Contract Provisions Governing Claims

Contract Provisions

The following is a summary of the legal notice requirements governing claims most often encountered in private and public contracts.

A notice of claim must be provided to the public entity by the entity that is filing the claim. While many contractors feel notice clauses are just an attempt to place one more hurdle in the path of valid claims, the intent of such clauses is to provide the public agency an opportunity to address the potential claim by eliminating the cause of the claim, deleting troublesome scope of work items, or reducing the impact of delays. Notice clauses also allow the agency to begin to build a record in order to defend itself from the claim.

In those instances where the contractor has not given the required notice of potential delay and claims, the courts have often denied the contractor the relief to which it would otherwise be entitled. Therefore, the contractor must strictly adhere to the claim notice requirements to prevent a waiver of its claim rights. A careful reading of all notice provisions at the outset of the claim review process will reveal all applicable notice provisions.

Most construction contracts contain provisions requiring a contractor to give prompt notice of a claim to enable public agency staff to take appropriate protective measures. This notice is typically termed "notice of delay."

Certain courts have strictly construed such notice of delay clauses, barring claims for time extensions or delay damages to contractors who fail to give timely notice. However, in the view of more liberal courts, failure to comply with notice clauses should not cause a forfeiture of the claim if the public agency is not prejudiced. The determination of prejudice may turn on whether the public agency did, in fact, have notice of the claim, so it could minimize the impact on the contractor and begin to collect data on the claimed increase in costs.

Many contracts require the contractor to provide immediate notice when any unanticipated or concealed condition is encountered during the course of the work. These clauses allow the public agency to inspect concealed conditions and, in certain cases, issue design modifications or change orders that may tend to minimize project disruption.

Disputed work is often the heart of a claim. Standard specifications generally require daily reports to the engineer on all labor, materials and equipment involved for any extra work claimed by the contractor.

Requests for an appeal are another important issue. Project agreements tend to empower the engineer, architect, or other agent of the public agency to initially determine the validity of a contractor's claim. If the contractor wishes to contest such an entity's decision, certain clauses may require an immediate request for appeal be filed by the contractor.

A notice of termination for default (or convenience) may be required, as well, by the terms of the contract documents. In extremely difficult situations, where the contractor is in material default on the contract or where the public agency is unable to perform, the affected party may be forced to give notice of termination for default. Events that may call for a notice of termination include an agency's inability to provide job site access, an agency's failure to make the agreed progress payments, or a contractor's failure to maintain the required contractor's license.

Termination clauses typically require a series of termination notices, allowing a grace period during which the noticed party can cure the default. It cannot be emphasized enough that initiating termination for default is a serious matter. Improper compliance with the notice provisions for termination could result in the public agency becoming the defaulting party.

Lastly, the arbitration clause of a contract may require some type of notice. The procedures for triggering arbitration are normally contained in the arbitration clause. Failure to initiate arbitration means the architect's decision becomes binding on matters of dispute between the public agency and the contractor. The time under the State Contract Act for initiating arbitration has been reduced to 90 days, Public Contract Code § 10240.1 (amended 1998). See Section 15.2 following for further discussion regarding arbitration.