Recent Court Ruling Continues Trend of Strict Interpretation of Public Construction Contracts To The Detriment of Contractors
The contractual pitfalls to contractors in securing full payment for public construction work have been reaffirmed and strengthened through a recent decision by the Ohio Court of Claims. Stanley Miller Constr. Co. v. OSFC, Ct. of Cl. No. 2006-04351, decided May 8, 2012, continues the ongoing trend of strict interpretation of public construction contracts which often denies full and fair compensation for labor, materials and services where the contractor fails to follow the general conditions to the letter.
In Stanley Miller, the plaintiff prime contractor, Stanley Miller Construction Co. (“SMC”), entered into a contract with the Ohio Schools Facilities Commission (“OSFC”) in 2003 for the construction of a middle school (the “Project”) for the benefit of the Canton City School District Board of Education (“Canton”).
SMC’s scope of work included various components of the Project, including the masonry and concrete work. According to Stanley Miller, the CPM construction schedule developed by the construction manager, the Ruhlin Company (“Ruhlin”), was inherently flawed and inefficient, particularly with respect to the masonry work. These concerns were repeatedly raised with OSFC representatives throughout the construction of the Project. SMC also asserted that Ruhlin interfered with its work on a regular basis and made ongoing threats to compel compliance with its directions.
On the scheduled completion date of July 2, 2004, which was not met, SMC submitted a one-page document to OSFC demanding an equitable adjustment to its contract for unexpected costs incurred during the Project which totaled approximately $1.1 million. There was a brief meeting and exchange of information concerning SMC’s claim, but no further action was taken and SMC ultimately initiated litigation.
The OSFC’s claim procedures in effect at the time only required notice of the claim and a contemporaneous statement of damages within ten (10) days of the occurrence of the facts forming the basis of the claim. This language did not require written notice, but a written request for an equitable adjustment of the contract had to be submitted prior to contract completion. Any failure to meet the above claims procedures would constitute a waiver by the contractor of any claim for additional compensation or for mitigation of liquidated damages.
The trial court held that the construction schedule was fundamentally flawed and incomplete and, as a result, granted judgment to SMC in the total amount of $404,276.93. In support of its decision, the trial court found that the OSFC had notice of SMC’s various concerns and failed to address these issues.
OSFC appealed and the Tenth District Court of Appeals reversed the decision, holding that the trial court was required to consider if there was a waiver of the requirement that SMC strictly comply with the dispute resolution procedures in the contract documents. Stanley Miller Constr. Co. v. Ohio Sch. Facilities Comm. (Ohio App. 10 Dist.), 2010-Ohio-6397. The Court of Appeals noted that something more than actual notice is required to establish waiver and further observed that the parties had followed the Article 8 process on numerous other occasions.
Upon remand, the trial court reviewed each category of damage asserted by SMC, beginning with the masonry division. As to this item, the trial court determined that SMC failed to provide any statement of damages, either orally or in writing, until shortly before the Project completion date and, as a result, SMC failed to strictly comply with the ten (10) day notice provision. The trial court therefore held that SMC waived its right to an equitable adjustment of its contract amount. In reaching this decision, the trial court acknowledged that compliance with the claims procedures had been waived for certain items of additional work performed by SMC, but the facts did not support that OSFC intended a blanket waiver of the notice provisions. The court also identified other failures by SMC to strictly follow the claims procedures, such as providing back-up information in a timely manner. A similar analysis was conducted on SMC’s other items of asserted damages resulting in the original judgment of $404,276.93 being reduced to $44,757.39.
In summary, the trial court held that although the evidence established that OSFC had breached the contract by failing to provide a workable construction schedule and by interfering with the means and methods of SMC’s work, SMC waived its right to an equitable adjustment to the contract by failing to follow the contractual claims process.
Stanley Miller should dispel any thoughts that, absent evidence of knowing waiver, equitable considerations will play a significant role in the determination of contractor entitlement to additional compensation, at least with respect to public construction. Given the high likelihood of scope changes and the inherent risk of claims on any meaningful public construction project, contractors would be well-advised to proactively recognize, understand and follow, to the letter, all provisions pertaining to scope changes, claims and other potential rights. In the event a contractor belatedly discovers a contractual misstep in seeking additional compensation, every effort should be made to document facts supporting a waiver argument and, with respect to ongoing, cumulative delay impacts, a strategic approach to properly pursue prospective damages should be developed and implemented.
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