by Mark A. Cobb
Last week, the Georgia Court of Appeals decided Western Surety Company v. Department of Transportation holding that a construction contract’s claim notice provisions were enforceable which, in turn, invalidated the prime contractor’s request for additional funds due to increased material costs. This holding underscores every contractor and subcontractor’s need to be aware of their contractual deadlines for providing notices on construction projects.
Background and Facts: This construction contract dispute involved the Georgia Department of Transportation (“DOT”), a government contractor, and two sureties. The DOT contracted with the GC to make road improvements in Georgia, and as a part of the contract the Sureties issued a payment bond and a performance bond to the DOT, as obligee. After the project was started, the GC experienced increased material costs (for the asphalt and other petroleum-related products) and suffered financial difficulties. The GC advised the Surety that it could not continue to perform under the contract and planned to voluntarily abandon the project. Consequently, the surety stepped in to complete the project pursuant to the terms of the performance bond.
The Issue: The surety ended up suing the DOT for, among other things, the additional material costs. The sureties, however, acknowledge that neither the original GC nor the Sureties themselves “strictly followed the claim notice requirements set forth under the contract.”
What Did the Contract Provision Require for Notice? The construction contract in dispute required written notice of any potential claims; it further specified that failure to provide timely notice was a waiver of the claim. Thus, if notice was not properly given, then the claim would automatically be denied. Specifically, the contract’s provision stated as follows:
NOTICE OF POTENTIAL CLAIM: In any case in which the Contractor believes that it will be entitled to additional compensation, the Contractor shall notify the Engineer in writing of its intent to claim such additional compensation. Such notice shall be given in order that the [DOT] can assess the situation, make an initial determination as to who is responsible, and institute appropriate changes or procedures to resolve the matter.
a. Claims for Delay — The [DOT] shall have no liability for any delay which occurred more than one week prior to the filing of such written notice. Failure of the Contractor to give such written notice in a timely fashion will be grounds for denial of the claim.
b. All Other Claims Except Acceleration and Delay — If the Contractor does not file such written notice before beginning the work out of which such claim arises, then the Contractor hereby agrees that it shall have waived any additional compensation for that work and the Contractor shall have no claim thereto.
The Sureties Argument: The Sureties claimed that the claim notice requirements were not applicable to the specific case because, among other things, the DOT waived strict compliance with the notice requirements, the GC and the Sureties substantially complied with the notice and claim procedures, and the DOT had actual notice of the claim.
The Holding: As the court pointed out, the parties had agreed (in their construction contract) that any additional material costs would require specific notice from the GC or Surety under the Contract and that compliance of this requirement would be “an essential condition precedent to any recovery of damages by the Contractor.” The Georgia Court further reminded the parties that “As a rule, ‘”[a]ny notice requirement must be reasonably construed.’ And substantial compliance with a notice provision may present an issue for the jury if ‘[t]he evidence … appears to be ‘in the spirit’ of the contract provision.’ [citations omitted]. Then, as the Court applies the facts in the trial court record, it concluded that none of the communications by the GC or the Sureties reasonably or substantially complied with the requirement that timely notice of a claim be given to the DOT. Thus, the Georgia Court of Appeals ruled that deadlines and notice provisions on construction contracts may be enforceable and, if proper notice isn’t given, it may preclude a party from seeking (much less recovering) additional money for its damages including increased material costs.
Practical Lesson: Regardless whether you are a prime contractor, specialty subcontractor or a sub-subcontractor working in Georgia, it is vital that you understand each term of your contract. When we review construction contracts for our clients, we create a list of deadlines and notice requirements and suggest that the client post it conspicuously on the project file, the project manager’s desk or other pertinent place as a reminder to strictly comply with the notice obligations; failure to meet each and every deadline may result in the loss of your claim, the inability to file a materialmen’s lien, or to seek additional compensation.