Non-compliance with Change Order Requirements Dooms Differing Site Conditions ClaimOn November 6, 2020, the Kentucky Court of Appeals affirmed a trial court’s decision dismissing a contractor’s differing site conditions claim on a sewer replacement project. In TSI Construction, Inc. v. Louisville and Jefferson County Metropolitan Sewer District, the appellate court concluded that the contractor’s failure to comply with contractual provisions necessary to preserve its claim were fatal to its lawsuit.

The case involved a sewer replacement project that required excavation and removal of a large amount of rock. The geotechnical report provided by the owner did not warn of any unusual conditions with underlying bedrock at the site that would affect construction. The contract required the contractor to provide notice to the owner of a differing site condition within 10 days of identifying the condition necessitating a change in the work with a formal written claim to follow within 30 days. The contract required the formal written claim to provide specific information regarding the nature of the claim, the facts giving rise to the claim, the date of discovery of the claim, and detailed pricing for the claim, as well as other supporting documentation.

When it began work in 2016, the contractor discovered that the layer of bedrock beneath the site was at a shallower depth than shown in the geotechnical report and other owner-provided site information. The contractor claimed it provided notice of this issue during weekly meetings with the owner, but the contractor did not send written notice to the owner until February 2018, after the project had achieved substantial completion. The contractor did not follow up with a formal written claim, as required under the contract, until nine months later in November 2018. After the owner denied the claim, the contractor filed suit. The owner sought summary judgment arguing that the contractor’s formal written claim was untimely under the parties’ contract. The trial court agreed, and the contractor appealed.

The appellate court upheld the trial court’s decision finding it was undisputed that the contractor failed to make any formal written claim within 30 days of providing notice of such claim, as required under the contract. The court was not persuaded by the contractor’s argument that the 30-day time limit for submission of a formal written claim was unreasonable, especially where the contractor admitted knowledge of the claim as early as 2016 but did not submit a formal written claim until two years later. Per the court, the contractor’s failure to comply with the contractual requirement constituted a waiver of its claims.

Takeaway from TSI Construction

Contractual notice requirements in change order clauses can be important to preserving claims, and, in certain jurisdictions, failure to comply with the notice requirements may result in waiver of an otherwise valid claim. Often, when a change occurs, the impacts are ongoing or not easily quantifiable, so compliance with certain notice requirements may be difficult. However, such difficulties may not relieve a contractor from fulfilling the notice obligation. In such circumstances, utilizing best efforts at compliance, which may require consultation with counsel, may be beneficial.

If you have any questions regarding negotiating or complying with change order clauses or construction disputes generally, please do not hesitate to contact Bryan Thomas or Aman Kahlon.

Posture Away, You May Still Get Your WayThe Sixth Circuit recently reversed a decision from an Ohio federal court related to whether a party waived its arbitration rights through posturing correspondence written prior to the filing of litigation or arbitration. In Borror Property Management, LLC v. Oro Karric North, LLC (No. 2:19-cv-04375), the Sixth Circuit upheld the defendant’s contractual right to arbitration by concluding that no waiver of such right had occurred.

Oro Karric North, LLC and its related entities (entered into contracts with Borror Property Management, LLC, for Borror to manage Oro’s residential apartments. Each management contract included an arbitration provision stating, in essence, that disputes between them would be determined by arbitration unless they first resolved the dispute among themselves.

When a dispute arose, Oro asserted in a letter that Borror was in breach of contract and stated that it planned “to proceed directly to litigation in either state or federal court” as the contracts “do not limit litigation exclusively to arbitration.” Borror then filed a lawsuit in court. Oro then moved to compel arbitration, but the district court denied that request. The question on appeal was whether Oro waived its otherwise enforceable right to arbitration by its pre-litigation conduct.

Federal law looks favorably upon arbitration, and any waiver of that right “is not to be lightly inferred.” A party waives its arbitration right only when (1) the party’s acts are “completely inconsistent” with its arbitration right, and (2) the party’s conduct is prejudicial to an opposing party (such as by significantly delaying one’s asserting the right to arbitrate).

The Sixth Circuit concluded that Oro did not waive its right to arbitration. It found that Oro’s “litigation-threatening” correspondence did not amount to conduct “completely inconsistent” with its arbitration right. Pre-litigation letters serve a variety of purposes — from identifying a party’s concerns to foreshadowing litigation to articulating a path to settlement. These letters, as the Sixth Circuit noted, are often more rhetorical art than legal science. And because a party’s true intentions in crafting such correspondence cannot be known, courts are reluctant to give those letters the same legal force as it might give a party’s representations in other settings.

Even if it were to find Oro’s letter entirely inconsistent with its arbitration rights, as the Sixth Circuit noted, Borror was not materially prejudiced by Oro’s actions. Typically, in this context, prejudice appears when one party spends substantial time or money in litigation before an arbitration right is invoked. Such was not the case here.

Having determined that Oro’s pre-lawsuit communications were neither inconsistent with its arbitration right nor prejudicial to Borror, the Sixth Circuit held that there was no waiver of Oro’s arbitration rights. Concluding otherwise, as the Sixth Circuit reasoned, would make it much more difficult for parties to work out their differences short of litigation, which would, in turn, unnecessarily increase the load on the judicial system.

This opinion supports the freedom to negotiate, posture, and act in one’s interest when faced with a dispute. While there is always some risk that pre-lawsuit or pre-arbitration conduct could result in a waiver, such is not the result preferred by the courts. By enabling parties to speak freely prior to filing suit, courts are facilitating out-of-court resolutions of their differences.

The Right to Arbitrate and the Risk of Losing ItThe Alabama Supreme Court recently found that a party was in breach of an arbitration agreement for declining to pay the fee schedule set forth by the American Arbitration Association (AAA) and thus lost the right to compel arbitration. This case serves as a reminder to follow the orders of arbitral institutions or risk losing the opportunity to arbitrate your dispute. The Alabama Supreme Court’s decision further enforces the sage advice to draft arbitration agreements carefully and meticulously to protect and ensure your rights and preferences in the adjudication of a dispute.

In Fagan v. Warren Averett Companies, LLC, the parties disputed the applicability of the Employment Arbitration Rules in regards to a dispute arising from a personal service agreement (PSA). Upon review of the plaintiff employee’s arbitration demand, the AAA determined the arbitration would be administered in accordance with the Employment Fee Schedule that required the defendant employer to submit a substantially higher filing fee than the employee.

When the employer declined to pay the AAA filing fee, the AAA closed the case. The employee then filed suit against the employer in state court, and in response, the employer filed a motion to dismiss and compel arbitration. The employer argued that the AAA’s administrative ruling applying the Employment Fee Schedule violated the PSA. The employee responded that the employer was precluded from enforcing the arbitration provision in the PSA because it had declined to participate in the arbitration.

The Alabama Supreme Court agreed with the employee holding that the employer’s refusal to pay the filing fee constituted a default of the arbitration agreement in the PSA and that, based on its breach, the employer had lost the right to compel arbitration.

What can you learn from this decision? First, if you elect arbitration as your means of binding dispute resolution, then the rules, decisions, and procedures of the chosen arbitral institution should be followed or you run the risk of losing the right to arbitrate altogether. That risk is not to be taken lightly. Arbitration is intentionally selected as a means of resolution for any number of reasons, but all of them important to the party so choosing. Arbitration can provide an arbitral tribunal that is expert and well versed in the subject matter and industry providing parties with crucial expertise they may not have access to in state or federal courts. It may also offer a more expedient and efficient means of resolution. But, whatever the motivations for selecting arbitration, the parties most likely want to preserve and protect that right. To preserve the arbitration remedy and all its accompanying benefits, adherence to applicable rules and procedures is important.

The second key takeaway from this case is to carefully and precisely draft your contracts. In this case, if the parties had specified they would split all costs and fees 50/50 in the arbitration agreement, the court may have decided differently. Enlisting legal help for an assiduous contract review may not sound appealing, but it is a task that can save you much heartache and expense down the road. Ensuring that your priorities, intentions, and requirements are codified clearly and unambiguously in a binding document is money well spent.