By Michael C. Loulakis and Lauren P. McLaughlin
With all the engineering feats and technical challenges parties overcome in building a project, complying with notice provisions is perhaps the simplest task one can perform on a job. And yet, despite the routine nature of monitoring the calendar for compliance with contractual deadlines, parties often make missteps in this regard and lose important contractual rights because proper notice was not provided.
In our print Civil Engineering magazine department, The Law, we write frequently about the importance of notice provisions in contracts. Typically, the cases involve one party’s outright failure to give notice of a claim. But what happens when notice is given, yet the right words or methods aren’t used? Do courts recognize “substantial compliance” when it comes to notice provisions?
One court recently tackled the sufficiency of the termination notice one party provided to another and decided whether it substantially complied with the contract.
Termination for default misses the mark
The disputes in James Construction Group LLC v. Westlake Chemical Corp. arose in the aftermath of a fatality that occurred during the construction of a chemical plant in Louisiana. In the spring of 2012, Westlake hired James to perform civil and mechanical work on a chlor-alkali plant operated by its subsidiary. The contract permitted Westlake to terminate the contractor if it committed “serious safety violations” and obligated James to pay excess completion costs in the case of default. Prior to termination, however, the contract required Westlake to give James three pre-termination notices:
- Notice that there was a serious safety violation, triggering a 72-hour window for remedy.
- Notice of continuing unsatisfactory pace and quality of remediation efforts.
- Final notice of termination of the contract or of a portion of the work.
The contract required that all notices be in writing.
Within the first year of performing work, James had numerous Occupational Safety and Health Administration recordable injuries and near-misses while on the job site, including a fatal injury suffered by James employee Gregory Price. Following the fatality, Westlake began discussing James’ safety record and set up a safety review and meeting. Although James’ safety performance initially improved following the meeting, it again lapsed and James was required to replace its site manager at Westlake’s request. After additional incidents and scheduling delays, Westlake met with James in person and informed it that it had five days to remove all remaining piping and mechanical crew from the job, citing safety concerns. Westlake did not send a written termination notice to James before or after the safety meeting.
James ceased work nonetheless and confirmed through email that the demobilization was complete. All remaining mechanical work was completed by Turner Industries Group LLC, a new subcontractor brought on by Westlake.
Westlake ultimately sued James for breach of contract, seeking to recover damages for the excess costs of Turner’s contract. Westlake argued that James owed these costs pursuant to the contract, as the costs resulted from the termination for default. James counterclaimed that Westlake breached the contract by terminating James without the required notices. At trial on this issue, the jury found that although Westlake had not provided written notice, it had “substantially complied” with the notice provisions and was awarded its damages. On appeal, the Court of Appeals affirmed this portion of the judgment.
Texas Supreme Court weighs in
James appealed the ruling on the basis that Westlake could not satisfy the contract’s notice requirements through “substantial compliance.” The Texas Supreme Court agreed and specified that substantial compliance required, at the very least, writing in some form in cases where written notice is required.
We hold that substantial compliance is the appropriate standard when evaluating whether a party complied with a contractual notice condition. However, we also hold that substantial compliance with a condition precedent requiring written notice may not be achieved without a writing in some form. Here, Westlake provided no writing at all with respect to at least two of (the) … required written notices and thus failed to substantially comply with the provision’s conditions as a matter of law.
The first of three notices that Westlake was contractually required to give James was a notice that there was a serious safety violation, which would trigger a 72-hour cure period. Although Westlake did send an email to James following Price’s fatality, the text of the email communicated the need for a safety review and did not directly mention the contract, the default provisions, or the 72-hour cure period. This email was followed by in-person meetings and no further written records. In court testimony, a Westlake representative was unable to point to the exact starting point of the cure period. The court decided the email was questionable in terms of satisfying the written notice requirement and placed emphasis on the fact that James could not be reasonably expected to understand the email as the trigger of the 72-hour window if Westlake itself could not identify it.
The second contractual notice requirement centers on whether the quality and pace of the remediation efforts are unsatisfactory following the cure period. Although Westlake sent many emails internally discussing the incident rate and safety concerns, these concerns were not communicated in writing to James. Westlake sent an email expressing the importance of safety for future success but did not discuss the cure period, unsatisfactory safety efforts, default, termination, or the contract. The court determined that this email, although mentioning safety, was too generic to satisfy the second notice requirement. Internal Westlake emails later discussed the need to put James on notice — further proof for the court that even Westlake did not consider its email as putting James on notice of termination. All parties agreed that the third notice requirement for termination was never provided in writing.
The court found that even if the first email satisfied the first of the three written notice requirements in the contract, the second two notices were never provided in writing, and therefore, the termination was not exercised properly and was not valid. Because written notice was not provided, the jury’s award of damages could not stand.
How the owner got it wrong
Three takeaways jump off the page from this case, similar to a Contracts 101 class: 1) double-check your contract for notice requirements and ensure project managers are tracking them, 2) be clear and unambiguous in your communications, affording and referencing contractual cure periods, especially if termination is the goal, and 3) ensure that these communications are in writing and not just verbal.
Not only must parties follow the contract notice requirements to a T, terminations for default require an even more heightened compliance with notice clauses. What is somewhat surprising is that the Texas Supreme Court decided that substantial compliance with the notice provisions for a termination could suffice. Here, however, the owner failed to even meet the substantial compliance doctrine. Even though there were numerous safety meetings following the fatality, and even though James left the job when orally terminated, and even though James itself created a written record of its own termination in an email in May, none of these actions were enough. The contract specified that notice from Westlake to James must be in writing three times, and that did not happen.
This case is also important to the extent it calls our attention to the importance of what goes into the notice letter. Here, the court consistently referred to the fact that the writings sent from Westlake to James did not mention that Westlake was putting James on notice, nor did they reference the contract, default, termination, or dissatisfaction with performance. The ambiguity here directly harmed the owner’s case and highlights the importance of making it clear exactly what message your notice is intending to give.