A "Stark" Reality for Indiana Contractors Who Do Not Strictly Comply with Contractual Claim Notice Provisions

April 2010

By:  Dean R. Brackenridge and Brian M. Falcon

Strict contractual claim notice provisions, which owners persistently include in contracts, present a recurring trap for Indiana contractors.  Indiana contractors must remain mindful of these provisions as work proceeds and be prepared to strictly comply with these requirements.  As Indiana courts are quick to find, a contractor who fails to strictly comply with contractual notice requirements may find itself unable to recoup additional project costs or to secure additional time.

To avoid getting tripped up by a contractual notice requirement, before beginning work, an Indiana contractor should know (and remain mindful of) the answers to the following questions:  (1) Is there a contractual time limit for providing notice of a claim? and (2) If so, does it apply equally to claims for additional costs and delays?

Contractors frequently encounter contracts which include notice provisions, such as the following:  "Claims must be made within 14 days after occurrence of the event giving rise to such Claim or within 14 days after the contractor first recognizes the condition giving rise to the Claim."  For example, in Starks Mechanical, Inc. v. New Albany-Floyd County Consolidated School Corp., 845 N.E.2d 936 (Ind. Ct. App. 2006), the court strictly interpreted such a contractual notice provision concerning submission of claims for additional payment, rejecting as untimely a contractor's change order that sought recovery of more than one million dollars attributed to "engineering deficiencies." 

In Starks, the contractor had entered into a contract with a school corporation to provide mechanical and plumbing services for the expansion and renovation of a school building.  Early in construction, Starks discovered "a number of alleged material defects in the design, specifications and plans provided by the School."  Id. at 937.  After this discovery, Starks sent a Request for Information (RFI) to the construction manager "to provide notice of the design defects and accompanying delays and to request time extensions and change orders."  Id. at 937-38.  The contractor also requested a time extension in the initial RFI and submitted additional RFIs as construction progressed.  The owner was aware of the contractor's concerns, but directed the contractor to proceed with construction and to correct the design defects.  The contractor hired an engineer to review the design specifications and plans, and to provide recommendations to the contractor regarding changes. 

Unfortunately for the contractor, although the RFIs included reference to the design defects and associated delays, the contractor did not include redesign costs in the many RFIs it submitted to the construction manager.  Nearly two years after the contractor first identified alleged design defects, it submitted a payment application, which included an "engineering deficiencies" line item for $1,342,593.88.  A few days later, it submitted a change order in the same amount.  The School rejected the change order request.  Litigation ensued.

Paragraph 4.7 of the contract (using the Standard AIA A201 General Conditions) in Starks required that all claims be made in writing within 14 days of the occurrence giving rise to the claim.  The contract required that claims associated with a "continuing delay" be updated weekly with estimated associated costs.  Critically, the contract also required that claims relating to time (e.g. delay damages) be made in accordance with Paragraph 4.7.  The contractor in Starks  argued that its RFIs constituted timely written notice.  Although the RFIs made it clear that the contractor was impacted, the RFIs did not suggest that the contractor was putting the owner on notice of a claim for additional payment.  As a result, the RFIs were not sufficient notice pursuant to the contract documents.  The owner contended that the contractor's claim, submitted 21 months after the contractor first noticed the design defects, was untimely.  The trial court agreed and the Court of Appeals affirmed.  The Starks court did acknowledge that "[i]t may very well be true that Starks incurred substantial additional cost because of engineering deficiencies and the School's insistence that Starks solve any problems and proceed with construction as scheduled."  Id.  "But to preserve its right to recover those costs, Starks was required to submit a Claim within 14 days and to submit weekly updates thereafter."  Id.  

It is instructive to compare this result with the earlier decision in Osolo School Buildings, Inc. v. Thorlief Larson & Son of Indiana, 473 N.E.2d 643 (Ind. Ct. App. 1985), where the court had interpreted a similar, but distinguishable, contract provision in the context of a claim for delay damages.  The contract in Osolo required that "a claim for an increase in the Contract Sum [be made in writing] within 20 days after the occurrence of the event giving rise to [the] claim."  However, the contract was silent with respect to notice for delay claims.  The Osolo court refused to assume that the parties intended to treat delay claims as subject to the same stringent notice requirements applicable to claims for additional costs, drawing an important distinction between "additional cost" and "delay damages." 

The contractor in Starks had unsuccessfully attempted to rely upon Osolo, contending that because its claim was also one for "delay damages" (rather than "additional costs"), the claim was not subject to the 14 day notice requirements.  However, the contract in Starks was clear that "claims relating to time (e.g. delay damages) ... be made in accordance with the applicable provisions of paragraph 4.7 (i.e. within 14 days of the occurrence giving rise to the claim)."  Therefore, the court in Starks rejected the contractor's argument.  

As a project progresses, an Indiana contractor must remain mindful of the notice hurdles included in its contract.  Where the contract requires written notice within a specified timeframe, a contractor hoping to secure compensation or additional time is well advised to strictly adhere to this requirement.  Raising an issue verbally during a weekly project meeting most likely will not suffice nor will vague correspondence or RFIs which do not include specific reference to the event giving rise to the claim, a description of the additional work or additional time resulting from the claim, and a statement of the costs associated with the claim.  Where the contractor cannot immediately calculate its actual costs, it is well advised, at a minimum, to provide an estimate of costs, along with a reservation of the right to amend or supplement its claim later.  Indiana contractors must remain vigilant in adhering to contractual notice requirements, even in situations where the owner has in essence instructed the contractor to proceed with work which will be the subject of a later claim for additional compensation by the contractor.

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