[co-author: Stephanie Snyder-Zuasnabar]*

In James Construction Group, LLC v. Westlake Chemical Corporation, the Texas Supreme Court clarified the standard necessary to satisfy notice provisions in a construction contract.  The Court’s opinion reached two key holdings: (1) substantial compliance is sufficient to satisfy a party’s obligation under a contractual notice requirement; (2) however, if the contract requires written notice, then the notice must be in writing to substantially comply even when there is actual notice.  This opinion is important for the construction industry because it clarifies a gray area, and unequivocally enforces contract provisions requiring written notices.  This opinion illustrates the importance of complying with notice provisions and the consequences of failing to do so.  The owner’s failure to comply with notice provisions deprived it of more than one million dollars in damages awarded by a jury.      

The Facts

The dispute arose from notices related to termination.  Westlake Chemical Corporation (“Westlake”) terminated its contract with James Construction Group, LLC (“James”). Westlake sought to recover costs associated with terminating James for default under the contract.  The contract required Westlake to provide three separate notices to James to trigger James’s obligation under Section 21.3 to pay extra costs incurred by Westlake in completing the work: (1) notice that James, in Westlake’s reasonable opinion, had serious safety violations, which triggered a 72-hour window for James to begin remediation; (2) notice that Westlake was not reasonably satisfied with the pace and quality of James’ remediation efforts; and (3) notice that Westlake was terminating the contract or a portion of the work. The contract also contained a general provision that required all contractual notices to be in writing.

The Notices

The First Notice

On December 28, Westlake’s project manager forwarded an email from Westlake’s VP, copying James’s site manager. The email described a recent site incident that resulted in a fatal injury as “completely preventable” and referenced a safety review so James could show Westlake how it would prevent similar incidents in the future. The email did not mention Section 21.3, default, safety violations or termination.

The Court explained that Westlake “needed to communicate sufficient information” that reasonably would make James aware that Section 21.3 had been triggered, starting the 72-hour window to remediate. The Court held it was “questionable” whether expressing safety concerns was enough to constitute the required first notice.

This question was rendered moot because the Court found that Westlake failed to send the second and third notices.

The Second Notice

Westlake attempted to use a January 18 email as evidence to support the second required notice.  This email discussed Westlake’s decision to use another contractor for pipeline work on the project, as Westlake was explicitly entitled to do under the contract. The email also indicated that no final decision had been made on safety. The Court did not review this email in a vacuum.  It considered the context in which it was sent, and Westlake’s subsequent actions and communications: Westlake subsequently assigned additional work under the project to James; Westlake sent subsequent email in March referencing the need to put James on notice; and there was a March safety audit recognizing increased safety monitoring and performance. The Court reasoned that in light of these communications and conduct, the January 18 email was not written notice that Westlake was dissatisfied with James’s remediation efforts.

The Third Notice

Westlake provided no written notice to James that it had elected to terminate the contract. Following another site incident, the parties met on April 11. Westlake told James to remove its workers from the job. The Court noted that “Westlake sent no letter, email or other writing to James memorializing the actions taken at the meeting,” hinting this would cause more discussion on whether the requisite written notice was provided. Even though James stopped all work on the project after the April 11 meeting and emailed Westlake confirming the same, Westlake could not get around its obligation to provide written notice of termination because the Court held: “actual notice is not a substitute for written notice.” This is the punch line of the opinion.  While some latitude may be given under the doctrine of substantial compliance, the Court held that a notice must be in writing to “substantially comply” with a provision requiring written notices.  The Court ultimately held Westlake was not entitled to the contractual damages awarded by the jury under Section 21.3.  The Court held that the notices were conditions precedent to such damages.  Westlake could not seek damages caused by the default if Westlake did not satisfy conditions precedent to be entitled to these damages.

The Indemnity Claim

The Court also considered whether Westlake’s failure to send the notices constituted a material breach such that it also precluded the damages Westlake sought under a separate indemnity provision in the agreement.  The Court allowed indemnity damages because, the Court reasoned, the notice provision was not a material breach.  Instead, the breach of the notice provisions merely meant Westlake could not invoke the right to terminate and recover damages allowed by the termination provision.  “[N]oncompliance with a condition precedent simply precludes the noncomplying party from enforcing its conditional right.”  It does not excuse the other party’s breach of other provisions.  For these reasons, the Court allowed Westlake to recover its indemnity damages.

The Take Away

This opinion underscores the importance of sending contractual notices consistent with the notice provisions in the contract.  The stakes are high.  If the contract requires the notice to be in writing, the parties must comply even where there is actual notice.  Otherwise parties may find themselves unable to enforce their rights and recover significant damages.

*Stephanie Snyder-Zuasnabar is currently a law clerk in our Houston office.

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