Alaska Supreme Court Decision Underscores Importance of Carefully Following Contract Claim Provisions
Tue Jul 14, 2020
© Alaska Contractor Summer 2020 Edition
It is a truism that construction projects rarely go exactly as planned. And in many situations, unforeseen events – such as differing site conditions, increases in material prices, or an owner-directed change in the project – may entitle contractors to an increase in the contract price. But such adjustments do not happen automatically. Rather, contractors must follow contractual notice and claim requirements to get paid for extra work.
Most construction contracts include notice and claim provisions. These provisions typically obligate a contractor to provide notice of a claimable event to the owner; and describe how and when to submit a claim if the issue is not resolved. If the contractor fails to comply with these provisions – either by providing notice in an improper form or submitting the claim late – it risks having the claim denied.
This is what happened in Alaska Dep’t of Transp. and Public Facilities v. Osborne Construction Company (“Osborne Construction”), decided by the Alaska Supreme Court May 1st. In that case, the court denied a contractor’s claim on behalf of its subcontractor because the contractor did not submit a formal claim within the 90-day period required under the contract. The opinion underscores the importance of timely claims and may signal a stricter approach to claim procedures in coming years.
Historically, Alaska courts have taken a moderate approach to this issue; often excusing strict compliance with contractual procedures so long as the contractor can demonstrate that it provided actual notice of its claim, and that the owner suffered no prejudice as a result.
For instance, in City of Valdez v. Valdez Dev. Co., the Supreme Court excused a contractor from the 10-day written notice requirement within its contract because the city of Valdez had actual notice of the contractor’s delay, and had suffered no damage or prejudice from not receiving formal written notice. 523 P.2d 177, 183 (Alaska 1974). Likewise, in Neal & Co. v. City of Dillingham, the court found that notwithstanding a contractual requirement for written notice, the contractor could have preserved its differing site conditions claim by clear, non-written notice to the city, but that it had not done so. 923 P.2d 89, 93-94 (Alaska 1996).
But in Osborne Construction, the court was less generous. In that case, the Department of Transportation and Public Facilities hired a general contractor to upgrade a building at the Fairbanks International Airport. The general contractor then hired a subcontractor to perform compaction grouting, to increase soil density under the building being improved. The subcontractor encountered what it believed were differing site conditions related to the soil, and it faced a shortage of locally available sand that met the contract requirements for its work.
In October of 2014, after approximately four months of work, the subcontractor sent a notice of increased costs to the general contractor, which the general contractor forwarded to DOT. Several months later, In February of 2015, the subcontractor sent a claim letter to both the general contractor and DOT, stating a claim for increased compensation based on the differing site conditions and shortage of materials. DOT did not respond to the subcontractor’s letter, but the court noted that it had no duty to respond to uncertified claims.
In May of 2016 – more than a year laterthe general contractor submitted a claim, but failed to properly certify it. The general contractor re-submitted the claim with a corrected certification in September of 2016.
DOT’s contracting officer denied the claim as untimely because it was not filed within 90 days of the contractor becoming aware of the basis of the claim. The contracting officer’s decision was affirmed by the DOT Commissioner but was reversed on appeal to the Superior Court. The Superior Court, relying on Neal & Co. v. City of Dillingham. and City of Valdez v. Valdez Dev. Co., held that DOT had actual notice of the claim, and “did not appear to be prejudiced by the lack of formal notice.” The Superior Court did not address the timeliness of the certified claim.
The State then appealed to the Supreme Court, which reversed again, focusing solely on the issue of timeliness. The court noted that the contractor “‘waive[d] any right to a claim’” by failing to file the claim within 90 days under the terms of the contract. And, because the claim was “at best . . . just under a year late and at worst over a year and four months late,” the contractor was barred from recovery.
The contractor argued that the 90-day limit for a formal claim never began running because DOT never responded to the original pass-through of the subcontractor’s claim in February of 2015. [Although rejected in the court’s May 1st decision, the contractor has filed a petition for rehearing on that basis.]
The Supreme Court also sidestepped the question of whether DOT had “actual notice” of the claim. Because the timeliness of the submission was dispositive of the case, it did not directly address the Superior Court’s analysis of notice.
There are three takeaways from Osborne Construction that contractors should follow to avoid having claims denied. First, contractors should carefully follow contractual notice procedures. Although City of Valdez and Neal & Co. remain valid precedent, prudent contractors should not depend on concepts of “actual notice” and lack of prejudice to preserve their rights to a claim.
Second, contractors should file claims in the time and form required by their contract. If a contractor cannot file a claim within the contractual period, it should request an extension of time from the owner. Contractors should not wait for a request to be denied before filing a claim – unless resolved, claims should be filed without delay.
Third, general contractors should effectively communicate with their subcontractors. One of the apparent challenges in Osborne Construction was the difficulty of presenting and certifying a claim on behalf of the subcontractor.
In sum, the best approach for contractors is to read, and follow, the provisions for claims within each contract.