Better Safe than Sorry – The Importance of Providing Notice of Potential Claims during Performance

A recent decision by the Court of Federal Claims underscores the need to provide notice of potential claims as well as the effects of exculpatory language limiting the ability to rely upon information provided by the government. In CKY Inc. v. U.S., No. 16-948 C, 2018 WL 4956963 (Fed. Cl. Oct. 12, 2018), the Court of Federal Claims dismissed a differing site condition claim, in part, because: the contract had a provision that made reliance on the government’s geotechnical report unreasonable, and the contractor failed to provide prompt written notice of its differing site condition claim.

In this case, the government contracted for $6.4M to rehabilitate a levee in Texas, which involved excavating old embankment material and replacing it with new embankment material. The new material had to meet certain specifications before it could be used to replace the excavated material, such as moisture content and compaction. The contractor encountered difficulty meeting those requirements because, it argued, the subgrade conditions made it impossible to do so without excavation and material replacement in addition to the amounts contemplated by the contract. It brought claims of differing site condition, defective specifications, constructive change, and breach of oral and implied-in-fact contract. It did not recover on any claims. The contractor sought an adjustment of more than $4.5M, but instead was ordered to pay almost $500k in liquidated damages.

In issuing its opinion, the court noted that the contract exculpated the government from any claims related to reliance on the government’s representations regarding the subsurface conditions. The government made a geotechnical report and supporting drill record data available upon request with the caveat: “[t]he data and report are not intended as a representation or warranty of continuity of conditions between soil borings . . . .” The court interpreted this provision (in combination with some RFI responses) to preclude any claims based on reliance on the drill record. After this broad application of exculpation, the court also held that the contractor’s failure to provide written notice to the government of the differing site condition was fatal to that claim. The contractor had communicated the conditions it encountered during excavations, and argued that this should have been all the notice the government needed to know that a differing site condition claim might be coming, even though the claim was not formally submitted until a year later. Citing AAB Joint Venture v. United States, 75 Fed. Cl. 414, 424 (2007) (“[c]onstructive notice can only exist where the Government is not prejudiced by the lack of written notice.”), the court held that constructive notice of a differing site condition was prejudicial to the government because it “foreclosed less costly alternative solutions or avoidance of contractor claims.”

In its discussion of less costly alternative solutions, the court speculated that the government “likely would have imposed a suspension of construction to evaluate reasonable alternatives.” This (hypothetical, tenuous) rationale was all the court deemed it needed to hold that the government was prejudiced by the lack of notice. The differing site condition claim, therefore, as well as the constructive change and implied-in-fact contract claims, could not succeed.

While there were some additional reasons for the court to hold as it did in this case, this decision emphasizes the importance of providing more than constructive notice of a differing site condition or other potential claims as soon as they are observed, along with the potential effects of seemingly benign exculpatory language. If you have any questions about this article or more generally on whether the time has come to provide notice of a claim during performance of a government contract, please don’t hesitate to contact us.