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Overcoming Failure to Strictly Comply with Contractual Notice Provisions
by Daniel J. Brenner
Construction contracts typically contain numerous notice requirements governing the process by which one party to the contract may submit a claim for additional compensation or additional time for performance of that party’s contractual obligations. These contract provisions often include strict requirements for both the timing and form of a claimant’s notice and provide that a claimant’s failure to comply with such procedural requirements serves as a complete waiver of the claimant’s right to pursue its claim. In other words, a claimant’s failure to submit timely notice of its claim or failure to utilize the correct method of serving its notice (i.e., e-mail as opposed to certified mail) precludes the claimant from subsequently pursuing its claim, regardless of the merits of such claim. Common examples of such notice provisions include:
- Claims for additional costs or scheduling extensions: “Claims by Contractor must be initiated by written notice to the Owner. Claims by Contractor must be initiated within 21 days after occurrence of the event giving rise to such Claim (7 days for any Claim for additional time) or within 21 days after the claimant first recognizes the conditions giving rise to the Claim (7 days for any Claim for additional time), whichever is later. If the Contractor fails to provide a proper Claim within the time frame set forth above, Contractor’s entitlement to an adjustment in the Contract Sum or Contract Time, if any, shall be waived.”
- Claims for additional costs resulting from unforeseen site conditions: “In no event shall Contractor be entitled to any increase in the Contract Price for a Concealed Condition unless Contractor provides written notice of the Concealed Condition immediately after becoming aware thereof and before further disturbing the Concealed Condition affected thereby or performing any Work in connection with the Concealed Condition.”
- Claims for additional time resulting from weather delays: “In the event Contractor intends to designate a particular day as a Weather Delay, and as a condition precedent to a designation, Contractor shall notify Owner immediately of the designation, but in no event later than one day after such Weather Delay occurs, and Owner and Contractor shall agree on whether such day shall be deemed a Weather Delay.”
- Claims for additional time or money: “If Contractor wishes to make a claim for an increase in the Contract Price for a Compensable Delay and/or for an extension in the Contract Time for an Excusable Delay or Compensable Delay or to make a claim for any other reason specifically permitted under the Agreement, Contractor shall give Architect and Owner written notice thereof within seven (7) days after the occurrence of the event giving rise to the claim . . . . “Claims not submitted as provided in this Provision are deemed conclusively to have been waived by Contractor, are null and void, and shall not be considered by Architect and Owner or otherwise serve as the basis for any increase in the GMAX Price or extension of the Contract Time.”
From the prospective of the recipient of the claim — typically an owner or a general contractor in the context of a subcontract agreement — the appeal of such provisions is clear: the party receiving the notice needs ample opportunity to respond to and address any potential claim and desires to limit the amount of time for which it is exposed to claims. However, in certain factual scenarios these provisions can lead to overly harsh, unjust results. Consider an excavation subcontractor who discovers unsuitable soil conditions that require the excavator to hand dig certain sections of the foundation, thus requiring more time for the performance of the subcontractor’s work than originally anticipated. The subcontractor orally advises the general superintendent during a site meeting, but does not provide written notice within the time frame required by the subcontract. As a result, the subcontractor could be subject to a significant claim by the general contractor for delays to the project which could have been avoided had the subcontractor supplemented its oral notice to the general contractor with timely written notice.
Fortunately, this subcontractor is not without recourse. Indeed, there exist several legal doctrines that, depending on the underlying factual scenario, can help a party avoid the perils of failing to comply with contractual notice provisions. This article discusses two such legal doctrines, namely the doctrine of first material breach and the doctrine of actual notice — both of which may apply to revive a claim that might otherwise be precluded due to a failure to strictly comply with contractual notice provisions.
Doctrine of First Material Breach
The doctrine of first material breach is a common sense principle that is highly appealing to a basic sense of fairness between contracting parties. Under the doctrine, when a party to an agreement materially breaches the contract — that is, fails to perform a contractual obligation that goes to the heart of the negotiated deal — that party is no longer able to take advantage of the benefits of the contract. In other words, the breaching party loses its ability to enforce the contract and the non-breaching party is relieved of its own contractual duties. While the doctrine is relatively straight forward, its application is not always so simple. First, it is not always clear whether a breach is material. Second, questions of “who breached first” are often contested.
Earlier this year, the Appellate Division of the New York Supreme Court addressed the application of the material breach doctrine to a party’s failure to strictly comply with contractual notice provisions in U.W. Marx, Inc. v. Koko Construction, Inc.,2 N.Y.S.3d 276 (N.Y. App. Div. 2015). In Koko, a roofing subcontractor (“Koko”) ceased performing its work after the general contractor (“Marx”) failed to make three consecutive progress payments, despite Koko’s repeated demands for payment. Marx, construing Koko’s absence from the jobsite to be a contractual default, responded by giving Koko three days to “cure” its alleged default by resuming work. Koko replied by providing Marx with a seven days’ notice of work suspension due to nonpayment, as provided in the subcontract. In turn, Marx declared Koko had breached the contract by abandoning the project, and terminated the subcontract.
Upon finding Marx’s withholding of payment to Koko as “unsubstantiated and unjustified” and therefore a material breach of Marx’s subcontract with Koko, the trial court entered judgement for Koko. In its appeal, Marx did not contest the ruling that it had materially breached the contract. Instead, Marx argued that despite the breach, Koko was precluded from any recovery due to its failure to comply with a contractual notice provision, which provided:
If the Contractor does not pay the Subcontractor through no fault of the Subcontractor, within seven days from the time payment should be made as provided in this Agreement, the Subcontractor may, without prejudice to any other remedies, upon seven additional days’ written notice to the Contractor, stop the [w]ork of this Subcontract until payment of the amount owing has been received. The Subcontract Sum shall, by appropriate adjustment, be increased by the amount of the Subcontractor’s reasonable costs of demobilization, delay and remobilization.
The appellate court agreed that Koko failed to comply with the contractual notice provision. However, because it deemed Marx’s earlier failures to make progress payments an uncured material breach of Marx’s own contractual obligations, Koko was relieved from performing its contractual obligations — namely the requirement to provide seven days’ written notice before stopping its work. Thus, because Marx’s breach was the “first material breach,” Koko’s failure to strictly comply with the notice provision did not affect Koko’s ability to make a claim for payment under the subcontract.
Illinois courts similarly apply the first material breach doctrine to excuse a party’s failure to comply with contractual notice provisions. In Danny’s Construction v. Travelers Casualty & Surety Co. of America, a Federal District Court noted that “[u]nder Illinois law [an unjustified] failure to make progress payments is viewed as a material breach entitling the subcontractor to suspend work even without contractual authorization.” 2007 WL 2198980 (N.D. Ill. July 31, 2007). Accordingly, under Illinois law, one party’s prior material breach of the contract — i.e. unjustified failure to make progress payments — excuses the other party’s failure to strictly comply with the contract’s claim notice provisions.
Doctrine of Actual Notice
While contractual notice provisions often explicitly require a specific method of providing notice, the doctrine of actual notice may protect a party who fails to abide by such requirements. Indeed, pursuant to this doctrine, so long as there exists legally sufficient evidence that the recipient was actually made aware of the potential claim, failure to satisfy the technical notice requirements of the contract may be excused.
For example, consider the case of Dennis F. McKenna Co. v. Smith, where the real estate purchase agreement between two parties permitted the seller’s attorney the opportunity to review and reject the sale prior to the consummation of the sale so long as notice was provided “in writing,” and addressed and delivered to the plaintiff either personally, by certified or registered mail, or via fax. 302 Ill. App. 3d 28 (1st Dist. 1998). After reviewing the executed agreement, seller’s counsel chose to reject it. However, counsel sent the rejection notice to the buyer’s broker rather than the buyer, failing to meet the literal terms of the contractual notice provision. Shortly thereafter, the seller agreed to a more lucrative deal with another buyer. The original prospective buyer sued to invalidate the second transaction, arguing that the rejection notice was improperly delivered and therefore inoperative, leaving the original contract in effect and enforceable.
The Appellate Court of Illinois found that while the failure to abide by the notice requirements constituted a technical breach of the contract, “the breach was immaterial under the principles of inherent justice,” because the prospective buyer’s agent had promptly forwarded the seller’s rejection letter to the prospective buyer. Thus, the buyer was made aware of the seller’s intent to void the contract despite not receiving the notice directly from the seller as required by the contract. The court concluded that this actual notice sufficiently met the fundamental purpose of the provision: to ensure the buyer was actually informed of the rejection. Noting that forfeitures of contracts are generally disfavored by the law, the court stated that “a party will be relieved from a technical forfeiture if an injustice would result.” As such, the court refused to invalidate the second transaction. See also Dean Mgmt., Inc. v. TBS Constr., Inc., 339 Ill. App. 3d 263 (Ill. App. 2d 2003) (deeming notice of termination by facsimile sufficient despite failure of contract to allow for notice by facsimile because terminated contractor had actual notice of general contractor’s intent to terminate subcontract absent subcontractor’s cure of its default within twenty-four hours).
Conclusion
While it is certainly a claimant’s most prudent course of action to strictly adhere to the claim notice requirements in its contract, a claimant’s failure to strictly comply with those notice provisions is not necessarily fatal. Indeed, under certain factual scenarios, the well-established legal doctrines of first material breach and actual notice may provide relief from the otherwise harsh ramifications of procedural notice deficiencies.