The Importance and Value of "Notice" Provisions in Construction Contracts

1. Introduction

Most construction contracts, whether they are standard or customized forms, usually contain specific provisions related expressly to the process of giving "notice." The notice generally refers to an obligation on the part of the Contractor to notify the relevant party administering the contract, normally the architect, resident engineer, or owner's representative, of a claim or change event that gives rise to possible additional entitlement for time and/or cost. The duty imposed upon the issuing party when giving notice in terms of information to be supplied and the time for performance of any specific and designated obligations varies with the form of contract employed.

The process of giving "notice" is crucial to the change and claims process in both triggering the contract mechanisms that allow the contractor, for example, to pursue additional contractual entitlements (time and cost) based upon the known circumstances at the time the formal notice was issued as well as preserving the contractor's rights to recover for any unforeseen but related impacts that may arise at a later date. It appears to be a simple process and yet experienced contractors continue to fail to issue contract compliant notice or provide any notice at all, putting their potentially meritorious entitlement for additional time and/or cost in jeopardy or even proving to be fatal.

This article does not provide any legal, contractual, or case law citations, references, or examples, as there are numerous existing publications that better serve such requirements in considerable detail. Instead, this article provides a general discussion about notice provisions with the intent of promoting an understanding of some of the key issues and factors involved that are often missed or misunderstood by the contracting parties, and facilitating improved management and early resolution of claims and change requests in construction contracts.

2. CONTRACT NOTICE PROVISIONS

The contracting parties in a construction contract are each bound to numerous terms and conditions, both in express and implied form, which require designated obligations and actions to ensure compliance and avoid a potential breach of contract. The question arises, however, as to how the owner, for example, can be bound to a specific contract term or condition if it has not received notice from the contractor of the event that triggers the relevant contract provision, and thus the owner would have a subsequent requirement to respond with a specific act, acknowledgement, or rebuttal.

Construction contracts attempt amongst many other things to provide a framework within which to effectively manage the ever-increasing pace and complexity of modern construction projects where claims for delay and cost have become commonplace and almost anticipated from the onset. Accordingly, when an impact or claim event occurs, the party against whom the claim is being made must have the opportunity to review and investigate the related circumstances and facts in a timely manner, certainly while the issues remain fresh and contemporaneous, and to provide the basis of a suitable response, which could involve mitigating actions to avoid the impact or claim. The concept of being able to mitigate potentially adverse and costly problems through receipt of timely notice and prompt action is of key importance as to the reasons for the inclusion of notice provisions and is often a forgotten factor when both parties become embroiled in a contentious claim situation.

Notice provisions are all too often misconstrued by contractors as administratively obstructive and objectionable, and by owners as a simple and direct means and method to deny the contractor's claims. In reality, notice provisions protect the relevant interests of all parties to the contract and provide core mechanisms towards facilitating a resolution of a claim or requested change as long as they are not ignored and are properly complied with and managed. Notice provisions, when triggered, enable the parties to consider their individual position and financial consequences. The owner, for example, may cancel or authorize a variation, or may be able to reduce its exposure if the basis of claim is justified. Alternatively, a timely notice coupled with contemporaneous documentation and records may enable a claim to be refuted or regulated with precision and relative confidence pursuant to the circumstances and facts involved. Similarly, if a contractor correctly follows the provisions and provides the required supporting data in a timely manner, the contractor's rights have been preserved and the owner has no valid position with which to deny the claim on its face because of failure of notice compliance.

Standard forms of construction contract use different language to describe notice provisions, each adapted to suit the circumstances in which they are to be used. However, the underlying principle in each contract form is effectively identical. A contracting party is required to notify the designated contracting party when a change or impact event occurs, when its effect becomes apparent and by how much, and when to provide supporting time and cost information as the impact of the event develops.

With due consideration of the above factors, three basic and practical key questions regarding notice provisions can be identified as a common thread in construction contracts:

1. When will the formal notice be required in practice?
2. What will the notice need to say to be compliant?
3. What happens if the notice is not compliant with the contract provisions?

These questions frequently raise additional factors that complicate the overall administration of the notice process and affect the merit of the contracting parties' rights.

3. WHEN WILL FORMAL NOTICE BE REQUIRED?

Contract notice provisions normally provide a specific and defined time frame within which a party must strictly adhere to provide notice of a claim or change event. The defined time frame can vary considerably between contract forms; however, it is not uncommon to see a notice period expressed anywhere between 7 to 15 days and in some cases up to 30 days. The contracting parties can of course agree to any time period in this regard when negotiating the contract terms and conditions; however, anything less than 7 days, for example 3 days, would place an unreasonable burden upon the party required to issue the notice and identify the impact or delaying event, evaluate the factors involved, and process the documentation to be fully compliant. This is particularly relevant on larger and complex construction projects where numerous simultaneous areas of differing work involving hundreds of craftsmen and laborers are operating on a daily basis. It may not be physically possible for the contractor to understand and evaluate every potential impact event that may occur under such short timeline circumstances. Often what appears to be a problem on a "first look" basis may resolve itself or may never have been a factor for consideration of notice in the first place. Conversely, an impact event of merit may not manifest itself immediately in terms of being recognized as a potential claim event requiring notice.

Very short notice periods favor the owner in being able to deny a claim every time the contractor fails to meet the notice timeline; however, they would allow the owner to respond on an almost immediate basis with regard to any mitigating actions that may avoid a claim or change altogether.

Short notice periods are unfavorable to the contractor in terms of being able to recognize and process compliant notice, effectively almost being forced into issuing regular, if not daily notices for almost any event, whether it had recognizable merit or not to protect its rights to claim for the impacts of each event. Such an approach would make the administration of the contract over burdensome and promote an adversarial atmosphere between the contracting parties.

Longer specified notice periods, for example 30 days or more, favor the contractor in giving time to finally recognize an impact factor, process the relevant documentation, and prepare a supportable basis for a change or claim. Longer specified notice periods also give the contractor further time to correct any errors regarding issues that were previously missed or relevancies that were misunderstood. Longer specified notice periods are potentially unfavorable to the owner to the extent that the opportunity of adopting any possible mitigating action to avoid the onset of a claim or change will be lost. If an impact event occurs on day 55, and the contractor issues compliant notice on day 80 (25 days later), any mitigating action that could have been adopted, relevant at the time of the actual event, is more than likely to have evaporated and the opportunity to avoid or reduce costs would have been lost.

Longer notice periods are not uncommon in the context of supplying additional information pursuant to the first notice. For example, if compliant notice is required within 10 days, fully detailed supporting cost and time information is often required to be supplied within 30 days of serving the original notice of impact.

A fair and reasonable time period for a notice provision is for the parties to negotiate and agree upon prior to the formal contract execution. What is clear, however, is that whatever the parties eventually agree, the notice time period should be correctly understood and followed to avoid any possibility of failure of compliance.

Contract notice provisions that do not stipulate any time period at all, or where the words "within a reasonable time" are used, create additional interpretation issues of both a practical and legal nature. If the notice provision does not stipulate any time period at all, the question then becomes one of the underlying rationale of how the parties intended such a provision to be utilized and their understanding at the time the contract was signed. In an extreme example, is it acceptable if, on day one, an impact event occurs that ultimately results in a major time and cost claim being issued, but the contractor does not give formal notice until the last day of the project, 350 days later? How would such a provision be contractually applied with due consideration of the rights of each of the contracting parties involved? Therefore, a provision without a stipulated time period is more likely to promote conflict and ongoing disputes.

What do the words "reasonable time period" mean? What is a reasonable time period for a notice provision? As discussed above, is it 3 days, 7 days, 15 days, or more? Do the words reasonable also relate to the size of the project and type of impact event itself? For example, an impact event whereby the contractor is denied access to the entire site pursuant to a written instruction from the owner that creates a critical path delay is different from an event where access is denied to a small part of the site that may have a cost impact for disruption but does not manifest itself until much later or may not have an impact at all. What in each case would be a reasonable period to give notice?

The simple answer is not clear and each case should be approached on its merits from a practical and legal perspective. The answer may be different in Boston than it may be in Bahrain, and very much dependent upon the contracting parties, the express provision language used, and crucially, the application of the local law. Clearly, without a specific defined period of notice, the application of the provision is open to individual interpretation, challenge, and potential exploitation, which are all recipes for fostering contractual conflict.

4. WHAT WILL THE NOTICE NEED TO SAY TO BE COMPLIANT?

. . .Continue to read rest of article (PDF).