General Construction case highlights Courts’ ongoing struggle with Mike M. Johnson

Brett Hill, Ahlers & Cressman

Another court in Washington was asked to apply the Mike M. Johnson decision to a contractor’s claim for extra work. This time it was the Division III Court of Appeals in Washington. The Division III Court of Appeals, which covers all of Eastern Washington, had a hand in the original Mike M. Johnson case. That court is the intermediary court that ruled in favor of the contractor in Mike M. Johnson.

It held that there were issues of fact as to whether Spokane County, in the Mike M. Johnson case, had actual notice of the changed conditions and, thus, waived the notice and claim procedures that the County was attempting to rely upon. The Division III Court of Appeals was later overruled by the Washington State Supreme Court, which held as a matter of law that the County of Spokane had not waived the notice and claim procedures. This time around, the Division III Court of Appeals, for the most part, ruled in favor of the public entity and followed the Mike M. Johnson decision.

The more recent case involved General Construction Company, who was under contract with the Grant County Public Utility District (“PUD”) to build a fish ladder for the Wanapum Dam. The Wanapum Dam is a “gravity dam” built to withstand upstream water pressure with its own weight. Thirteen anchor tendons help support each of the expansion units of the dam because those units do not have sufficient weight to withstand the water pressure. The anchor tendons consist of steel cables anchored in the upstream bedrock.

During construction of the fish ladder, General Construction ran into several changes. One of the significant changes that occurred involved the PUD’s change of General Construction’s sequence of its work on the project. General Construction planned to work on two portions of work simultaneously in one of the expansion units, Unit 11. However, Unit 11 moved during construction, which may have occurred due to corrosion of the anchor tendons that the PUD may have had knowledge of prior to bid time, but did not notify General Construction. As a result, the PUD directed General Construction to change the sequence of its work. There were several other changes that occurred during the project.

General Construction’s contract with the PUD had strict notice and claim procedures that applied to any claims by General Construction for additional money or time on the project. General Construction complied with the notice and claim procedures in some instances, but did not comply in other instances. In this case, like the Mike M. Johnson case, and the prior Bignold v. King County case, there was evidence that the representatives of the owner had actual knowledge that the contractor was incurring additional costs. One of the questions in this case was whether the PUD waived compliance with the notice and claim procedures by its actual knowledge of the change and direction to perform the work.

The Division III Court of Appeals clearly struggled with the distinction between the Bignold and Mike M. Johnson cases.  In Bignold, the Washington Supreme Court held that an owner cannot rely upon notice and claim procedures to defeat a contractor’s claim when the owner has actual knowledge of the contractor’s claim at the time it arises and directs a contractor to proceed with the work. That case involved the construction of an embankment where materials excavated from one portion of the work were planned to be used on a second portion of the embankment. The materials were too wet, contained boulders, and were not suitable to be borrowed as had been specified by the owner. The owner nonetheless directed the contractor to proceed with the work – which it knew required bringing in fill material. There, the Court held the contractor’s failure to provide written notice was irrelevant when the owner had actual knowledge of the change in condition and directed the contractor to proceed. In Mike M. Johnson, the facts were quite similar to Bignold, but the Washington State Supreme Court held that the actions of the owner were not clear enough to constitute a waiver of notice and claim procedures in the contract.

The Court in General Construction attempted to reconcile the differences between the Bignold and Mike M. Johnson cases.  The Court reconciled the two cases as follows:

Giving effect to both Bignold and Johnson, we discern the following rules. First, for work within the scope of the contract, which here was “all work necessary for the construction of Wanapum Future Unit Fish Bypass,” the terms of the contract must be complied with unless there is evidence that PUD waived compliance with the notice and claim requirements. For work outside of the contract, and changed work within the scope of the contract where [General Construction] satisfied the contractual notice and claim procedures, quantum meruit applies and entitles [General Construction] to compensation.  In essence, Bignold provides a supplemental means of recovery when the contract is not applicable.

The key to the Court’s inquiry is whether the work was inside or outside the scope of the contract. The example that they provide is that “for instance, if PUD had required General Construction to repair or replace an anchor tendon, the work would have been outside the scope of the contract to build the fish passages.” While this distinction seems clear in this example – anchor tendons v. fish ladder construction – it may not be so clear in practice.

The decision by the Court in General Construction was reached by only two of the three judges. While the two judges were enough to create a majority, one of the three judges disagreed with the result. That judge wrote a dissenting opinion that pointed out the problem with the in-scope v. out-of-scope distinction:

Distinguishing between work within the contract terms and outside the contract provisions is sometimes difficult and nonsensical. Washington courts have never provided working definitions for “work in the contract” and “work outside the contract.” Ultimately, General Construction prevailed on some of its claims against the PUD, but it lost on those claims where it failed to comply with the contract’s notice and claim procedures.

Comment  The General Construction case makes clear that judges in Washington continue to struggle with the Mike M. Johnson case.  It is difficult to explain the distinction between the Washington State Supreme Court’s holdings in Mike M. Johnson and Bignold. Lower courts are forced to try and find a way to interpret the two cases consistently with each other.  The distinction adopted by the Court in General Construction will likely be cited by courts in the future to explain these two cases that appear to conflict.

In addition to the notice issues addressed above, the General Construction case also addressed two other interesting issues: (1) whether a contractor complies with a notice requirement when the notice is written on a chalkboard – but not put on paper; and (2) whether an owner’s employee can waive a contractor’s obligation to provide notice per the contract. 

One of the claims for extras involved the PUD’s direction to General Construction to abandon the method of construction that had been planned by General Construction on the project. When the PUD’s engineer directed General Construction to abandon that method, General Construction’s representative allegedly provided notice to the PUD by writing it on the project chalkboard for the PUD’s representative to see. General Construction argued that the act of writing it on the chalkboard complied with the written notice requirement in the PUD’s contract.

The court held that the chalkboard writing was not sufficient and stated as follows:

Even if it were semantically correct to call this ‘written,’ it defies the clear contractual intent that notice be made in a substantial and permanent manner, which could, if necessary, be forwarded to PUD management for approval. Writing on a blackboard which is subsequently erased evinces no intent by [General Construction] to provide notice.

It is not clear from the case whether the requirement that the notice be in a “substantial and permanent manner” was actually in the PUD’s contract. If so, this would be unique because most owner contracts do not contain this requirement.
We must give credit to General Construction for creativity on this argument. Unfortunately, this argument did not prevail.

General Construction also argued that the PUD’s engineer, who was a PUD employee, had waived the notice and claim procedures in the PUD’s contract. General Construction argued that the PUD’s engineer had directed General Construction not to file claim letters.

The issue on appeal was whether the engineer had authority to waive the notice and claim procedures by directing General Construction to not file claim letters. The contract provided that its engineer had authority to modify the contract to direct minor changes. Per the contract, he specifically had authority to direct changes that would not result in additional costs, as well as limited authority to direct changes that would cost less than $10,000.  He also could require General Construction to continue with changed work pending a decision by the PUD on General Construction’s objection. However, the contract specifically precluded him from directing work changes that would result in substantially increased costs, or otherwise modify the contract.

Notably, General Construction was not arguing that the PUD’s engineer had directed the additional changes that were over $10,000, only that he had waived the notice and claim procedures in the contract. It was not clear from the opinion whether the PUD’s contract had specifically stated that the engineer could not modify any other term in the contract. The Court of Appeals summarily dismissed General Construction’s argument. The Court held “the engineer simply had no authority to modify the contract and [General Construction] knew that fact.” The Court stated that the limiting language in the contract as to the engineer’s authority to direct changes in excess of $10,000 precluded his ability to waive General Construction’s obligation to comply with the notice and claim procedures in the contract.

Comment: This part of the General Construction decision demonstrates a trap for the unwary. You should carefully review what restrictions, if any, are applicable to the owner’s representative prior to performing work. If there are limitations on the owner’s representative’s right to direct changes or modify the contract, these provisions may be enforceable.

Brett Hill is Partner with Ahlers & Cressman PLLC and is a member of AGC’s Legal Affairs Committee