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Bad news should travel fast: a collaborative view of contract notice provisions

Tuesday 24 October 2023

Credit: ktasimar/Adobe Stock

Mark C Sanders

QDR International, Wilmington, DE

Notice provisions are a necessary part of construction contracts, but they can also be a source of contention. Employers may regard receipt of formal notice as merely the first step towards an eventual claim. Contractors may regard strict notice provisions as an inequitable barrier used to deny otherwise just claims. The guidance written on the application of notice provisions focuses on protecting the parties’ individual rights. Can parties look at notice as the first step in a collaborative change management process without losing any of that protection?

Much has been written about contract notice provisions, and the advice is reasonable and consistent. Notice provisions help employers to avoid surprises, and contractors comply with them to uphold claims. Employers are advised to incorporate and consistently enforce clear and reasonable requirements.[1] Contractors are advised to comply, especially in jurisdictions where precedent or code calls for strict interpretation.[2] Even where interpretation may be more nuanced or varied, strict compliance is the safest approach.[3] All this guidance is sensible, but it does not imply a collaborative approach to successful project delivery. How can notice provisions be viewed from a collaborative perspective?

While necessary, notice provisions can increase administrative burden and promote an adversarial atmosphere between the parties.[4] Employers and contractors often view formal notice as the first shot fired in a potential dispute. A collaborative approach would shift the parties’ focus towards efficiency and partnering, allowing employers to avoid surprises and contractors to uphold their rights, while minimising negative side effects. Such an approach would better balance the importance of notice provisions to claims and defences with their importance to proactive and collaborative contract management.

Claims perspective

Failure to comply with notice provisions is a common defence to construction claims, and it can bar recovery, even leading to results that appear inequitable.[5] Such instances lead contractors to view notice provisions as a one-sided set of administrative barriers that employers can leverage to deny otherwise just claims. That view is reinforced by the use of stringent requirements within jurisdictions known to strictly interpret those requirements. The following sample provision was paraphrased from a contract executed in such a jurisdiction in the United States:

‘If at any time Contractor believes that it is entitled to an adjustment to the contract price or schedule due to an unforeseen event, Contractor shall within seven days after Contractor knows, or should have reasonably known, of such event, deliver a request for change to the Contracting Officer, on the required contract form. The request shall describe the nature of the event and the type and amount of relief sought. For situations that are ongoing, the amount of relief shall be estimated to the best of Contractor’s knowledge and ability. Failure to provide timely notice will constitute a waiver of any right to an adjustment to price, schedule, or any other relief associated with the event.’

The preceding clause requires more than mere notice of an impact. It specifies a tight duration for the delivery of specific and detailed information in a particular format. Moreover, conformance requires significant competence as the clause specifies what the responding personnel ‘should have reasonably known’ and includes requirements to describe events and impacts and estimate relief ‘to the best of Contractor’s knowledge and ability’. Depending on the event and its impacts, conformance could require the timely input of a project manager, superintendent, estimator, scheduler, subcontractors and more. The response is not required to be perfect, but any material error or omission could jeopardise the ability to recover some or all of any resultant impact. Contractors often believe that anything they say can and will be used against them, and those beliefs are formed by experience.

Contract managers may not be attorneys, but taking care not to waive the employer’s rights is effectively part of their job description

Meanwhile, the employer’s team is also likely to be experienced with notice provisions from a claims perspective. Guidance advises them to take care not to waive notice requirements, as lack of strict conformance might be raised in the employer’s defence of a claim even if the employer had actual or constructive notice of the underlying event and its impacts.[6] Contract managers may not be attorneys, but taking care not to waive the employer’s rights is effectively part of their job description. Consequently, strict enforcement of notice provisions is the rule, even when the notice will convey no new information.

Therefore, from a claims perspective, the parties are focused on protecting their rights and interests. The challenge is doing that while working together for the success of the project.

Contract management perspective

For asset managers, project managers, and cost engineers, the concept of notice goes beyond the requirements included in any one contract. Notice is a key input for change management processes and could come from any project participant. For example, the AACE Total Cost Management Framework notes: [7]

‘[C]hange management is the responsibility of everyone involved with the project because the success of the process depends on everyone actively watching for and notifying project management of any potential or actual deviation or change.’

From this perspective, notice is everyone’s responsibility because the identification of a deviation, variance, or change leads to a proactive response that includes analysis, further scope definition, and impact assessment. Those activities may or may not result in contract changes, but only those changes that cannot be resolved through contract change management processes will become claims.

Even within the context of a contract, notice is viewed first as an input to change management, which may or may not transition to claims management. The Construction Extension to PMI’s PMBOK Guide notes:[8]

‘The construction contract establishes the procedures for the project’s change control system. Standard provisions often include certain notice requirements [...].

A well-written contract with fair contract terms provides a basis for minimizing claims when it comes to scope changes and unknown site conditions, force majeure delays and fortuitous events, and timely reporting and fair-notice provisions.’

The primary purpose of contract notice is to inform the counterparty to begin change management and impact mitigation.

These excerpts introduce the positive potential of a well-drafted notice clause. Notice informs stakeholders of an unforeseen event or potential change such that they can begin working together to find and execute the best possible solution. Timely notice should still serve to protect the parties’ rights and interests, but that is a secondary purpose. The primary purpose of contract notice is to inform the counterparty to begin change management and impact mitigation.

Collaborative use

Projects are more likely to have successful outcomes when the interests of the parties are aligned. If parties can minimise the impact of unforeseen events, the risks and magnitude of claims are reduced for all. In an ideal world, parties might even find opportunities to deliver greater project benefits at lower cost and share the savings. So, how can parties draft and apply notice provisions in a more collaborative way?

A well-drafted notice provision will seek to balance speed with the quality of information – the shorter the allowable period for notice, the greater need to allow information to be supplemented or superseded as the underlying events and their impacts are better understood. The specified means of communicating notice should not reduce speed and efficiency. Instead, it should help to ensure the attention of the proper recipient and verification of receipt, characteristics in which secure electronic communications should easily outperform delivery of hard copies. Format and content requirements should be kept simple, focused on conveying the date and nature of underlying events and the order of magnitude of potential time and cost impacts. Further details can follow the initial notice.

For application in a collaborative relationship, employers should want to pay for services received, even considering a failure to comply strictly with notice provisions, as long as they are not prejudiced by that failure. Why? Because the success of the employer and contractor is viewed jointly. Over the long term, not paying for services received will drive some contractors out of the client’s market, leaving only those that can accommodate the client’s sharp business practices.

The ability to survive in such an environment typically requires sharp business practices on the part of the contractor, for example, raising technical inconsistencies in the contract scope after bidding instead of before bidding, excessively front-loading cost curves, and pricing change orders more opportunistically, especially when the client is under pressure to deliver the project. The contractor shifts its business strategy more towards profitability in every interaction and less towards maintaining the long-term relationship. Responding accordingly, employers that own significant fixed assets with long-term needs will experience significantly increased transaction costs in such an environment.

The collaborative employer wants the contractor to see value in sharing critical information in a timely manner. The employer should expect the contractor to work to uphold its right to recover extra costs for extra work. It should see notice as the starting point of a change management process directed toward achieving the most efficient solution at the best possible value.

The collaborative contractor will be open and honest in its assessment of potential change events. The contractor will discuss project status transparently and indicate when unforeseen events might have an impact that would trigger a notice provision. The employer and contractor will discuss which events merit formal notice and select the manner, form, and content of notices to minimise administrative burden. For example, in most instances, electronic communications are now more efficient and more certain than outdated requirements for delivery of hard copies.[9]

If an employer or contractor is uncertain as to whether notice is necessary or whether a purported notice conforms to contract formalities, they will discuss the requirements at the same time. They will not keep quiet for future advantage in a potential claim scenario. It is better to attempt to take the opportunity to avoid a claim altogether.

This approach is far from pure idealism. In fact, an employer and contractor working together are more likely to find the best approach to navigating the many risks and unforeseen events likely to be encountered in delivering a complicated infrastructure project. Neither party has full control of the environment, supply chain, regulatory issues, or intervenors that they are likely to encounter together. Change is inevitable, and when an unforeseen event occurs, the employer and contractor must work together to ensure that they are both properly informed. They are in the project boat together, and proper notice lets each party know which direction to paddle through the rocks.

Conclusion

The execution of complex projects requires the parties to work together proactively to achieve a successful outcome in light of inevitable changes and unforeseen events. Notice requirements can be viewed as burdensome, adversarial, and inequitable, and the guidance offered to employers and contractors in this area has been focused on protecting their individual rights. While that guidance is reasonable, a collaborative approach to project execution demands more.

Employers and contractors can leverage notice provisions for the benefit of the overall project. From a collaborative perspective, the parties will view notice requirements as contract provisions relating to a key input for change management. Employers will draft notice provisions intended to ensure that the right information is timely delivered to the attention of competent decision-makers. Contractors will not fear that formal notice will damage their client relationship but will expect it to strengthen that relationship, as employers will interpret notices as diligent conformance to the requirements of the contract.

When an unforeseen event occurs, employers and contractors should both want a properly informed counterparty fully focused on solving the instant problem. Well-drafted notice provisions will encourage open communications, and their proper application will leverage notice as an input to collaborative change management. Employers can draft stringent notice provisions and contractors should strictly comply, but collaborative parties will remember that the provisions are intended to facilitate proactive change management. Protection of the parties’ rights is a secondary benefit that will be applicable only if contractual change management processes do not result in a negotiated resolution of cost and schedule impacts. The first line of defence is working together to minimise those impacts in the first place.

 

[1] Kimberly L Karr, ‘Enforcing Notice Provisions in Construction Contracts in the United States’ (K&L Gates, 20 October 2014) www.klconstructionlawblog.com/2014/10/enforcing-notice-provisions-in-construction-contracts-in-the-united-states, accessed 14 June 2023 (on drafting clear and reasonable notice provisions, compliance, and defences for non-compliance).

[2] Benjamin J Morris, ‘The Importance of Knowing and Complying with Your Contract’s Notice Provisions’ (Foley & Lardner, LLP, Pile Driver Magazine, 28 December 2017, www.foley.com/en/insights/publications/2017/12/the-importance-of-knowing-and-complying-with-your accessed 14 June 2023 (Courts in Florida, New York, Washington, Ohio, Massachusetts and New Jersey have at times found that contractors can be completely barred from recovery if the contractor failed to exactingly comply with every requirement of the operable notice provision. California, Alaska, Pennsylvania, Rhode Island, Virginia and Connecticut courts often take a more nuanced approach and apply standards based on prejudice, fairness, and equity.); David Robertson and Katarina Sikorska, ‘Effective service of notices under construction contracts’ (White & Case, 16 April 2019) www.whitecase.com/insight-alert/effective-service-notices-under-construction-contracts accessed 14 June 2023 (reviews The Trust Company (Australia) Ltd atf the WH Buranda Trust v Icon Co (Qld) Pty Ltd & Anor [2019] QSC 87, the Supreme Court of Queensland); James De Melo, ‘Don’t Let Notice Requirements in Your Construction Contracts Go Unnoticed’ (WeirFoulds LLP, 19 March 2020 www.weirfoulds.com/dont-let-notice-requirements-in-your-construction-contracts-go-unnoticed accessed 14 June 2023 (reviews notice issues in Canadian cases, including timelines for compliance, substantive requirements, and the form of notice).

[3] Jeremy Glover, ‘Notices’ (Fenwick Elliott, 9 November 2017) www.fenwickelliott.com/research-insight/annual-review/2017/notices accessed 14 June 2023 (reviewing FIDIC 1999 form, sub-clause 20.1 (28 days), NEC4 Core clause 61.3 (56 days), and attitude of UK courts); Gareth Whisson, ‘Contracting in Latin America: a quick guide for foreign companies dealing with construction contracts’ (Turner & Townsend, 2 July 2018) www.turnerandtownsend.com/en/perspectives/contracting-in-latin-america-quick-guide-for-foreign-companies-dealing-with-construction-contracts accessed 14 June 2023 (few local standard contract forms; public and private clients tend to develop their own contracts in-house; FIDIC contract forms are prevalent or at least in use in many countries, some examples of NEC forms in Brazil and Perú, multinationals driving trend toward more standardised contracts for large projects); Jack E Byrom, ‘Substantial Compliance – When the Contract Doesn’t Always Mean What It Says’ (Porter Hedges, 26 August 2020) www.porterhedges.com/texas-construction-law/substantial-compliance-when-the-contract-doesnt-always accessed 14 June 2023; Donald Charrett, ‘FIDIC – Grey Areas and the Governing Law Supplement to presentation: “FIDIC Contracts – International?”’ (Barton Legal Seminar, 26 November 2020, review of applicability of FIDIC provisions, including certain notice provisions, in a variety of international jurisdictions); Jamie Kellick and Mark Wilson, ‘Contractual time bar provisions – are they enforceable?’ (Kennedys, 7 May 2021) www.kennedyslaw.com/thought-leadership/article/contractual-time-bar-provisions-are-they-enforceable accessed 14 June 2023 (In UAE and Oman, the default position for enforcement of notice provisions may be as strict conditions precedent, but law allows for arguments based on disproportionate harm, good faith, unjust enrichment, or void clause by superseding statutory limitation); Javier Sánchez Llopes, ‘Trends in the use of international standard forms of contracts in the Latin American market’ (Driver Trett, 1 July 2022) www.driver-group.com/en/global/news/international-standard-forms-of-contract-latin-america accessed 14 June 2023 (egs of FIDIC 2017 and NEC4 use in Perú).

[4] Michael Harris, ‘The Importance and Value of “Notice” Provisions in Construction Contracts’ (Long International, 2023) www.long-intl.com/articles/notice-provisions accessed 14 June 2023.

[5] Jenifer B Minsky, ‘You are on notice: Failure to comply with contractual notice provisions can be fatal to your claim’ (Peckar & Abramson, 6 September 2022) www.pecklaw.com/client_alerts/you-are-on-notice-failure-to-comply-with-contractual-notice-provisions-can-be-fatal-to-your-claim (summarises successful notice defences in Minnesota, New York, and Washington).

[6] Simon Bellas and others, ‘The Importance of Strictly Complying with Notice Requirements on Australian Projects’ (Jones Day, October 2017) www.jonesday.com/en/insights/2017/10/the-importance-of-strictly-complying-with-notice-requirements-on-australian-projects accessed 14 June 2023 (reviews Civil Mining & Construction Pty Ltd v Wiggins Island Coal Export Terminal Pty Ltd, the Supreme Court of Queensland. In Australia, courts have consistently held that contractors must strictly comply with any express conditions for extra time or money under construction contracts. This includes any condition requiring written notice of an event (known as a ‘time bar’). As a general rule, this strict approach is applied regardless of how onerous those requirements may be. Crucially, under Australian law, a failure to comply can operate as a complete bar to recovery under the contract. A question commonly raised is whether the actions of a principal or principal’s representative can amount to a waiver of the requirement).

[7] AACE International, ‘Change Management’ in H Lance Stephenson (ed), Total Cost Management Framework: An Integrated Approach to Portfolio, Program, and Project Management, (2nd edn, AACE International 2015).

[8] Project Management Institute, Construction Extension to the PMBOK® Guide (2016), see ss 12.2.12 and A1.2.

[9] ‘Have You Thought About ... Notice Clauses?’ (Brownstein, 16 September 2020).www.bhfs.com/insights/alerts-articles/2020/have-you-thought-about-notice-clauses- accessed 14 June 2023 (discusses preference for email notice during the Covid-19 pandemic).

Mark Sanders is a partner at the Wilmington, DE, office of QDR International and can be contacted at msanders@qdrclaims.com.