Washington Supreme Court Expands Contractor Notice Obligations

Brett M. Hill | Ahlers Cressman & Sleight | November 26, 2018

The Washington State Supreme Court dealt another blow to public works contractors in Washington State. In a case recently issued by the court, Nova Contracting, Inc. v. City of Olympia, [1] the court expanded contractors’ obligations when providing notice on public works construction projects. The Nova Contracting case was the subject of a previous blog. The case involved Nova Contracting and the City of Olympia. Nova was the low bidder on the contract. Nova alleged that the City of Olympia did not want Nova to win the job and intentionally hindered Nova’s ability to perform the job. The facts alleged by Nova, which were covered in the previous blog, involved the City’s improper and apparently punitive rejection of submittals on the job and the City’s eventual wrongful termination of Nova. Of significance in the case is that Nova never actually began work on the job. All that Nova had done at the time of termination was begin mobilizing its equipment on site. The Court of Appeals found that Nova had alleged sufficient facts to establish that the City violated the duty of good faith and fair dealing by improperly rejecting Nova’s submissions and had breached the contract with Nova by improperly terminating.

The Washington State Supreme Court reviewed the Court of Appeals decision in Nova and reversed. The Washington State Supreme Court said that the WSDOT Standard Specifications that were incorporated in the City of Olympia contract required Nova to give notice of a claim if it would be alleging that the City of Olympia had breached the contract by wrongfully rejecting Nova’s submittals. The Supreme Court seems to take a simplistic approach that the contract required notice, and Nova had no recourse if it did not give notice. What makes this case different than any of the other prior notice cases interpreting the WSDOT Standard Specifications is that this case involved a situation where the contractor was not making a claim for additional time or money on the job. Here Nova was only making a claim for its lost profits on the existing contract that was improperly terminated by the City of Olympia. WSDOT Standard Specifications are drafted to address situations where there is a claim for additional money or time. The notice specifications make numerous references to claims for additional time or money and require documentation related to those types of claims. The initial notice requirement also states the contractor must provide notice to the owner before doing the extra work: “immediately … before doing the work.” However, Nova had not done any work on site. Nonetheless, the Washington State Supreme Court still held that Nova was required to give the initial notice.

The Washington State Supreme Court held that Nova’s claim for lost profits – or expectation damages – was barred because it failed to follow the notice and claims procedures for its claim for lost profits when the City breached the duty of good faith and fair dealing. Nova apparently needed to be clairvoyant and understand that the multiple rejected submittals would later be found by a court to violate the duty of good faith and fair dealing and that it may need to later make a claim that the City improperly terminated the contract. This is the only way that Nova would have known that it needed to start making claims for each of the rejected submittals.

Comment: Contractors who are doing work on projects that incorporate the WSDOT Standard Specifications now need to be aware that they must follow the notice and claims procedure not only for claims for additional time or money, but for any claim for which they may need to seek legal recourse for in the future – including claims that the public agency is violating the terms of the contract. Absent doing that, the contractor may be at risk of losing that legal right in the future.

[1] 2-18 WL 4625429 426 P.3d 685.

Contractor Beware: Design-Build Firms Must Review Washington’s Licensing Requirements

John Krawczyk | Ahlers Cressman & Sleight | September 19, 2018

Design-build contracting is a method of project delivery where the contractor provides both architectural/design and building services to the owner. Yet rarely do firms perform both design and building work in equal measure. Rather, in many instances, firms perform the vast majority of their work on the building side while advertising and providing design services for smaller projects using in-house architects.

Regardless of the volume of design-build contracting a firm performs, any firms practicing this method of project delivery must be aware of Washington State’s registration requirement under RCW 18.08.420(1), and specifically the condition that a “designated architect” must serve as a partner, manager or director of the firm’s governing structure.

Based upon the technical wording of RCW 18.08.420(1), any firm that “practices, advertises or offers to practice architectural services” in Washington state must register with the Board of Architects as an architecture firm. [1] Thus, arguably any business that engages in design work in Washington State, even in limited occasions, can be considered an architecture firm for the purposes of the statute.

The concern is that some firms performing a small amount of design work through an architect-employee may be unaware of this potential statutory pitfall requiring a wholly separate registration for this ancillary practice within their business. As a result, these firms may not have taken the steps to be compliant with the regulation and may violating the statute each time they advertise for or accept design work business in Washington. Surprisingly, failure to register as an architecture firm can come with a hefty penalty, as violations are classified as misdemeanors and can result in statutory penalties of up to $1,000 for each offense. [2]

Even if all design-build firms are currently compliant, meeting the statute’s requirements to be licensed as an architecture firm in Washington can be onerous to businesses whose focus is on the building side. Acquiring a license to practice in Washington as an architecture firm entails identifying a designated architect, who will have final decision-making authority on all design work. The designated architect also must be properly licensed to practice architecture in the state, and most importantly, must also hold a governing position within the firm—either a partner in partnerships, manager in limited liability companies, or a director in corporations.[3] This can be an unexpected and costly pre-requisite to offering design-build services, especially where that end of the business does not constitute a large portion of the company’s profits. Before you plan on offering design services in Washington, ensure your firm is, or can easily become, compliant with the statute’s requirement for an architect to be a corporate-governor.

COMMENT: Ultimately, new and established contractors offering design-build services in Washington State must plan ahead and consider whether they need to structure or restructure their business in order to avoid costly technical violations of the local statute. Additionally, if your firm practices design build work in several states, it is essential that you are aware of each jurisdiction’s unique requirements for licensing so that you may appropriately assess the risk of taking on design work in multiple jurisdictions.

[1] In defining who is an architecture firm, the phrase “practice of architecture” is described as a “professional service consisting in whole or in part of consultation concerning floor planning, the aesthetic or structural design of private or public buildings, their equipment or utilities and the responsible supervision of construction or the repair or alteration of buildings, by persons or firms offering such service for a fee.” Creelman v. State Bd. of Registration for Architects, 73 Wn.2d 298, 301, 438 P.2d 215 (1968); RCW 18.08.310-.320.

[2] RCW 18.08.460.

[3] RCW 18.08.420(1).

Recent Supreme Court Opinion Serves as Call to Action for Contractors to Review Contract Notice Requirements

Paige Scott | Schwabe Williamson & Wyatt | October 2, 2018

The Supreme Court of the State of Washington issued its opinion in Nova Contracting ‎Inc. v. City of Olympia, Docket No. 94711-2 on September 27, 2018, which hammers home the ‎need for contractors to review the notice provisions in their contracts. The Washington Supreme ‎Court held that the contractor’s failure to strictly comply with the notice provision ‎applied to the contractor’s subsequent claims for the cost of the work actually completed ‎under the contract but also to the contractor’s claims for expectancy and consequential ‎damages (the Court declined to address the availability of an equitable exception to the notice ‎provisions).

Put simply, the burden has been placed on all contractors to not only understand contractual notice provisions but also strictly comply with such provisions, or risk losing the ability to seek damages should a disagreement arise over their work.

The Washington Supreme Court’s decision focused on the standard specification section 1-04.5 of the Washington State Department of Transportation’s (“WSDOT”) Standard Specifications for Road, Bridge, and Municipal Construction (2012).  As many contractors performing public work in Washington know, WSDOT’s specification section 1-04.5 provides that if the contractor “disagree[s] with anything required in a change order, another written order, or an oral order from the [City] Engineer, including any direction, instruction, or determination by the Engineer, the Contractor shall … immediately give a signed written notice of protest to the Project Engineer …” (emphasis added).

Importantly, section 1-04.5 further provides that by not giving notice, the contractor “waives any additional entitlement and accepts from the Engineer any written or oral order (including directions, instructions, interpretations, and determinations).”  If a contractor fails to strictly comply with this section, i.e., submit a signed written notice of protest to the Project Engineer over any disagreement, then the contractor will be barred from seeking relief, including subsequent claims for the cost of the work actually completed, expectancy, and consequential damages.  This “barrier” has severe implications on a contractor’s bottom line and ability to seek recovery should a disagreement arise.

In response to the Court’s opinion, contractors should endeavor to “double down” on their own efforts to review their contracts and the specific notice provisions contained therein.  It is vital that contractors understand the notice provisions they are subject to and how to strictly comply should the need to protest work arise.  Should any questions arise during contract review, it is recommended that a contractor consult an attorney to discuss potential exposure to the company.  By ensuring that the proper procedures are followed, contractors will be better able to preserve potential claims for the cost of work, expectancy, and/or consequential damages.  Such provisions are typically nonnegotiable, but further scrutiny prior to the execution of the relevant contract by one’s attorney may allow for some push back to protect against burdensome or oppressive provisions.

Washington Supreme Court Reaffirms Compliance with Contractual Notice Requirements

Jennifer McMillan Beyerlein | Lane Powell PC | September 27, 2018

Today, the Washington Supreme Court unanimously held that failure to satisfy a “notice of protest” provision bars all claims for protested work — including claims for breach of the covenant and fair dealing and claims for expectancy and consequential damages. In Nova Contracting, Inc. v. City of Olympia, the Court reversed a Court of Appeals decision holding that Nova’s failure to file a written notice of protest did not bar the contractor’s claims for expectancy and consequential damages based upon a breach of the duty of good faith and fair dealing.

In this case, the City of Olympia contracted with Nova to replace a deteriorating culvert. During the submittal and approval process, the City rejected many of Nova’s submittals and ultimately ordered Nova to cease work and vacate the jobsite well before completion of the project. The construction contract between the City of Olympia and Nova required Nova to immediately notify the City in writing if it disagreed with various enumerated aspects of the construction and stated that Nova’s failure to do so would waive “any claims for protested [w]ork.”

The Court made several holdings. First, the Court held that the contract claim notice requirements applies to Nova’s breach of the covenant of good faith and fair dealing claims. Second, reasoning that the contractual term “any claims” meant all claims related to the protested work without exception, the Court held that by failing to file a written notice of protest, Nova waived any and all claims for protested work. Third, the Court also rejected Nova’s argument that its claim did not ripen until the City issued its stop work order because the construction contract contained an express obligation of continuing performance.

We advise that you seek legal counsel for questions relating to this ruling.

In Washington, Insurers Can’t “Unring The Bell” After Wrongful Denial Of Coverage

Kevin Mapes | The Policyholder Report | April 23, 2018

For the second time in two months, a federal court in Washington state has rejected an insurer’s attempt to avoid the consequences of its wrongful failure to defend its insured by effectively changing its mind and later—in this case much later—offering a defense. In Rushforth Construction Co. v. Wesco Ins. Co., plaintiff Rushforth was a general contractor. Following good contracting practices, Rushforth made sure that it was included as an “additional insured” under liability policies issued to its subcontractors. When Rushforth was sued for construction defects, it tendered the claim to Wesco, the insurer for one of those subcontractors.

Wesco’s claims handling was less than stellar. Rushforth tendered the matter to Wesco on July 1, 2016. To its credit, Wesco opened a file and began investigating the claim, even going so far as to draft a reservation of rights letter sometime around September 1, 2016. From there, however, the claims-handling wheels came off. For reasons unexplained, the reservation-of-rights letter was never finalized or sent, despite repeated inquiries from Rushforth. Finally, more than a year after the claim was tendered, Rushforth filed suit against Wesco. Only then did Wesco send its letter, agreeing to defend under a reservation of rights. Rushforth rejected that offer.

Rushforth moved for partial summary judgment on three issues: 1) whether Wesco breached its duty to defend; 2) whether Wesco acted in bad faith; and 3) whether Wesco’s belated offer to defend cured its breach. According to Judge Coughenour of the Western District, the answers are 1) yes; 2) yes; and 3) no. The Court specifically rejected Wesco’s argument that it never actually denied a defense, and thus could not have breached. “An insurer may breach its duty to defend by failing to respond to an insured’s tender in a reasonably timely manner.” And because Wesco offered no justification for its delay, the Court went on to conclude that Wesco had acted in bad faith as a matter of law.

Finally, the Court rejected the insurer’s argument that its belated offer of a defense cured its prior breach. Because Wesco’s breach was material, the insured was released from its contractual duty to cooperate, and Wesco had no right to provide a belated defense. The insured “had the option of allowing Wesco to assume a defense, but it was not required to do so. Wesco cannot cure its breach by forcing [Rushforth] to accept a belated defense.”

For insurers handling claims in Washington, the case presents another reminder that Washington law favors the policyholder. Fail to defend at your own peril, and don’t expect the opportunity to “fix” a wrongful denial if the insured fights back. For policyholders, the lesson is similar: the law is frequently on your side in Washington, and insureds should not hesitate to aggressively protect their interests in the face of an insurer’s denial of coverage (or, as here, an insurer’s failure to act).