Advisories & Insights

In a major victory for public owners, the Washington State Supreme Court, on October 23, 2003 in Johnson v. Spokane County, ruled that contractors must strictly comply with contractual notice provisions to preserve their right to claim extra compensation for change orders, delay, impact, or changed conditions on projects. In the Johnson case, the Supreme Court finally put to rest arguments long advanced by contractors, and their attorneys, that claim notification provisions were simply "technical" and did not provide a defense by the owner to a contractor's claim for delay or impact or extra work. The Johnson court soundly rejected that argument.

Furthermore, the Johnson court held that even if an owner had actual notice of a contractor's claim, the contractor's failure to provide notice pursuant to the written contract provisions still barred the claim.

Johnson Court's Ruling.
The Supreme Court in Johnson held, "We hold that 'actual notice' is not an exception to compliance with mandatory contractual protest and claims provisions."

The court specifically noted, "General notification to the County that it expected additional compensation did not amount to claims under the contract, nor did it excuse MMJ [Johnson] from complying with the contractual claims provisions."

As to Johnson's arguments that the county had actual notice of the delay, thereby waiving technical compliance with contract notice provisions, the court held, "To hold that a contractor's notice of protest to the owner serves to excuse the contractor from complying with mandatory claims procedures would render contractual claims requirements meaningless."

With such a statement, the Supreme Court, by a 5 to 4 vote, adopted the position that public owners have long held to be the law in the state of Washington. Written contractual notice provisions mean something and must be complied with. Failure by the contractor to comply with those provisions will bar a claim.

This case has significant impacts for public owners, because Johnson will alter the way contractors approach preparation and notice of claims. As one contractor's attorney suggested in the Daily Journal of Commerce on October 31, 2003, the contractor's response to Johnson will be to "bury owners in a blizzard of paperwork for every single delay and change on a project."

Spokane County hired Mike Johnson Construction to construct two sewer projects. After the projects were awarded, the County discovered there was a road rewidening project that would affect the project's design and plans. On June 4, 1998, the County issued a proposed change order to Johnson.

The contract's Special Provisions required Johnson to file a written notice of protest to any work required by a change order. The contract further required, within 15 calendar days of the protest, a sworn filing of information that included, amongst other items: (1) the estimated dollar cost of the project work, and (2) an analysis of the project schedule, showing any schedule change or disruption. Spokane County had adopted by reference the Standard Provisions issued by the Washington State Department of Transportation.

Johnson did not protest the County's change order. Instead, on June 26, 1998, Johnson wrote a letter to the County indicating that the impact of the change order was "causing additional delay and costs to our work." On July 16, 1998, the County advised, "If you believe you have a claim for additional compensation within this contract, please submit this claim per section 1-09.11(2)." Johnson did not submit a certified claim as required by the County's specifications. Johnson argued that he was excused from complying with the Special Provisions because County inspectors had directed Johnson's work to be done and had actually observed the changed work and delay that Johnson had encountered. That actual notice, however, was insufficient in the eyes of the court to preserve Johnson's right to file a claim.

Although the Supreme Court did not completely rule out an actual notice exception to strict compliance with written contractual claims requirements, it held that such a waiver would arise only from "unequivocal acts of conduct evidencing an attempt to waive." Therefore, it is the owner's announced intent to waive notice, rather than the conduct of the owner, that is determinative.

The dissent criticized the majority's decision as contrary to the general rule in Washington that "where the contractor notifies the owner of a changed condition, failure to precisely follow claims procedures will not defeat the contractor's right to compensation, unless that procedural error causes prejudice to the owner." Despite the strong dissent, that principle is no longer law in Washington.

What Should Public Owner Do After Johnson?

The court's decision in Johnson means for contractors that strict compliance with notice provisions is absolutely critical to preserve a claim. For owners, it means is that a public owner has an absolute right to insist on strict compliance with notice provisions before negotiating, and certainly before paying, any contractor claim. It furthermore means that public owners must pay particular attention to the language, structure and method of claims notification and claims certification procedures set forth in their contracts.

How such notice provisions are drafted is the most important thing public owners should pay attention to after Johnson. Our experience with representing public owners indicates that there is a vast disparity in public owner contracts in this state in the way claims notification and certification provisions are drafted. Sophisticated public owners, such as the City of Seattle and the Seattle School District, for example, have tough and technical claims notification and certification procedures.

However, many public owners, especially those who are engaged in only the occasional construction project, have very weak and loose contractual notification requirements. In many cases currently no claims certification requirements exist in public contracts. Public owners such as water districts, fire districts, smaller cities, smaller ports, rural school districts, and public hospital districts, that use form contracts, are best served after the Johnson case by taking the time to make certain that the contract's Special Provisions contain strong notification and claim certification procedures. Without such procedures, those public owners may find themselves paying claims that an owner, like the City of Seattle, would not pay because of their more particular certification and claims notification provisions.

After Johnson, many public owners should strongly reconsider whether they continue to use public contracts that contain arbitration provisions with the American Arbitration Association. Although arbitration has long been trumpeted as a quick and economical way to resolve disputes, arbitration has its limitations. Particularly important in light of Johnson is the fact that arbitration has no right of appeal. After Johnson, the contractor's failure to conform to a contractual notice provision provides a legal defense to the public owner that may mean the claim would be dismissed as a matter of law in the Superior Court. Many arbitrators, who are not practicing lawyers, may still be inclined to allow claims to go to hearing, even where such claims would be dismissed in the Superior Court.

What Might We Expect of Contractors After Johnson?

The answer is more aggressive claim prosecution and more paperwork forwarded to the owner. Because contractors will more frequently be turning to their attorneys to guide them through notice provisions, contractors' attorneys may get involved at an earlier stage in the claims process and claim notice letters may now be drafted by attorneys rather than project personnel. Claim letters may now be sent for everything conceivable that might later give rise to a claimed event of delay. Because of this aggressive attitude toward claims, it is more important than ever that public owners make certain that their construction contracts contain strong claim notice clauses.

Change orders must now be executed so that all delay and impact is addressed and resolved. Contractors however may now refuse to execute change orders that do not preserve rights for later impact and delay claims.

After Johnson, contractor's attorneys are already advising their clients to refuse to do change order work without a signed Change Order in advance. This means owners may have to result more frequently to using Construction Change Directives to get change order work done.

After Johnson, notice provisions and claim certification provisions are more important to a public owner than ever to insure a well-run project. Owners must now take the effort to draft meaningful notice provisions that will give them the opportunity to mitigate contractor claims at the earliest stage of a project.