Contractor Waived its Claim by Failing to Strictly Comply with its Contractual Dispute Resolution Procedures

Construction and Procurement Law News, Q4 2016

Firm Alert

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A recent case by an intermediate court in Ohio, IPS Electric Services, LLC v. University of Toledo, reminds parties to read and follow contractual provisions regarding notice of claims.

Throughout the course of a public construction project for the University of Toledo, various issues arose that impacted completion. Between October and December, the general contractor sent two letters to the owner’s project manager regarding a variety of project issues, some of which the contractor contended the owner caused, which affected the contractor’s productivity and increased its costs. In January of the next year, the contractor sent a third letter to the owner’s project manager stating that it had “previously provided ... written notices of impacts and claims with respect to the [project]” and that by way of this letter, it was “provid[ing] additional support for [its] claims as a follow-up to [its] prior submissions.” This letter set forth dollar amounts the contractor allegedly incurred as a result of delays and a resultant compressed schedule. The contractor sent a fourth letter in February that provided back-up for other unanticipated costs incurred by the contractor.

In March, the owner sent a letter to the contractor stating that the contractor had waived its claims because it failed to comply with the dispute resolution procedures set forth in Article 8 of the Contract.

Article 8 of the Contract stated in pertinent part:

8.1 Initiation of a Claim

8.1.1 Every claim shall accrue upon the date of occurrence of the event giving rise to the claim.

8.1.2 … [T]he Contractor shall initiate every claim by giving written notice of the claim ... within 10 days after the occurrence of the event giving rise to the claim.

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8.1.4 The Contractor’s failure to initiate a claim as and when required under this paragraph 8.1 shall constitute the Contractor’s irrevocable waiver of the claim.

8.2 Substantiation of Claims

8.2.1 Within 30 days after the initiation of a Claim, the Contractor shall submit 4 copies of all information and statements required to substantiate a claim as provided in this Article 8 and all other information which the Contractor believes substantiates the claim.

8.2.4 The Contractor’s failure to comply with the requirements of this paragraph 8.2 shall constitute an irrevocable waiver of any related claim.

 The contractor filed suit alleging breach of contract and unjust enrichment. The trial court dismissed the unjust enrichment claim and held that although some of the owner’s actions constituted a breach of its contract with the contractor, the owner “proved by a preponderance of the evidence that [contractor] failed to comply with the contract’s dispute resolution procedure, resulting in the irrevocable waiver of any related claim.” In reaching its decision, the trial court rejected the contractor’s argument that because it could only know its precise amount of damages once the project was fully completed, it did not need to strictly comply with the dispute resolution procedures in Article 8. The trial court found that the claim initiation process set forth in Article 8 “must be initiated within ten days after the occurrence of the event giving rise to the claim, not once the ‘contractor is able to precisely calculate its damages at the conclusion of the project.’” The trial court also found that the owner’s repeated refusal to consider the contractor’s claim did not negate the contractor’s obligation to pursue administrative remedies as required under the contract.

The appellate court agreed, finding that contrary to the contractor’s argument, “courts cannot decide cases of contractual interpretation on the basis of what is just or equitable.” The contractor was required to follow the Article 8 procedures even if the owner was unlikely to provide the relief sought. The appellate court also agreed that the owner insisted upon strict compliance with Article 8 and had not waived compliance.

Parties should become familiar with the claim procedures set forth in their contract and should seek legal counsel if further explanation is needed. Although not all courts are uniform in the enforcement of contractual notice and claim procedures, the failure to comply with the contract may open up a contractor to the possibility of waiving its claim.