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Sureties And Contractors: Deviate From The Contract's Claims Notice Provisions At Your Own Peril

May 04, 2014 BY Adam Beedenbender

        The Georgia Court of Appeals’ March 28, 2014 decision in Western Sur. Co. v. Department of Transp. is likely to strike fear into the hearts of Georgia Contractors and Sureties. In that decision, the Court held that such Contractors and Sureties, absent extraordinary circumstances, must comply strictly with their Contract’s notice and claims provisions, or they will forfeit their right to seek damages or compensation for cost increases. Thankfully, as will be discussed below, those Contractors and Sureties can take a few simple steps to ensure that their claims will be heard, and their damages will be recouped.

            The facts of the case are fairly straightforward: the Georgia Department of Transportation (“DOT”) entered into a contract with Bruce Aleba Contracting, Inc. (“BAC”), which was to provide construction services on U.S. Highway 27. Two surety companies (“the Sureties”) issued performance and payment bonds to the DOT, as obligee. Shortly after the project commenced, BAC began to suffer financial pains due to drastically increased material costs. Ultimately, BAC could not afford to perform the work, and was forced to abandon the project. In June of 2007, the DOT placed BAC in default, and directed the Sureties to complete the project.

            In September of 2007, the Sureties sent two “claim letters” to DOT, asking for additional compensation in order to defray the impact of those rising material costs. In response, DOT requested additional information from the Sureties, which the two entities chose not to provide. Unable to obtain their desired additional funds, the Sureties sued DOT for an alleged breach of certain contractual terms entitling the Sureties to compensation in the event of price inflation. The DOT argued that, in failing to strictly comply with the contract’s notice and claim provisions, the Sureties waived all potential claims against DOT. At trial, the lower court entered partial summary judgment in favor of DOT. On appeal, the Sureties raised four arguments, and we will discuss the practical impact of each in turn.

            First, the Sureties argued that DOT waived the requirement of strict compliance with the contract’s notice and claims procedures. Effectively, the notice provision required the Contractor and/or the Sureties to notify the project engineer, in writing, prior to making any claim for additional compensation. Further, the Contractor and/or Sureties were required to provide supplemental information to DOT upon its request. In the event of the Contractor and/or Sureties’ non-compliance with these claim notice provisions, any right to additional compensation was deemed waived by those parties to the contract.

            While both BAC and the Sureties freely admit that the strict requirements of the Contract’s claim notice requirements were not complied with, those entities argue that DOT waived the requirement of strict compliance by: (i) generally encouraging disputes to be handled informally, (ii) ‘punishing’ other contractors and sureties who actually followed strict claims procedures, (iii) granting time extensions, and (iv) negotiating with the Sureties.

            The Court dismissed the Sureties’ first two arguments outright, holding that this type of vague and generalized “course of dealing” evidence was not specific enough to establish a waiver in the present case. Rather, per the Court’s holding, only an “affirmative act” on the part of DOT, which would lead the contractors and sureties to “reasonably believe that it was not necessary to give timely notice of a claim,” could amount to a waiver of strict compliance by DOT. Alas, no particularized affirmative act was alleged by Sureties.

            The Court also rejected the Sureties’ final two arguments, finding that DOT did not waive strict compliance simply by granting extensions or flexibly negotiating with the Sureties. During the course of negotiations between the parties, DOT did not “agree or intimate that it would waive any of the Contract requirements,” but rather “continued to request information and acts on the part of the Sureties,” which was “consistent with an insistence of strict compliance with the terms of the contract.”

            Second, the Sureties argued that they reasonably and substantially complied with the contract’s notice and claims provisions by way of their September 2007 claim letters to DOT. While it is true that “substantial compliance with a notice provision” may be sufficient if it is “in the spirit of the contract’s requirements,” the Court found the Sureties’ effort to be lacking for two reasons. First, the letters were tardy: the Sureties sought compensation for price increases after having incurred the elevated expenses. Second, the content of the notice was insufficient. DOT requested additional information from the Sureties after its receipt of the September 2007 claim letters. The Contract between the parties allowed DOT to seek this supplementary information, but the Sureties simply did not provide it.  Due to these defects in content and timing, the Sureties could not credibly claim that they were in “substantial compliance” with the contract’s notice and claims provisions.

            Third, the Sureties contended that DOT had actual notice of the Contractor and Sureties’ claims, and that such actual notice was sufficient to obviate the need for substantial compliance with the contract’s notice provisions. In support of this proposition, the Sureties cited APAC-Ga. v. DOT, which held that “[t]he key issue is whether DOT had actual notice of the delays for which APAC seeks damages.” See APAC-Ga. v. DOT, 221 Ga. App. 604, 607, 472 S.E.2d 97 (1996). However, the Court of Appeals held that APAC was easily distinguishable from the case at bar, because the APAC contractor had “sent over 50 letters to DOT,” which had also “granted [APAC] extensions without request.”

            Here, due to the Sureties’ failure to provide detailed information to DOT, DOT was not made sufficiently aware of the Sureties’ specific claims for damages. The Court ultimately held that if the Sureties were able to have their compliance with the contract waived simply because of the DOT’s knowledge of price escalations (which are often publicly available information), then the contractual “provision requiring timely written [notice of a potential claim] would be meaningless and superfluous.” Thus, DOT did not have sufficient “actual knowledge” of the Sureties’ claims to obviate the Sureties’ need to comply strictly with the contract’s claims notice provisions.

            Finally, the Sureties asserted that DOT must demonstrate that it was prejudiced or harmed by the failure to strictly comply with the contract’s claims notice provisions. However, the Court found no applicable Georgia law which could support the Sureties’ claim that DOT was required to show that it was injured by the Sureties’ failure to strictly comply with the relevant contractual notice requirements. Accordingly, the Court of Appeals upheld the trial court’s grant of partial summary judgment in favor of DOT.

Practical Takeaways for Contractors and Sureties

1.    Familiarize yourselves with your Contract’s Claims Notice provisions, and comply with them strictly. Do not expect a Georgia court to hold that informal “notice” to your contractual counterparty is sufficient, or that your counterparty had “actual knowledge” of your claim. Instead, cross your Ts, and dot your Is. Then double-check to ensure that all necessary procedural steps have been complied with.

2.    Do not allow your counterparty to intimidate you into non-compliance. In the case at bar, the Sureties alleged that DOT strongly “encouraged” contractors and sureties to handle disputes informally, and “punished” those who resorted to the strict claims procedure. While this may have been the case, the Sureties were left empty-handed at the end of the day, because the Court found that DOT took “no affirmative act” which led the Sureties to believe that strict compliance had been waived. Which brings us to #3.

3.    If your counterparty wants to waive strict compliance, get that waiver in writing. Do not rely on hints, or even oral assurances that “this dispute is best resolved informally.” If both of you truly wish to resolve the dispute without resorting to the formalized procedure, make sure that your counterparty has formally waived its right to seek strict compliance with the claims provisions.

The Journal is a publication for the clients of Drew Eckl & Farnham, LLP. It is written in a general format and is not intended to be legal advice to any specific circumstance. Legal Opinions may vary when based upon subtle factual differences. All rights reserved. 

Editorial Board:

H. Michael Bagley