A few years ago, a friend asked me for a legal definition of substantial completion. That was easy: beneficial occupancy. However, the substitution of one phrase with another was of little help. The same can be said about defining “waiver.” It is a voluntary (and perhaps intentional) relinquishment of a known right. But what is it really, or rather, how does it work?

Equity again

In a past article, I discussed the interplay of equity and law, particularly in the context of construction contracting. Essentially, equity can trump or overstep the law in order for fairness to be achieved. Waiver is an equitable concept and depends heavily on the relationship between the parties and their course of dealing with each other.

For example, although the contract requires a 10-day written notice for claims for extras, the owner may be deemed to have waived this contract right under certain circumstances. One such circumstance: He tells the contractor to collect the extra work items to have them all resolved at the end of performance.

Here, the “right” of the owner is to be alerted to cost increases. He “voluntarily” gave up that right through his oral direction to ignore the clause and presumably he knew what he was doing; the waiver saved him paperwork and may have helped expedite performance.

More commonly, the contractor argues “waiver” not because of an owner’s specific order, but because of the owner’s inaction in enforcing the notice clause.

“Estoppel” is the flip side of waiver. With this equity concept, the courts do not rule that a person waived his right, but that he is “estopped” (prevented) from using the right. The basis of this legal excuse lies in a misleading or wrongful action or inaction that was relied on to one’s detriment. For example, the owner’s representative is fully aware of your field routing of conduit in a warehouse, but after installation, orders you to reroute based on a contract drawing.

Aside from the nuances in the application of waiver or estoppel, one thing is clear: the concepts are employed only when the contractor did not or could not perform the contract as written.

Some examples:

1. The “Prevention Doctrine”

It is not uncommon for a general contractor to have a “pass through” claim procedure in the subcontract. The substance of the clause allows the subcontractor to submit claims to the general contractor, who will in turn pass them through to the owner. Often, the subcontractor’s entitlement to time or money is limited to that granted by the owner, and the subcontractor otherwise waives a direct action against the general.

When the general contractor fails to pass the claim to the owner, or delays in doing so thereby nullifying recovery from the owner, the pass-through clause would bar the claim. The wrongful inaction by the contractor prevented the contract procedure from being employed and accordingly the contractor may be deemed to be estopped from raising the clause as a defense.

2. Waiver of Arbitration

Standard arbitration clauses permit either party to initiate arbitration in the event of a dispute. For a variety of reasons, both parties may decide later to waive their right to arbitration and proceed in court. But, what if only one party wants to avoid arbitration?

Let us say that the electrical contractor files suit, and the other side responds in court. By superficial appearances, the electrical contractor wanted to waive arbitration and showed its intention by the filing in court and the other side accepted the waiver by joining in the lawsuit. What actually has occurred is less obvious.

The strong federal policy in favor of arbitration requires more than acquiescence for a party to waive this right. In the example given, the owner may subsequently decide that it wants to arbitrate and will file a motion in court to that effect. However, has the owner also waived arbitration? The courts have been less than clear on this point.

In some jurisdictions, active participation in the court action is sufficient for waiver (such as engaging in discovery or bringing in third parties), but not always. A recent federal appeals court decision allowed the owner to invoke arbitration after months of participation in pretrial activities in court. The court’s primary finding was the absence of prejudice to the contractor who filed suit. Confusion was thus created as “prejudice” is a concept that applies to estoppel, not waiver. The difference is of extreme importance in how the contractor framed his arguments.

3. Waiver of Impact Claims by Change Order

The facts are typical: an owner and contractor sign a change order for extra work. Later, the contractor discovers the change had so-called ripple effects on unchanged work or it caused unexpected delays.

Also typical are the courts’ reactions, disallowing attempts to reopen a change order. Signing a change order without a reservation of rights can be considered a waiver of related claims.

With federal government contracts, even where a reservation of rights is stated in the change order, impact claims are considered waived by the inclusion of an overhead mark-up on the direct costs.

4. Waiver of Written Notice Requirement

Many contracts require the contractor to give written notice of increased costs or time within a specified period, or the claim is waived. This notice requirement can itself be waived. The key issue is whether the owner knowingly waived the notice clause.

Generally, the owner’s oral directions or conduct must be definite in requiring extra work, and the owner must be shown to know or have reason to know that extra costs will be involved. Where extra conduit, wire or devices are involved, proof of this kind of waiver can be straightforward. More significant issues of proof are involved, however, where the claim is for delays or disruptions and the owner’s involvement in creating the claim is less distinct. For example, one court has held that evidence of waiver of written notice must be “clear and unmistakable.”

Conclusion

Waiver and estoppel can arise in a vast array of circumstances from waiver of a specification requirement to estoppel from applying liquidated damages. Because these concepts arise in equity, your proof must be based on arguments of fairness (waiver) vs. overreaching (estoppel).

To paraphrase Aristotle, there are only three ways to have a winning argument: by using the preconceptions of the audience; by the force of personality of the speaker; and by logic. Equity fits under points 1 and 2. EC

ITTIG, of Ittig & Ittig, P.C., in Washington, D.C., specializes in construction law. He can be contacted at 202.387.5508, e-mail: USBuildlaw@aol.com, or his Web site, www.ittig-ittig.com.