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A construction contract usually sets out clear and definite
notice provisions addressing the procedures for the making
and documenting of a claim. While contractors may neglect
to strictly adhere to these procedures, favoring an informal
notice procedure to the comparatively antagonistic procedures
set forth in the contract, such an informal approach to
contract administration may result in substantial loss to a
contractor. In Starks Mechanical, Inc. v. New Albany-Floyd
County Consolidated School Corp., 854 N.E.2d 936 (Ct.
App. Ind. 2006), the contractor’s failure to follow the notice
provisions set forth in the contract made its claim to be reimbursed
for engineering costs associated with deficient
specifications untimely and, therefore, it was waived.
In Starks Mechanical, Starks Mechanical, Inc.
(“Contractor”) entered into a contract (the “Contract”) with
New Albany-Floyd County Consolidated School Corp.
(“Owner”) for the expansion, renovation, and improvement
of a middle school. After only one month on the project,
Contractor discovered certain alleged deficiencies in the
design specifications and submitted to Owner a Request for
Information (“RFI”) to provide notice of the alleged design
defects and to request a time extension. Owner responded to
Contractor by directing Contractor to complete the project
and to correct the alleged defects.
Contractor submitted RFIs throughout the course of the project,
but many of the RFIs failed to assert a claim for the
design costs it incurred. Nearly two years after signing the
Contract, and with the project wrapping-up, Contractor included
a line-item in a payment application for “Engineering
Deficiencies” resulting from the Owner’s responses to the
RFIs. This was the first formal notice provided to Owner of
the actual costs incurred by Contractor associated with redesigning
certain deficient specifications.
At trial, the court granted summary judgment in favor of
Owner, finding that Contractor’s claim for additional payment
had been waived due to its failure to provide timely
written notice of its claim in accordance with the Contract.
Contractor appealed the trial court’s decision to the Court of
Appeals, arguing that the trial court misinterpreted the Contract
and, that by submitting RFIs, the Contractor provided
the requisite contractual notice.
The Court of Appeals held, first, that a request for information
did not amount to notice of a claim. Specifically, the
Contract provided that “Claims” must be made “within 14
days after occurrence of the event giving rise to such claim or
within 14 days after the claimant first recognizes the condition
giving rise to the Claim, whichever is later.” Although
the RFIs submitted by Contractor may have been timely, the
RFIs did not claim additional engineering costs resulting
from the design deficiencies. As such, the RFIs failed to provide
Owner with notice of the claim for additional engineering
costs within the fourteen days mandated by the Contract.
While the Owner may have known that correcting deficient
specifications required Contractor to incur engineering fees,
the purpose of such notice provisions is to alert an owner as
to the cost of their decision so that the owner has an opportunity
to make decisions with the bottom-line in mind. In failing
to alert Owner as to the true financial impact of its decision,
Contractor failed to provide Owner the information
mandated by the Contract; therefore, the Court rejected its
claim.
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Moreover, the Court of Appeals found that Contractor
failed to submit weekly updates of its claim, as required by
the Contract. The Contract provided
that “[i]n the case of continuing delay,
the Claim along with estimated associated
costs must be updated weekly
and submitted to the Construction
Manager for the duration.” Contractor
admitted its failure to provide weekly
updates as to the estimated costs associated
with its ongoing claim for correcting
deficient specifications. Coupled
with the failure to request additional
engineering costs resulting
from the deficient specifications, the
Court of Appeals determined that
Contractor’s claim for additional
compensation was untimely.
Having concluded that Contractor’s claims were untimely,
the Court of Appeals affirmed the trial court by finding that
Contractor’s failure to adhere strictly to the notice requirements
of the Contract amounted to a waiver of those claims.
Of note, the Contract did not include an express provision
providing that failure to make a claim within the provided
period equates to a waiver of claim. The Court of Appeals,
therefore, did not rely on language expressly equating deficient
notice with waiver of a claim as found in some construction
contracts. Rather, the Court of Appeals construed
the existence of a time period in which to make a claim as
evidence that the parties intended to treat untimely claims
as waived.
Starks Mechanical is instructive on many common contractual
issues. First, although many contractors attempt to remove
language from a contract equating deficient notice
with waiver of a claim as a means of protecting their rights
to make untimely claims, courts may elect to reject claims
from contractors which fail to adhere strictly to the contractual
notice requirements. Second, contractors should recognize
that, although tedious and formal, failure to adhere to
the notice provisions of a contract can have severe consequences.
While this case was decided in Indiana, the logic
behind the Court of Appeals’ decision could be applied by
any court in this country. As such, contractors and owners
alike should heed this ruling when negotiating and performing
construction contracts.
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