By: Drew Colby
One of the most dangerous clauses in any construction contract is the claims clause. The claims clause provides relief (monetary and/or time) for changes in the work. This clause can be a landmine for owners and trades alike. Claims clauses typically have four components; namely, (1) is the work really a change; (2) when must notice be given; (3) what are the consequences for failing to give notice; and (4) what notice is required.
As to whether the work is really a change or encompassed by the original definition of the “Work,” one must look to several contract clauses to answer this question. The first place to look is the “Contract Documents”. Specifically, do any of those documents clearly or inferentially include the disputed work? Perhaps in the Contract Documents (or perhaps not), another clause to look for is one that broadens the scope of work. Sometimes this broadening is introduced by “reasonably inferable” language. For example, a clause might have words to the effect that “the Contractor must perform all work set for in the Contract Documents and all other work reasonably inferable therefrom regardless of whether it is expressly stated.” Another manifestation of this broadened scope can be found in language addressing intended results or someone’s subjective assessment. An example of this language is: “the Contractor must perform all work set forth in the Contract Documents and all such other work necessary to achieve the Owner’s intended results.” Clearly, the owner wants as broad a scope as possible to avoid changes. Trades do not. Thus, it is imperative to review the scope of work to ensure it is understood and priced appropriately.
Perhaps the biggest landmine in claims clauses is when notice must be given. The time-frame for requiring notice ranges and include descriptions such as the following: (1) when the trade “should have known” of the existence of the claim (this can be interpreted when the Subcontract is signed); (2) before conditions justifying the claim are disturbed (the trade could unwittingly time-bar its claim by performing work that disturbed what otherwise would be a valid claim. We see these a lot in hazardous waste interactions); and (3) when the trade had actual notice of the claim. Given the fact that the timing of the notice can have a profound impact on the validity of the claim, the parties should address this time-frame before signing the construction contract.
Tied to the “when must notice be given” requirement is the consequences of failing to provide such timely notice. Many owner-originated/modified contracts bar claims if timely notice is not provided. From the owner’s perspective, this language creates more price-certainty on the project. The argument in favor of barring is that the failure to provide timely notice prevents project participants (e.g., owner, consultants, other trades, etc.) from being included in the process of mitigating the impacts of any such changes. Trades, on the other hand, typically push back. The push back language we see most often is that the failure to comply with notice requirements only bars claims if the party entitled to receive the notice is actually prejudiced by such failure to provide timely notice.
The last requirement for notice deals with process. Specifically, what must the notice include and how must it be sent? Often owners will want as much specificity as possible. For example, what are the time and cost impacts of such change? This is not an unfair request. However, trades often will not know the exact time and cost impacts until the full breath of the claim is known. Thus, we often negotiate language saying the trades must give an initial good faith estimate and then revise the estimate if factors substantially change the same. Thereafter, a final accounting must be provided when the full scope of those impacts can be firmly estimated.
A sneaky and sometimes fatal requirement of claims clauses is how such notice must be delivered. The traditional delivery processes were limited to: (1) in-person, (2) via overnight delivery, or (3) certified mail. These vestiges of the past do not reflect the fact that virtually all current communications are sent electronically (e.g., texts and emails). Thus, we frequently include email as an acceptable form of notice if the email is sent with delivery confirmation. If the other side insists on limiting notice to the more traditional delivery processes, we will typically add that advance copy of the notice be sent via email. The goal of this language is to appraise all parties of the existence of such claim at the earliest possible moment.
In short, the impact of claims clauses cannot be overstated. It is essential that they be reviewed and modified at the contract-negotiation phase to minimize conflict while the project is on-going. We draft and review hundreds of contracts annually and are available to assist.
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