In Nova Contracting, Inc. v. City of Olympia, No. 94711-2 (Wash. Sept. 29, 2018), the Washington Supreme Court, sitting en banc, ruled in favor of a municipality on the issue of whether the general contractor complied with a contract’s notice of claim provision.  Relying on Mike M. Johnson, Inc. v. Spokane County, 150 Wn.2d 375, 78 P.3d 161 (2003), the court in Nova Contracting held that a broad notice of claim provision (waiving “any claims” for noncompliance) (a) mandates written, rather than actual, notice of claims and (b) applies not only to claims for cost of work performed, but also to claims for (i) expectancy and consequential damages and (ii) breach of the covenant of good faith and fair dealing.  Slip op. at 2-3, 15.

The case arose from certain disputes between the City of Olympia (the “City”) and a contractor (“NOVA”) in connection with a public works contract in which the contractor agreed to replace an aging cement culvert. The contract contained a “notice of protest” provision from the Washington State Department of Transportation’s standard specifications.  This provision required the contractor to “‘give a signed written notice of protest’ ‘immediately’ if it ‘disagree[d] with anything required in a change order, another written order, or an oral order from the [City] Engineer, including any direction, instruction, interpretation, or determination by the Engineer.’” Id. at 1-2.

"The City provided the project designs, but left implementation decisions to the contractor. The contract required that NOVA submit its implementation plans to the City prior to construction.  The City rejected many of the contractor’s initial implementation plan submittals.  NOVA revised and resubmitted the plans, but the City again rejected them.  Pending review, resubmittal and approval of several key plans, and under a tight schedule to complete the work, the City issued a notice to proceed to the contractor.  At this point, NOVA complained about how the City was handling the submittal process, but never filed a formal notice of protest regarding the City’s rejection of submittals.  NOVA submitted a second batch of submittals, but it, too, was rejected.  Again, NOVA failed to file a formal notice of protest.

The City issued a notice of default, giving NOVA an opportunity to cure its delinquent performance under threat of contract termination. NOVA responded with a third batch of submittals and undertook efforts to mobilize its forces on the project site (apparently without authorized access).  The City rejected the contractor’s submittals and ordered NOVA to stop work and vacate the jobsite.  In response to the City’s decision, NOVA filed a formal written protest, arguing, among other things, that the stop work order was inconsistent with the earlier notice of default letter giving the contractor an opportunity to cure certain performance issues and that the City was abusing the submittal process to correct or alter defects in the project design.

The City eventually terminated NOVA’s contract for default, to which NOVA responded with another formal written protest. NOVA then filed a claim for damages against the City, which the City denied in its entirety.  A lawsuit by NOVA followed, predicated on claims of extra work, improper termination, and breach of the covenant of good faith and fair dealing in how the City allegedly handled the submittal process and refused to participate in project activities.

Raised in a reply in support of its motion for summary judgment against NOVA’s claims, the City argued that NOVA’s claims were waived because it failed to provide a written protest of the City’s rejection of its submittals as required by the contract. NOVA opposed the motion and argued that material issues of fact existed regarding which party breached first and if that breach excused subsequent performance.  But, NOVA never responded to the City’s belated waiver argument and never opposed the City’s ability to raise that argument.  The trial court granted the City’s motion, but evidently did not address whether NOVA complied with the contract’s written notice of claim requirement.

The Washington Court of Appeals reversed the trial court’s ruling, finding there were material issues of fact whether the City breached the covenant of good faith and fair dealing in rejecting the contractor’s submittals. Without citation to authority, the Court of Appeals ruled that any waiver of claims by the contractor only applied to claims for the cost of the work performed under the contract, but not expectancy and consequential damages.  The court affirmed the dismissal of NOVA’s other contract claims and remanded the case for adjudication on the issue of whether the City breached the covenant of good faith and fair dealing.

The Washington Supreme Court reversed the decision of the Court of Appeals regarding the extent of NOVA’s waiver of claims under the contract. First, the Supreme Court ruled that the broad scope of the contract’s written notice of claim and waiver clause did not provide any exception for consequential or expectancy damages.  Section 1-04.5 of the contract stated that upon failure to comply with the claim notice procedures, the contractor “completely waives any claims for protested Work.”  (Emphasis added.)  Citing to myriad cases, the court held that the term “any claims” meant “all” claims related to the “protested Work,” inclusive of expectancy and consequential damages.

Next, the court found that the waiver of claims provision also applied to a claim for breach of the covenant of good faith and fair dealing, which was not a claim sounding in equity (as NOVA asserted), but in contract. Id. at 15 (citing Rekhter v. Dep’t of Social & Health Servs., 180 Wn.2d 102, 113-16, 323 P.3d 1036 (2014) (plurality opinion) (describing the duty of good faith and fair dealing as a “contractual duty around a contractual term”).  Therefore, according to the court’s reasoning, “even if there is an equity exception to Mike M. Johnson’s rule of strict compliance with Section 1-04.5 that would not save NOVA’s claim.” Id.  NOVA’s filing of a claim for breach of the covenant of good faith and fair dealing also did not relieve it from complying with the contract’s notice of claim requirement at every stage in the submittal process.

Adding insult to injury to NOVA’s appellate hopes, the Washington Supreme Court also ruled that even though the City only first raised the issue of noncompliance with the claim notice provision in a reply brief and not in the underlying motion, NOVA never objected to the procedural timeliness of the City’s argument. Rather, NOVA responded on the merits, which proved unavailing to NOVA’s cause.  Finally, the court granted the City’s request for attorneys’ fees pursuant to RCW 29.04.240 of the public works statute.

The NOVA Contracting case reinforces the Mike M. Johnson decision, underscores the importance of timely and proper submission of claim notices, and provides a cautionary tale of dire consequences (i.e., waiver of all claims) that may befall a contractor for failing to comply with contractual notice of claim requirements.  Public and private construction owners would be wise to incorporate such provisions in their contracts to mitigate risks related to stale claims, while contractors will need to pay close attention to the clauses to protect against the possible waiver of claims.  Although some in the legal community believe that Mike M. Johnson may be waning precedent, NOVA Contracting puts minds at ease—at least for now.