Ohio Court Holds Contractor Claims Barred Because of Failure to Comply With Contract’s Claim Submission and Dispute Resolution Provisions

Cleveland Construction, Inc. v. Kent State University
2010 Ohio 2906, 2010 Ohio App. LEXIS 2407 (Ohio Ct. App. June 24, 2010)

The Ohio Court of Appeals held that a contractor’s failure to submit claims in accordance with the contract’s dispute process and its failure to exhaust administrative remedies prescribed by statute would bar its claims regardless of assertions as to the futility or unfairness of such procedures.

Cleveland Construction, Inc. (“CCI”) contracted to build four residence halls on Kent State’s main campus. The project encountered a series of delays, including, initial delays related to site preparedness and the architect’s failure to secure a required permit for the project, as well as later weather and labor-related delays. While Kent State issued change orders for some of the delays, it denied other claims for delay and acceleration damages.

CCI a filed a breach of contract claim against Kent State in the Ohio Court of Claims alleging damages from delays and the failure to issue contractual change orders. Kent State also counterclaimed alleging deficiencies in CCI’s work. The trial court found that Kent State breached it contract with CCI by: (1) failing to remit to CCI the unpaid balance of the contract amount; (2) waiting over three months to resolve CCI’s February 2003 claim for an extension of the project schedule; (3) refusing to grant CCI a reasonable extension of time for a labor strike and the extraordinary inclement weather of May and July 2003; and (4) improperly denying various other change order requests that CCI submitted. On Kent State’s counterclaim, the trial court found that some of CCI’s work was defective or incomplete. CCI established damages in the amount of $3,382,612.32; and Kent State, for its part, established damages of $352,879,72. Setting off Kent State’s damages against CCI’s damages, the trial court awarded CCI damages in the amount of $3,029,732.60, plus prejudgment interest.

Kent State appealed the decision to the Ohio Court of Appeals, asserting that CCI waived claims by failing to file the claims in accordance with the contract’s dispute process, and also by failing to exhaust pre-suit remedies provided in the dispute resolution provisions of the contract.

First, Kent State asserted that CCI failed to submit the claims to architect under the dispute resolution process provided in Article 8 of the contract. Article 8.1.1 of the parties contract provided:

Any claim against the State shall be made in writing to the Associate and filed prior to the Contract Completion, provided the Contractor notified the Associate no more than ten (10) days after the initial occurrence of the facts, which are the basis of the claim. To the fullest extent permitted by law, failure of the Contractor to timely provide such notice shall constitute a waiver by the Contractor of any claim for additional compensation or for mitigation of Liquidated Damages.

Kent State contended that CCI did not timely file its claims with the architect as required. The trial court, however, held it would be “inherently unfair” to require CCI to pursue a dispute process where individuals who were personally involved in the dispute acted as adjudicators.

On appeal, the Court disagreed. The Court held the courts cannot decide cases of contractual interpretation based on what is just or equitable, and that the trial court erred when it, in effect, deleted the second sentence of Section 8.1.1 from the parties’ contract. The Court held that that the express terms must be applied.

The Court also Kent State’s concluded that the trial court erred in similarly holding that CCI was not required to exhaust administrative remedies. Kent State argued that R.C. 153.12(B) precludes a contractor from bringing a breach of contract action against the state unless the administrative remedies provided for in a public contract are exhausted. Under Article 8, CCI was required to first file all claims with the “associate.” If the associate decided against CCI, then CCI could appeal to the project administrator. If the project administrator did not resolve the claim to CCI’s satisfaction, CCI could then appeal to the Office of the University Architect. Kent State claimed that CCI did not follow this process. CCI countered that submitting the claim through the administrative process would have been a “vain act”, as the arbiters in Article 8 were involved in the previous decisions and unlikely to reverse them.

On appeal, the Court stated that the exhaustion of administrative remedies doctrine is a judicially-created rule designed to promote economy in resolution of disputes for which an administrative remedy exists and that the “vain act” exception is applicable to the judicially created doctrine. The present case, however, presented a rare instance where a statute, R.C. 153.12(B), required CCI to exhaust its administrative remedies before bringing suit. The Court found that unlike the judicially-created rule, the exhaustion of the administrative remedies doctrine codified in Rule 153.12(B) does not include any exceptions. Moreover, the Article 8 process provides the public owner with the ability to resolve the dispute without costly and time-consuming litigation, as well as to make adjustments during construction in light of known, defined costs. Accordingly, the Court held that a failure to exhaust administrative remedies, would be fatal to CCI’s claim.

The Court these held that although the trial court erred in rejecting Kent State’s defenses, the matter still required remand to determine if Ken State had carried its burden of proof on these defenses.

Click here to view full text of decision courtesy of LexisNexis.

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