Supreme Court of Kentucky Holds Claim-Preservation Requirements Not Barred by KFCA; Strictly Enforced Notice Provisions

On Thursday, December 13, 2018, the Supreme Court of Kentucky, reversed an appellate court decision and reinstated the trial court’s order granting partial summary judgment in favor of the Louisville and Jefferson County Metropolitan Sewer District. Louisville and Jefferson County MSD v. T+C Contracting, Inc., Supreme Court of Kentucky, Case No. 2017-SC-000274-DG. In addition to analyzing the enforceability of liquidated damages provisions,¹ the decision is notable because, for the first time, the Court considered the application of Kentucky’s Fairness in Construction Act (KFCA) in relation to claim notice provisions. In doing so, the Court held that the Act does not nullify “claim-preservation requirements” in a construction contract, even where failure to satisfy those requirements results in a waiver of the claim. While the Court reached the correct result, the long overdue foray into the Act, led to a superfluous analysis that may generate more confusion than clarity.

In 2007, Kentucky’s Fairness in Construction Act was signed into law. The act applies to all public and private projects, and was intended to level the playing field between contractors, subcontractors, and owners. Accordingly, KRS 371.405(2) identifies certain construction contract provisions that are against public policy and void. The provisions that are made unenforceable by the Act generally include: (a) a provision that purports to waive a contractor’s right to resolve a dispute through litigation in court or binding arbitration with a neutral third-party adjudicator; (b) a provision that waives a contractor’s right to file a lien; and (c) a provision that waives a contractor’s ability to recover damages or additional time for delays caused by the owner (i.e. no-damages-for-delay provisions).

The construction contract before the Court contained comprehensive dispute resolution provisions comprised of 22 separate subsections. The Court considered each section independently to determine whether it complied with the Act. First, the Court classified each clause as either: (1) a provision that required the contractor to comply with certain requirements in order to preserve its claim; or (2) a provision that prohibited claims from eventually being resolved by a third-party adjudicator, even if they were properly preserved. The Court held that KRS 371.405(2)(a) nullifies the second category, but not the first. For example, the Court determined that section (J) of the contract, requiring the contractor to provide a detailed written claim to the owner within 30 days of the first notice, was deemed to be a “claim-preservation provision,” permissible under KRS 371.405(2)(a).

Next, the Court continued its analysis by considering whether each provision was barred by KRS 371.405(2)(c), the no-damages-for-delay provision. While there was no delay claim before the Court, it broadly held that 2(c) operated to nullify all construction contract clauses that prohibit parties from asserting unpreserved claims, subject only to the exceptions enumerated under KRS 371.405(3). Therefore, under the Court’s reading, the contract provision requiring written notice of a claim within 10 days, section (A), was initially barred by KRS 371.405(2)(c), but salvaged by the exception found in 371.405(3)(b) – specifically stating that the Act shall not render void a provision that requires notice of any delay by the party affected by the delay.

Likewise, the Court held that section (F) of the contract - stating that compliance with the dispute resolution provisions was a condition precedent to any claim for additional costs – was initially invalidated by 2(c), but salvaged by 3(d). There, the Court reasoned that the KFCA does not render void a clause that provides for “any other procedure designed to resolve contract disputes.” Because section (F) required dispute resolution procedures be followed, but did not ultimately deny the contractor’s right to submit its claims to a neutral third-party adjudicator, it was held to be enforceable.

However, two provisions in the construction contract were determined to be void and unenforceable under the KFCA. First, section (O) required claims be submitted to MSD’s chief engineer for the issuance of a final and binding decision. Additionally, section (S) stated that the parties agreed that all decisions of the Chief Engineer are final, conclusive and binding and cannot appealed to or challenged in any forum or court. The Court held that each of those provisions denied the contractor the right to submit its claims to a neutral third-party in violation of the KFCA. Accordingly, under KRS 371.405(4), the Supreme Court severed sections (O) and (S) from the remainder of the contract that was in compliance with the KFCA.

After determining the enforceability of each of the provisions, the Supreme Court went on to consider whether the contractor preserved its claims under the terms of the contract. The contractor argued that by providing written notice on at least three instances it satisfied the notice requirements. The contractor further argued that its failure to provide a detailed claim within 30 days of the initial notice should be excused because it was impossible to comply with that provision under the circumstances. The Court disagreed, and found that the contractor waived its claim for additional compensation by failing to strictly comply with the dispute resolution provisions required by the contract. As a result, the trial court’s order granting summary judgment in favor of MSD was proper.

Construction contracts frequently include detailed dispute resolution provisions that require notice and claim submittal within a specific time from the date of the event giving rise to the claim. The Supreme Court of Kentucky reinforced the validity of these provisions and the requirement that claimants must strictly comply in order to preserve a claim. The KFCA will not invalidate a claim-preservation provision, even where the failure to comply results in a waiver.

Even so, the Court’s broad interpretation of the no-damages-for-delay provision may create unintended consequences for lower courts attempting to apply the Supreme Court’s framework. Careful attention should also be given when drafting dispute resolution provisions to ensure that each clause, standing alone, is enforceable under the Supreme Court of Kentucky analysis.

Click here to see a copy of the Opinion.

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¹A subsequent alert will address the Supreme Court of Kentucky’s analysis of the liquidated damages claim which revisits the seminal decision of Mattingly Bridge Co. v. Holloway & Son Const. Co., 694 S.W.2d 702 (Ky. 1985).