Complying with notice requirements is essential to maintaining your rights to payment on a construction project. This is true not only for mechanics lien and payment bond rights, but also any other rights to payment under your construction contract. These will be explicitly outlined in the terms of your contract, and they should be followed as close as possible. Failure to do so could spell disaster, as it did for a certain Alaska contractor. In a recent case out of the Alaska Supreme Court, a contractor’s claim for additional compensation was denied for failing to provide timely notice, as required by their contract.
Alaska contractor sends late notice of claim for additional compensation
The case in question is State of Alaska, Dept. of Transportation and Public Facilities v. Osborne Construction Company
- Owner: State of Alaska, Department of Transportation and Public Facilities (ADOT)
- General Contractor: Osborne Construction Company (Osborne)
- Subcontractor: GMI, A Division of AVAR (AVAR)
ADOT had hired Osborne as a general contractor to perform upgrades to a building located at the Fairbanks International Airport. The upgrades were designed to ensure the building could withstand an earthquake. Osborne, in turn, hired AVAR to perform compaction grouting to stabilize the soil structure of the site.
Project complications arise immediately
AVAR began work, making the agreed-upon injections into the soil. However, as the project progressed, multiple issue began to pop up. First, the sand intended to be used wasn’t available locally. After multiple rejections from ADOT’s engineering team, they finally found a supplier out of California.
Later on, while grouting from the inside of the building, structural issues arose. After a study was performed, ADOT approved the modifications to the work which now required increased spacing between injection sites. The work was completed on October 10, 2014.
On October 13th, Osborne transmitted AVAR’s “Notice of Change in Ground Conditions” (dated October 3rd), citing differing site conditions and outlining the increased costs.
On February 2nd of the following year, a claim for additional compensation was sent to Osborne and ADOT.
The claim was based on (1) differing site conditions, and (2) a lack of locally available sand that met the contractual specifications.
For more on these topics see:
- Preparing for Coronavirus Impact on Construction Supply Chain
- What You Need to Know About Differing Site Conditions Clauses in Construction Contracts
Finally, in May of 2016, Osborne submitted a claim to ADOT for additional compensation, incorporating AVAR’s February letter. Two months later, ADOT had respond by stating the claim didn’t comply with certain certification requirements, and recommended Osborne remedy the issue.
Osborne complied, and the revised claim was sent another 2 months later.
Alaska court denies compensation claims
The Alaska DOT contracting officer had denied the claim for failing to comply with the notice requirements under Article 15.1.5 of the contract, which read:
If the claim or dispute is not resolved by the DEPARTMENT, then the CONTRACTOR shall submit a written Claim to the Contracting Officer within 90 days after the CONTRACTOR becomes aware of the basis of the claim or should have known the basis of the claim, whichever is earlier.
The contracting officer stated that the latest Osborne should have known the basis of the claim was October 10, 2014. Therefore, the latest the claim should have been filed was January 8, 2015. This was affirmed by the ADOT Commissioner.
Osborne appealed to the Superior Court, which reversed the decision. There, the court stated that “in certain circumstances contractual and statutory formal notice requirements are excused or satisfied by actual notice.” Since ADOT was aware of the differing site conditions and the unavailability of of local material supplier, they were not prejudiced by the lack of formal notice.
The case ended up in the Alaska Supreme Court.
AK Supreme Court: The contract is clear, notice was sent late
ADOT argued that the 90-day period began to run when the contract becomes aware of the of the underlying condition that forms the basis of the claim. Conversely, Osborne suggested that ADOT is confusing a “claim” with a request for a change under Differing Site Conditions provisions under the contract.
Under those provisions, the ADOT is required to modify the contract when conditions have changed. Osborne argued that there’s not “claim” until the change request is denied.
The court wasn’t convinced by Osborne’s argument. The contract terms were clear: “the CONTRACTOR waives any right to [a] claim” if it fails to file its Claim within the 90-day period set by Article 15.1.5. The court even quoted the contracting officer’s decision:
Osborne at best was just under a year late, and at worst over a year and four months late in filing its claim.
Therefore, the court reversed the Superior Court’s decision, and reinstated the Commissioner’s decision. Osborne failed to file its claim within the time period outlined in the contract. Thus, Osborne waived any right to additional compensation.
Contract timing provisions are critical to payment claims
This case clearly confirms that the notice provisions contained within a contract must be strictly adhered to. This is true, regardless if the owner has actual knowledge of a potential claim or not. It’s unclear whether Osborne was aware that the claim was late, and attempted some legal gymnastics to justify the claim. Perhaps they honestly relied on their interpretation of the contract.
In any case, contractors should review and understand every aspect of their contract. If there’s any ambiguities or provisions you are unsure of, either request clarification from the other party, or contact a lawyer to review the contract. That way you can ensure you get paid what you’ve earned, instead of missing out on a legitimate claim due to a technicality.