Texas Supreme Court Clarifies Acceptable Form of Compliance with Contractual Notice Provisions
The Supreme Court of Texas addressed the appropriate form of compliance with contract notice provisions in James Construction Group, LLC v. Westlake Chemical Corporation, wherein it adopted the substantial compliance test, a test that had been previously adopted by several Texas appellate courts. 650 S.W. 3d 392 (Tex. 2022).
In May 2012, Westlake Chemical Corporation (“Westlake”) contracted with James Construction Group, LLC (“James”), a general contractor, to perform civil and mechanical construction work at a chlor-alkali plant in Geismar, Louisiana. Id. at 397. After several months, Westlake terminated James due to significant safety violations. Id. at 396. Westlake also sought recovery of costs for replacement of James midway through the project. Id.
Section 21 of the contract governed termination. Id. at 397. Section 21.3 authorized Westlake to terminate James for “[d]efault” if Westlake determined that James, among other things, had “serious safety violations,” and required Westlake to provide James with three written notices:
- Notice that Westlake determined there were serious safety violations, triggering a 72-hour window for James to “begin to remedy” the violations;
- Notice that Westlake was “not reasonably satisfied with the pace and the quality of the remediation effort”; and
- Notice that Westlake elected to terminate the contract or a portion of the work.
Id. at 398.
Upon termination, Section 21.3 permitted Westlake to “take possession of the Work or the portion thereof terminated” and to complete that work, with James being responsible for excess costs incurred by Westlake. Id.
In December 2014, Westlake sued James for breach of contract seeking damages for costs associated with transferring the work to another general contractor. Id. at 400. James counterclaimed, alleging that Westlake breached Section 21.3 by improperly terminating James without the required notice. Id. at 401. The jury found that both parties breached the contract and awarded damages and attorney’s fees to each of them. Id. at 401-402. The jury decided that, although Westlake failed to send two of the required written notices, the communication between the parties was sufficient to overlook the missing notices. Id. The Fourteenth Court of Appeals affirmed the judgment as to the award of damages and attorney’s fees to Westlake, and reversed as to the award to James on its counterclaim. Id. at 402.
James petitioned for review of the court of appeals judgment. Id. at 403. Relevant here, James argued that the appellate court erred in finding that Westlake could satisfy Section 21.3’s notice requirements with substantial compliance, and further claimed that Westlake could not recover damages for James’s purported breach because Westlake did not strictly comply with Section 21.3. Id.
As to notice provisions, the Texas Supreme Court addressed whether the owner’s entitlement to recover contract damages for termination of the contractor as a result of default depended on strict (as opposed to substantial) compliance with the written-notice conditions precedent, and if substantial compliance was sufficient, whether legally sufficient evidence supported the jury’s finding of compliance (even though at least two of the notices were not given in writing). Id. at 396.
Westlake contended that it provided the required written notices to James with the first being on December 28, 2012, when Westlake’s manager forwarded an email from Westlake’s vice president to James’s site manager describing a safety incident as “completely preventable,” and discussing the scheduling of a safety review. Id. at 409. . Id. at 410. The court failed to see how James could be reasonably expected to determine from the communications when the 72-hour period began if Westlake could not do so either. Id.
Westlake claimed that it provided a second written notice in a January 18, 2013 email (“January 18 Email”) in which Westlake advised James about its decision to terminate James and use another contractor. Id. at 410. The court disagreed. Id. at 411-412. Like the first notice, this email did not mention Section 21.3, default, or termination. Id. at 411. Consequently, there was no indication that Westlake was dissatisfied, and James was not on notice of termination for default or recovery of excess costs. Id. at 411-412. Though an internal Westlake email mentioned concerns over James’s safety record and discussed whether to notify James about possible removal, the court did not find evidence that Westlake executed this plan. Id. at 412. Ultimately, the January 18 Email could not qualify as the second required notice. Id.
The parties did not dispute that Westlake failed to provide a third written notice. Id. Westlake argued that lack of written notice was immaterial because James’s actions demonstrated that it knew about the termination based on a meeting on April 11, 2013, when Westlake advised James that due to an additional safety incident, they decided to transfer remaining work to another contractor and instructed James to remove workers from its job site. Id.
The court held that “actual notice is not a substitute for written notice” and “absent waiver, oral notice does not satisfy a written-notice requirement as a matter of law.” Id.at 409, 412. Due to Westlake’s failure to provide written notice as a condition precedent, James’s obligation to pay costs in excess of the contract price to cover expenses for hiring a new contractor under Section 21.3 was not triggered. Id. at 412-413.
The court held that Westlake did not comply with the contract’s written notice requirement, and thus failed to satisfy the conditions precedent to its rights to recover damages. Id. at 418. The court unanimously agreed that substantial compliance is the appropriate standard when determining whether a party complied with a contractual notice condition and stressed that “substantial compliance with a condition precedent requiring written notice may not be achieved without a writing in some form Id. at 405. The substantial compliance test holds that “a party’s minor deviations from a contractual notice condition that do not severely impair the purpose underlying the condition and cause no prejudice do not and should not deprive that party of the benefit of its bargain.” Id. at 406.