Fundamentals of Construction Claims. William J. McConnell
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of the other party (or third parties that the other party is responsible for, such as subcontractors and vendors) is noncompliant with the contract requirements. However, there are instances when the paying party to a contract takes on performance obligations, such as furnishing materials to the performing party or completing work that is a predecessor to the performing party's work. When a party fails to perform its physical work in accordance with the contract terms, and this failure affects the other party's cost and/or time on a project, the affected party can assert an affirmative claim to seek recovery per the contract terms. Typical performance issues involve:
Quality Issues: When the physical work of one party is noncompliant with the contract requirements and it impacts the other party's costs and/or time on the project.
Schedule Issues: When the work of one party is not performed per the contract schedule and this impacts the other party's costs and/or time on the project.
Separate Contractor Issues: When the physical work of one of the party's subcontractors, vendors, or separate contractors is noncompliant with the contract requirements and the contract makes this party responsible for its entities, and one of these entities impacts the other party's costs and/or time on the project.
D. Third-Party Issues
Third-party issues typically fall into one of two groups. First, when a party to an agreement, such as a subcontractor in a contractor–subcontractor agreement, is impacted by an owner–designer issue, most contracts allow the subcontractor to submit a claim to the contractor and then the contractor is obligated to pass the claim through to the owner for attempted recovery. Standard contract agreements have strict procedural requirements for this type of claim. Second, when one or both parties to an agreement are impacted for reasons that are out of the control of both parties to the contract, such as a hurricane, certain contract forms allow additional time as the exclusive remedy for the claimant, while others keep the door open for the recovery of both cost and time impacts related to the impact. For this second group of impacts, standard contract forms also have strict procedural requirements such as the source for weather data, etc. Examples of third-party issues include:
Pass Through Issues: When the agreement between two parties contemplates pass through claims and when the performing party that is able to submit a pass through claim has cost and/or time impacts due to a pass through issue, such as a design error.
Abnormal Weather Issues: When the agreement between the parties contemplates average weather conditions and when the performing party has cost and/or time impacts due to abnormal weather conditions.
Force Majeure Issues: When an event that is beyond the control of the parties to a contract either precludes or postpones performance under the contract and this impacts one or both of the parties' costs and/or time on the project.
E. Change Order Negotiation Issues
When both parties to an agreement relating to a construction project agree that the claimant is entitled to a change order or backcharge under the agreement but the parties cannot agree to the cost and/or time impacts sought by the claimant, dispute resolution provisions are often triggered by the claimant to resolve time and/or cost impacts.
Summary
Most claimants wait until the end of the project to move forward with a dispute resolution even though most contract forms consider that such issues will be resolved during the project. Claimants generally take this position to help keep the peace while work is underway; however, this strategy simply kicks the proverbial can down the road and often leads to a nuclear conclusion of the project. Moreover, many standard contract forms allow the paying party to direct the performing party to complete change order work while the cost and time impacts are resolved—this type of direction can place cash flow strains on the performing party and again cause large disputes at the tail end of projects.
4 Step 3: Fulfill Pre-Claim Requirements and Notice Requirements
Construction contracts often prescribe both pre-claim requirements and formal claim notice requirements. In addition, most contracts require that notice be issued in writing and transmitted via an accepted method, such as certified mail or registered mail, archaic as that may seem. Contractor pre-claim notice requirements allow the respondent the opportunity to render a decision on the issue before it is elevated to a formal “claim” status. Formal claim notice generally comes after the respondent has rejected all or a portion of claimant's change request.
It is common for claimants to ignore or otherwise fail to adhere to pre-claim notice requirements and/or formal claim notice requirements. Because lack of notice defenses can cause draconian results for claimants, state and federal courts have ample case law on this subject. States vary on their treatment of respondent's “failure to provide proper notice” defense. A minority of states interpret notice provisions strictly and often time bar delinquent claims, regardless of merit. Most states and federal courts take a more liberal “fairness” approach and often accept claimant defenses that can demonstrate that the respondent:
1 had constructive notice;
2 was not prejudiced due to the lack of notice; or
3 waived notice requirements based on prior conduct.
Claimants that fail to adhere to strict notice provisions and whose claims are rejected by respondents based on a lack of notice should contact a qualified construction attorney to discuss available defenses.
Constructive notice means that the respondent knew or should have known about the claim event. This may include verbal notice, discussions at a meeting(s), or superior knowledge. Second, claimants can assert a lack of prejudice defense if the respondent was not prejudiced by lack of timely notice. In other words, the respondent would not have acted differently even if the claimant had issued proper notice, e.g., the claimed work had to get done for the project to move forward and there was no alternative. Third, a waiver of notice defense may occur when the respondent did not previously enforce strict notice requirements as a condition precedent for the negotiation of claims.
I. Pre-Claim Requirements
Standard contract agreements contemplate various types of claims that frequently arise on construction projects and for certain categories of claims these contract forms include pre-claim provisions that allow respondents an opportunity to review the impact and, if so determined, issue a change in the claimant's contract sum and/or contract time before the claimant initiates dispute resolution. Thus, it is important for the claimant to define the nature of a potential claim so it can evaluate whether any pre-claim steps are necessary before it invokes the dispute resolution process. Below is a sample of impacts that often require a pre-claim notice. Each of the examples below is based on a contractor being the claimant and an owner being the respondent and these two parties have entered into a standard contract form and the owner is responsible for the design on the project.
A. Design Issues
1. Differing Site Conditions
A differing site condition occurs when the contractor discovers subsurface or concealed conditions that differ materially from those indicated in the contract documents (Type 1 Differing Site Condition) or materially different from conditions ordinarily encountered in work in the location of the project (Type 2 Differing Site Condition), and this differing condition will cause an increase in the contractor's cost and/or time to perform the work. Standard contracts typically require the contractor to allow the owner the opportunity to decide on whether to authorize a change order to cover resultant impacts. If the contractor does not agree with the owner, it can initiate dispute resolution. The examples below review specific pre-claim requirements.
AIA A201 – Section 3.7.4: The contractor