Q: We are administrating a construction project that encountered site conditions different than what was anticipated. During the course of the construction, we addressed the different site condition through various correspondence and meetings. The construction contract requires the contractor submit a formal written notice of differing site conditions. However, we did not receive formal notice. The contractor has nonetheless made a claim and is arguing that by virtue of our involvement, as well as advising the owner to address the differing site conditions, the necessity for the contractually required notice no longer applies. Is the contractor correct in arguing that it does not have to give the contract notice?

A: As a general rule, contractors need to heed contract notice provisions to the letter or they risk footing the bill for costs associated with additional work. Although it varies from state to state regarding state and local projects, the fact that your owner here may have had actual knowledge of the extra work by virtue of the participation in the process addressing the different site conditions, the lack of formal notice does jeopardize the contractor's right to recover in state court actions. It is likely that without compliant notice of a claim, this contractor is out of luck.

Courts do not generally overlook clear contract language requiring notice. Many state courts have found that informal communication of claims and notices are noncompliant and inconsistent with contract terms and require the parties to follow formal contract claim procedures and specifically reject the "constructive" or "actual" notice exceptions. The reasoning behind such decisions is that the courts have found as a matter of policy that timely notice serves the public good and proper purpose. Here, the noticed provisions give public and private parties a chance to adjust budgets, mitigate damages, and avoid wasting money. Submitting bills or claims late deprive a party of the opportunity to modify their plan, cut costs, or seek other ways to stay within their construction budget.

Note that on exception, relying on the owner's actual knowledge of the claim is possible if federal laws apply. On federal projects, federal common law is much more lenient regarding notice provisions. Rather than sticking to a notice provision's literal interpretation, many federal courts have focused on the purpose of the clause in cases involving federal contracts and have taken a more practical approach in finding that notice does not need to be any specific format so long as it clearly notes the existence of a different condition or change and apprises the party of a claim.

Q: Our firm has gotten into a dispute with one of our consultants. Our contract calls for arbitration; however, rather than demand arbitration, the consultant went ahead and filed a lawsuit against our firm. Now that we have litigated for some time, can we arbitrate the claim? Furthermore, aren't we forced to arbitrate the claim, or do we have to litigate in court?

A: Generally speaking, if you have a right to arbitrate, you must enforce it. As the saying goes, use it or lose it. Your question does not indicate at what point in the process arbitration is demanded and by whom. If you want arbitration, you should seek to force your arbitration clause at the outset of any dispute.

In most jurisdictions, courts will enforce an arbitration clause unless there is conduct that is inconsistent with the right to arbitrate. Certainly, the filing of a lawsuit instead of demanding arbitration could be inconsistent with the right to arbitrate. Your response indicates a voluntarily use of the litigation process rather than responding by demanding arbitration. This could be interpreted to be inconsistent with enforcement of your right to arbitrate. The court in this matter is going to look at what prejudice resulted from the parties' conduct in this matter. Certainly, the court is not going to order the matter to arbitration if parties have availed themselves of the litigation process, particularly if they invoke the litigation machinery inasmuch as a court is not going order a matter to arbitration so the parties have to do everything over. Repeating the efforts to resolve the dispute that happened in the litigation in the arbitration procedure would be pointless. It is not the lapse in time in demanding arbitration that causes one to necessarily lose the right to arbitration; it is the conduct inconsistent with arbitration, such as engaging in court litigation, which can act as a waiver of the right to arbitrate.

Michael J. Baker, Esq., is a partner in the Cerritos, Calif.- based law firm of Atkinson, Andelson, Loya, Ruud & Romo. He is an expert in design and construction contracts, mediation, and litigation. Please send him your legal questions via e-mail at mbaker@gostructural.com.

The answers to the questions provided herein, although intended to be accurate, authoritative, and informational, may or may not accurately reflect the law in your jurisdiction or where you do business. In providing answers to these questions, it should be recognized that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional licensed in your jurisdiction should be sought. The information provided herein is for informational and hypothetical purposes only.