NARROW EXCEPTION TO MIKE M. JOHNSON CONFIRMED BY DIVISION III COURT OF APPEALS

Date: September 20th, 2016

Recently, Division III of the Washington State Court of Appeals attempted to provide guidance to Washington trial courts and the construction industry on the interplay between two landmark Washington Supreme Court construction law cases – Bignold v. King County (1965) and Mike M. Johnson Construction v. County of Spokane (2003). While the result is a somewhat predictable affirmation of the owner-friendly Mike M. Johnson decision, the Court of Appeals’ decision in General Construction Company v. Public Utility District No. 2 of Grant County does leave the door open ever so slightly for contractors to avoid the enforcement of draconian notice and claim provisions for substantial changes that are “outside the contract.”

The General Construction lawsuit arose out of a public project to build a fish ladder into the Wanapum Dam on the Columbia River near Vantage, Washington. Public Utility District No. 2 of Grant County was the owner of the Project, and General Construction was the general contractor. The contract between the PUD and General contained a very broad scope of work requiring General to perform “all work necessary for the construction of Wanapum Future Unit Fish Bypass.” Moreover, the prime contract contained mandatory “Mike M. Johnson” notice and claim provisions. During the course of construction, there were numerous changes to General’s planned course of construction, including owner directed re-sequencing of General’s work. As a result of the numerous changes to General’s work, General incurred substantial additional costs.

Unfortunately, General failed to comply with the mandatory notice and claim provisions under the contract with regard to many of its claims. As a result, the trial court denied several of General’s claims for additional compensation on summary judgment. However, the trial court was not sure how to handle General’s claims related to the more substantial changes to its contract. General argued that under the Bignold case, the PUD was required to show that it was prejudiced by General’s failure to strictly comply with the contractual notice and claim provisions and that the PUD could not show prejudice. The PUD argued that the Mike M. Johnson case rejected General’s prejudice argument and that the contractual notice and claim provisions must be strictly enforced to bar General’s claims. To help resolve this debate, the Court of Appeals agreed to review the case in order to provide guidance to the trial court on how strictly to apply the notice and claim provisions to General’s remaining claims and whether the PUD was required to establish prejudice in order to rely on the notice and claim provisions to bar General’s recovery.

After a detailed discussion of the Bignold and Mike M. Johnson decisions (including Justice Chambers’ thoughtful dissent in Mike M. Johnson that relied on Bignold and advocated for the prejudice requirement), the appellate court found a way to give effect to both cases. In a nutshell, the appellate court confirmed that Mike M. Johnson requires strict enforcement of contractual notice and claim provisions for the vast majority of construction claims and that a showing of prejudice is not required. However, the appellate court also noted that Bignold remains good law post Mike M. Johnson and that Bignold still allows a contractor to recover additional compensation under the equitable theory of quantum meruit for “substantial changes beyond the contemplation of the parties and not covered by the contract that result in extra work or substantial costs to the contractor.” For changed work that is truly “outside the contract,” the appellate court ruled that Bignold provides a “supplemental means of recovery” and that such claims would not be barred by a contractor’s failure to comply with Mike M. Johnson notice and claim provisions.

So what is the big picture takeaway from the General Construction decision? Absent legislative action to overturn Mike M. Johnson, contractors must continue to timely and properly jump through the procedural hoops set forth in their contracts to ensure their claim rights are preserved. That being said, the General Construction decision highlights and affirms one of the narrow exceptions to Mike M. Johnson – changes that are so substantial as to fall outside the scope of the contract. The problem with the exception and the General Construction decision in general is that it provides little guidance on the issue of what “outside the contract” means in the real world. At best, the General Construction decision provides contractors with a potential argument that their claims should be allowed despite a failure to strictly comply with contractual notice and claim provisions. Because the Bignold exception is narrow and somewhat vague, prudent contractors should make every effort to comply with the notice and claim provisions even when the basis for the claim is arguably “outside the contract.”

If you have any questions about the General Construction decision or any other construction law matter, please contact Brian Guthrie at bguthrie@ashbaughbeal.com.