[author: Patrick Fontana1]
The Supreme Court of Texas recently addressed notice requirements in a construction contract. In James Construction Group, LLC v. Westlake Chemical Corporation, the court held that even though the substantial compliance doctrine applies to notice requirements, when a contract requires written notice, substantial compliance cannot be achieved without a writing, even if the parties have actual notice.
Background
Westlake Chemical Corporation (“Westlake”) hired James Construction Group (“James”) as a general contractor to do civil and mechanical construction on a chlor-alkali plant. Under the contract, James was contractually responsible for the safety of its employees and subcontractors, but Westlake was able to intervene if, in its reasonable opinion, James was performing its duties in an unsafe manner that might cause injury or damage (“intervention provision”). If Westlake had to intervene, the contract provided that Westlake could require James to take remedial action and that James would be solely accountable for all costs associated with the remedial action.
Additionally, the contract provided that Westlake could terminate James for default if, in Westlake’s reasonable opinion, James had committed serious safety violations (“default provision”). To terminate for default, the contract required Westlake to give James three separate notices. If James was terminated for default, then Westlake had the right to take possession and complete the work and James would be responsible for any extra costs. Furthermore, a provision of the contract required all notices to be given in writing.
While James was working on the project, there were several safety incidents including OSHA-recordable injuries. James was cited for a serious safety violation when an employee on the job suffered a fatal injury. Following the workplace fatality, Westlake and James engaged in a series of conversations resulting in a period of improved safety performance, but performance subsequently deteriorated again. In an in-person meeting, Westlake informed James that it was reassigning all mechanical work to a different contractor. James retained the civil work.
Westlake sued for breach of contract under the intervention provision, the default provision, and for failure to indemnify as required by the contract. James counterclaimed for breach of contract.
The Lawsuit
Following trial, the jury found that James had breached the intervention provision and the default provision and Westlake was entitled to $1,054,251.81. The jury also found that James breached an indemnity provision and awarded Westlake $102,767.69 in damages. Westlake was also awarded attorney’s fees. Finally, on James’ counterclaim, the jury found that Westlake did breach a waiver of consequential damages provision and awarded James attorney’s fees for defending against those claims.
The court of appeals affirmed the judgment regarding the default provision and indemnity provision of the contract. The court of appeals found that the substantial compliance doctrine did apply to the notice provisions and that the evidence supported a finding of substantial compliance. Since the default provision claim was upheld, the court of appeals did not address the intervention provision claim. On James’s counterclaim, the court found that the waiver of consequential damages provision was not a covenant not to sue and entered a take nothing judgment, reversing the award of attorney’s fees to James.
James appealed to the Texas Supreme Court and argued that Westlake failed to comply with the condition precedent, the notice requirement, to recover damages under the default provision. Neither party disputed that the notices were express condition precedents or that the default provision required three separate notices. James argued that to satisfy the condition precedent, strict compliance with the written notice requirements was required. Westlake argued that substantial compliance with the written notice requirements was sufficient.
The Supreme Court of Texas reversed the judgment on the default provision claim finding that the correct standard for evaluating whether a notice requirement had been satisfied was the substantial compliance standard, but that substantial compliance with a written notice requirement requires a writing. The court stated that the “bargained-for requirement of written notice necessarily serves a purpose beyond actual notice; otherwise, its inclusion is useless.” The court held that “[a] contrary holding would allow parties to elude the bargain they freely made and would open the door to a host of factual disputes about whether proper contractual notice was given—the very kinds of disputes that the writing requirement is intended to foreclose.” Thus, “when a contract mandates written notice, a writing is a necessary part of complying with that condition, substantial or otherwise.” Here, the court found that, at best, only the first notice was in writing. Therefore, Westlake had failed to satisfy the condition precedent to recovering damages under the default provision. Additionally, the court reversed on the intervention claim, finding that the provision could not serve as an “end-run around” of the default provision.
Takeaways
James Construction Group, LLC v. Westlake Chemical Corporation is a cautionary tale for failing to follow notice provisions in contracts. Even when the parties had actual notice, failure to comply with the written notice provision cost Westlake over one million dollars.
[1] Snell & Wilmer Summer Associate, who is not admitted to practice law.
