NEW YORK STATE COURT OF CLAIMS DISMISSES CONTRACTOR’S BREACH OF CONTRACT CLAIM DUE TO CONTRACTOR’S FAILURE TO ABIDE BY THE NOTICE AND RECORD KEEPING PROVISIONS OF CONTRACT WITH NEW YORK STATE DEPARTMENT OF TRANSPORTATION (“DOT”)
Pursuant to the New York Court of Claims Act the Court of Claims has jurisdiction to hear and determine claims against the state. The Court of Claims may also have jurisdiction over certain state agencies, as well as over the state itself. This will depend on whether the agency is considered an arm of the state or if jurisdiction is specifically conferred by statute. In addition to the state and its various departments, an example of an authority over which the Court of Claims has exclusive jurisdiction is the New York State Thruway Authority.
The February 28, 2013 decision of the Court of Claims in Fahs Construction Group, Inc. v. State of New York should be of interest to any contractor that enters into construction contracts with the state of New York or any of the state’s departments or agencies over which the Court of Claims has jurisdiction. In Fahs Construction disputes arose between the contractor and the New York State Department of Transportation (DOT) related to a contract for the reconstruction of a portion of Interstate 90. The contractor commenced suit in the New York Court of Claims asserting two causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing, seeking damages in the amount of $5,498,889.17. The claims asserted by the contractor included payment for various items of extra work and the recovery of increased “General Conditions costs due to delays resulting from the late award, design errors, design omissions, significant additional work and intentional delays caused by the actions of Region personnel.” The contractor also sought damages for “Unreasonable Response to Request for Extension” which the Court of Claims ultimately characterized as a claim for constructive acceleration.
The DOT moved for summary judgment seeking dismissal of the contractor’s claims on the basis that the contractor had failed to provide notice of the claims as required by sections 105-14 and 109-16 of the contract’s Standard Specifications and failed to submit supporting records related to its claims as required by section 109-05 of the contract. DOT argued that the contractor failed to fulfill a necessary condition precedent to recovery, thereby requiring dismissal of the claim.
In reviewing the contract terms the court noted that section 109-16 entitled a contractor to compensation for extra work and delays, but compliance with the notice and recordkeeping requirements of section 105-14 was required. The court pointed out that section 109-16 made clear that “[f]ailure by the Contractor to notify the Engineer in writing pursuant to the provisions of this contract, or to maintain and furnish cost records of such claims, shall constitute a waiver of the claim.”
Section 105-14 of the contract contained notice provisions for “time-relate disputes” such as delays and disruptions as well as claims for “extra work”. These notice provisions required that the Contractor give notice within “ten days after the after the Contractor has knowledge or should have knowledge of an event, matter or occasion that will result in time related damages” for time-related claims and “within 10 days of its contentions” related to claimed extra work. With respect to these notice requirements the contract provided:
“Failure of the Contractor to give such written notice in a timely fashion will be grounds for denial of the dispute and the Department does not have to show prejudice to its interest before such denial is made. In the event the Contractor fails to provide the required notice within the ten day work period and in the event the Contractor fails to maintain and submit such specified records set forth in these provisions, the Contractor hereby agrees to waive the dispute for compensation notwithstanding the fact that the Department may have actual notice of the facts and circumstances which comprise such dispute and is not prejudiced by said failure”.
With respect to both time related claims and “extra work” claims, section 109-05 of the contract also provided that the contractor maintain and submit records on a periodic basis such as “daily records and reports of all labor, material and equipment used in connection with such work” and “force account summaries of labor”. The contract further provided:
“The notification and record-keeping provisions in this Contract shall be strictly complied with for disputes of any nature and are a condition precedent to any recovery. This affords the Department the opportunity to initiate measures that will mitigate damages to all parties and/or to agree to terms and conditions for timely payment for any eligible added costs . . . If the Contractor fails to strictly comply with either the notification or the record keeping provisions of this section, any claim of the Contractor with respect thereto shall be deemed waived.”
Citing the New York Court of Appeals seminal decision in A.H.A. Gen. Constr. V. New York City Hous. Auth., 92 NY2d 20 (1998), the Court of Claims found that the “Standard Specifications make clear that compliance with the notice and recordkeeping requirements of the contract are a condition precedent to a claim for either delay damages or extra work” and that “[f]ailure to strictly comply with such provisions generally constitutes waiver of a claim for additional compensation.” The Court of Claims also held that “inasmuch as express conditions are those agreed to by the parties, not implied by law to do justice, literal strict compliance is required.”
The Court of Claims justified the onerous contract terms, reasoning that the “notice and recordkeeping provisions of public works contracts serve the salutary purpose of providing public agencies with timely notice of deviations from budgeted expenditures or of any supposed malfeasance, and allow them to take early steps to avoid extra or unnecessary expense, make the necessary adjustments, mitigate damages and avoid the waste of public funds.” The court concluded that the contractor did not strictly comply with the applicable notice and recordkeeping provisions and that its failure to provide timely notice and submit the required records and reports “prevented the defendant from verifying the work and mitigating costs to the tax-paying public.”
The contractor made a number of arguments to the court attempting to excuse its failure to strictly comply with the notice and recordkeeping provisions in the contract including 1) bad faith by the defendant DOT; 2) waiver of the notice and recordkeeping requirements by the defendant DOT; and 3) actual notice by the defendant DOT of the contractor’s claims. However, each of these arguments were rejected by the Court of Claims.
With respect to the allegations that defendant’s conduct was motivated by bad faith, the Court of Claims held that “the law is clear that neither bad faith nor intentional wrongdoing is sufficient to excuse compliance with express conditions precedent unless such conduct frustrated or prevented the occurrence of the condition.” As there was no showing that any alleged conduct by DOT personnel frustrated or prevented the contractor’s compliance with the notice and recordkeeping provisions of the contract, the contractor’s “bad faith” argument was rejected.
The contractor’s waiver argument was premised on the DOT’s failure to raise the notice and recordkeeping defenses during the administrative dispute resolution process. However, the court recited what it characterized as well settled law stating that “a waiver is the intentional relinquishment of a known right with both knowledge of its existence and an intention to relinquish it. Such a waiver must be clear, unmistakable and without ambiguity.” Not persuaded by the contractor’s argument, the Court of Claims held that the DOT’s failure to raise the notice and recordkeeping requirements prior to the litigation did not constitute an unmistakable intent to relinquish a known right.
Lastly, relying on the decision of the Appellate Division for the 3rd Department in the case of Whitmyer Bros., Inc. v. State of New York, 63 A.D.2d 103 (3rd Dep’t. 1978), the contractor asserted that its technical noncompliance with the notice and recordkeeping provisions of the contract should be excused based upon DOT’s actual knowledge of the claims and the extensive record of correspondence between the parties. In Whitmyer the Appellate Division had held that although a similarly situated contractor did not strictly comply with the notice provisions in the contract, the State had “actual notice” of the claims through correspondence and other means. The Whitmyer court upheld the contractor’s claims under the contract in that matter, despite the contractor’s failure to strictly comply with the notice provisions, stating that “where the State is apprised of the contractor’s claim that extra work beyond the contract was being performed, the State has been precluded from insisting upon strict compliance with the notice provisions.”
Relying on this principal, the contractor in Fahs Construction contended that its various correspondence and numerous requests for an extension of time, as well as its appeal of the denial of its request for an extension of time, were sufficient to provide the state with actual notice of its claims. The Court of Claims rejected this argument, however, stating “[t]he instant contract, unlike the one at issue in Whitmyer, expressly requires strict compliance with its notice and recordkeeping provisions and makes clear that neither actual notice of the facts and circumstances which comprise the dispute nor lack of prejudice to the defendant negate the claimant’s waiver of a claim for noncompliance.”
Based on the contractor’s failure to strictly comply with the notice and recordkeeping provisions of the DOT construction contract, the state’s motion for summary judgment was granted and the contractor’s claim was dismissed.
As the Fahs Construction case illustrates, it is imperative that contractors strictly comply with all notice and record keeping provisions contained in New York State contracts. The arguments of “bad faith”, “frustration” or “waiver” in justifying a contractor’s failure to comply with such provisions will only be successful in limited circumstances. And although other contracts may leave room to make an argument for “actual notice”, the Standard Specifications of New York State contracts such as the one in Fahs Construction may preclude such an argument. The notice and recordkeeping provisions should be thoroughly reviewed and an experienced construction lawyer should be consulted to assure strict compliance with such provisions.