfy the contract's notice requirements. The county's attorney informed the contractor that the county did not intend to waive any defense it might have against a claim by the contractor. The contractor never complied with the formal requirements of the contract for making a claim.

The supreme court noted that as a general matter of contract law, procedural contract requirements must be enforced absent either a waiver by the benefitting party or an agreement between the parties to modify the contract. The court held that as a matter of summary judgment, the contractor did not meet the requirement of the contract for making a claim for additional payment. It likewise held that actual notice of the claim did not satisfy the contract, and the county's actions did not constitute a waiver of the county's right to assert the contractor's non-compliance as a defense to the claim.

The dissent in Mike M. Johnson agreed that actual notice is not an exception to contract compliance. However, the dissent asserted that the real issue is whether the county's actual notice plus its direction to the contractor to proceed amounted to compliance with the contract by the contractor or waiver of the notice requirement by the county. The dissent would have ruled that when an owner directs a contractor to do work outside the original contract, and then observes the work being done, the owner cannot then rely solely on technical non-compliance with a claim provision to deny reasonable compensation, especially when the owner has not been prejudiced by the non-compliance.

Standard form contracts used by some public agencies contain protest and claim provisions that may allow a contractor to pursue a claim even though the contractor has failed to make the required notice. These provisions state that failure to give the required notice constitutes a waiver of the contractor's rights unless the contractor can prove the owner's interest was not prejudiced in any way by the contractor's failure.

Summary of Bill:

A contractor may enforce a claim right under a construction contract, even if the contractor has failed to submit the claim to the project owner in the form or within the time required by the contract, if the contractor can show:

• the owner knew of and consented to the work done by the contractor that is the basis for the claim; and
• the owner benefitted from the work.

Appropriation: None.

Fiscal Note: Not requested.

Effective Date: The bill takes effect 90 days after adjournment of session in which bill is passed.