March 14, 2024 Article

Failure to Follow Your Contract's Notice Requirements Can be Costly

In Kinetic Systems, Inc. v. IPS-Integrated Projects Services, LLC et. al., No.: 20-cv-1125 (D.N.H. February 6, 2024), the U.S. District Court for the District of New Hampshire granted summary judgment for a general contractor, finding a subcontractor’s claims for additional payment barred, underlining the importance of strict compliance with contractual notice requirements. Attorney Peter Callaghan of Preti Flaherty represented the general contractor, IPS-Integrated Projects Services (“IPS”).

Kinetic Systems, Inc. (“Kinetics”) was a subcontractor on a project to build a manufacturing facility for the owner, Lonza Biologics, Inc. (“Lonza”). The relationship between Kinetics and IPS was governed by two Subcontracts. Kinetics was paid the lump sum prices set forth in the Subcontracts, and other approved amounts. This dispute centered around an additional amount requested by Kinetics (approximately $12,000,000) based on unpaid change orders for work it alleges it did on that project.

The Court found IPS complied with the terms of the Subcontracts when it rejected Change Proposals which sought amounts already included in the lump sum Subcontract amount and for additional payment after Kinetics did the work. Kinetics’ requests for additional payment were untimely because it did not comply with the Subcontracts’ notice requirements. In other instances, Kinetics failed to timely notify IPS of cost or schedule impacts from proposed changes.

Kinetics did not dispute the requirements under the Subcontracts or that it submitted certain Change Proposals after work was completed. Rather, Kinetics argued that IPS waived the agreed-upon time for Change Proposals. The Court rejected this argument—to constitute waiver, a party’s actions must clearly demonstrate an actual intention to forego a right. Waiver may not be inferred when parties routinely follow contractually required procedures. The Court also rejected Kinetics’ contention that there was a waiver where IPS and Kinetics separately negotiated a dispute about Kinetics’ claim for additional payment, when the parties engaged in a contractually required dispute resolution process.

Key Takeaways

IPS had clear contractual provisions regarding change orders and impacts from changes, it consistently followed them, and because its subcontractor failed to do so, it was unable to recover for claims made after performing work. Because IPS consistently followed the contractual terms, a claim of waiver was easily brushed aside by the Court. Unless there is unmistakable evidence of a party waiving its rights, or modifying terms of the contract through conduct, parties will be held to strict compliance with contractual notice provisions.

The decision also underscores the importance of supervisory personnel to remind subcontractors to comply with contractual provisions and to consistently hold themselves and others to comply. Contractors should have a detailed understanding of each contractual notice provision before commencing work. This includes subcontractors who are subject to flow-down provisions incorporating other contracts. Contractors should maintain a system for recording and tracking information, including plans, specifications, contracts, and change-order requests. Relaxing requirements and not enforcing contractual provisions can lead to big recoveries.