Substantial Compliance – When The Contract Doesn’t Always Mean What It Says

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As COVID-19 continues to result in government shutdown orders, labor shortages, and increased lead times to acquire materials, project owners, contractors, and subcontractors may begin to make claims of “force majeure,” or may otherwise suspend or even terminate work.  Often these notifications or directives can first happen over the phone --- a contractor tells an owner that there is a manpower shortage, or that they are held up by an inability to work on the project site because a local order prohibits work from continuing.  Many contracts require written notice of any such delays within a set period of time, so diligent parties will follow up such phone calls with a formal letter or email, but that does not always happen.  So what happens months later when a contractor or subcontractor submits a claim for schedule extension or additional compensation?  An enterprising party might remember the “written notice” provision and take comfort in the fact the “oral notice” they received months before does not meet the requirements of the contract.  After all, the contract says “written notice,” so oral notice will never suffice, right?

A recent Texas Court of Appeals decision says otherwise.  In James Const. Group v. Westlake Chemical Corp., 594 S.W.3d 722 (Tex. App.—Houston [14th Dist.] 2019, pet. filed Apr. 7, 2020), the Houston Court of Appeals examined a written notice provision in the context of a construction contract for the first time in more than a century.  Specifically, the contract in Westlake required that, prior to termination, Westlake provide James Construction with written notice of any “serious safety violations.”  Id. at 731.  After providing such notice, Westlake had the authority to take unrestricted possession of the work or portion terminated and then pay for its completion and charge such costs to James Construction.  Id.  The parties did not dispute that such written notice was an express condition precedent to Westlake’s rights to termination or to take unrestricted possession of the work.  The parties further did not dispute that Westlake did not provide such written notice, but instead provided oral notices.  At trial, the jury determined that the notices Westlake provided “substantially complied” with the contract’s notice provision.  Id. at 740.

On appeal, the parties argued over whether substantial compliance was the right test, or whether the contract’s written notice provision, which was an express condition precedent, required strict compliance.  Id.  The court noted that this question had not been addressed by the Texas Supreme Court in more than 100 years, when the court held that “less than strict compliance with [a contract]’s certificate condition did not defeat the contractor’s right of recovery.  Id. (citing Linch v. Paris Lumber & Gran Elev. Co., 80 Tex. 23 (Tex. 1891)).   The Westlake court further acknowledged that other Texas courts had held that written notice requirements could be strictly enforced, but not in a construction context.  Id.  However, overall, the court agreed that the overall weight of authority, including from federal court, required finding that Westlake’s “failure to strictly comply with the written notice provisions . . . [did] not compel reversal.”   Id.  at 746.   Accordingly, the Court of Appeals held that substantial compliance with the notice provision could allow Westlake to recover from James Construction.  Id. at 761.

In recognition of the seriousness of this issue, this case is currently on appeal before the Texas Supreme Court.  In its briefing filed with its petition for review, Westlake has argued that the substantial compliance doctrine should apply only to a constructive condition, rather than an express, written one.  However, this is an important case that reflects a trend in case law even in federal courts in Texas that substantial compliance with notice provisions is sufficient. See, e.g., South Texas Electric Co-op. v. Dresser-Rand Co., 575 F.3d 504, 507 (5th Cir. 2009) (calling the applicability of “substantial compliance” to contractual notice provisions “well-established Texas law”).  Unless and until the Supreme Court resolves this issue, parties in Texas—and particularly in Houston—should be aware of Westlake and its potential effect on written notice provisions.

It is important to note that some Texas courts disagree that substantial compliance with a written notice provision is permissible.  For instance, in Osborne v. Mutzig, the San Antonio Court of Appeals held that a written notice provision in a lease agreement that required a landlord to provide “formal written notice” of default to trigger a guarantor’s obligations could be strictly enforced.  2003 WL 21010609 (Tex. App.—San Antonio May 7, 2003) (mem op.).  Accordingly, the landlord’s oral notice was “not sufficient to give notice of a declaration of default.”  Id.  Additionally, the Houston Fourteenth Court of Appeals, prior to Westlake Chemical, had a number of cases suggesting that written notice provisions require strict compliance unless specifically excused by a jury.  See Arbor Windsor Court, Ltd., v. Weekley Homes, LP, 463 S.W.3d 131 (Tex. App.—Houston [14th Dist.] 2015, no pet.) (written notice provision must be enforced absent jury finding of excuse; Emerald Forest Utility Dist. v. Simonsen Const. Co., Inc., 679 S.W.2d 51 (Tex. App.—Houston [14th Dist. 1984, writ ref’d n.r.e.) (written notice provision must be enforced as drafted).  Westlake Chemical controls over these Houston cases, of course, but they illustrate that this issue is not definitively under Texas law, and that some courts may be more sympathetic to requiring strict compliance with express conditions precedent.

Finally, there is some authority suggesting that some careful drafting may protect written notice provisions from the substantial compliance doctrine.  A federal court applying Texas law looked at specific language to uphold an express condition precedent that a contractor provide written notice of a warranty claim to a subcontractor before the subcontractor became obligated to make any repairs.  Kiewit Offshore Servs., Ltd. v. Dresser-Rand Global Services, Inc., 2016 WL 4564472 (S.D. Tex. Sep. 1, 2016).  In Kiewit Offshore, the contractor argued that it provided email notices to the contractor of several warranty issues sufficient to trigger the contractor’s warranty obligations.  The parties’ contract required all such notices to be either hand-delivered or sent by certified mail.  The contractor argued its email notices substantially complied with this provision.  The Court disagreed, even though the Court generally noted that substantial compliance was the prevailing law in Texas.  Instead, the Court noted that the parties’ contract stated explicitly that “neither telephone nor email shall constitute valid means for communicating notice.”  Id. at *6.  Because email was specifically agreed as insufficient notice, the Court found that the contractor had not met its express condition precedent, and that the subcontractor therefore had no warranty liability under the contract.  This ruling suggests that parties can foreclose the issue of substantial compliance by expressly stating in contracts that oral notice is not sufficient.

So where does this leave parties to contracts with written notice provisions?  As experienced parties are aware, written notice provisions are used in clauses related to force majeure, warranty obligations, dispute resolution, termination, and others.  Parties frequently make these provisions express conditions precedent in the hopes of protecting themselves from being ambushed at a later date.  Under Westlake, these provisions could all be turned on their heads with a simple oral notice.  So how do parties proceed?  If a party has an obligation to provide written notice under a contract, it is always recommended that the party comply and provide written notice as soon as practicable.  If a situation arises that is so urgent that it requires oral notice, it is recommended to always follow up such oral notice with a written communication after the fact.  Parties who receive oral notice of an event for which a written notice is required should insist on written notices of same, but should also carefully document the date that oral notices were provided in the event a dispute arises.  Whether email is sufficient written notice or not is also still in flux in the law.  In drafting your contract, you should specify whether email will be sufficient notice or not. Taking these steps should mitigate any uncertainty provided by Westlake until other appeals courts or the Supreme Court weigh on in this critical issue.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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