American Safety Casualty Insurance Company v. City of Olympia

This case arises from a contract dispute between American
Safety Casualty Insurance Company (American Safety)1 and the city of Olympia

(City) and the trial court's award of summary judgment in favor of the City.2 There

is no dispute that American Safety did not follow the contract's provisions when it

sought additional compensation for work it had performed and that it filed suit after

the 180-day time limit established in the contract. However, American Safety

argues that the City implicitly waived its right to demand compliance with the

contract's provisions when it agreed to negotiate and try to reach a settlement.

American Safety argues that the trial court erred in granting summary judgment to

the City, and that the Court of Appeals was correct to reverse because an issue of

material fact existed as to whether the City waived its contractual defenses. The

City maintains that it expressly reserved its rights; that any waiver of rights must be

unequivocal; and that, at most, its acts were equivocal and thus did not constitute a

waiver. We agree with the City and reverse the Court of Appeals.

I

Facts and Procedural History

In 2000, the City awarded contractor Katspan, Inc. (Katspan) a contract to

construct a segment of the LOTT southern connection pipeline project. Under the

terms of the contract, the contractor was required to follow the contractual
procedures if it wished to file a protest, formal claim, or lawsuit.3 Katspan agreed

that protests to any change orders or compensation issues were to be brought to the

attention of the project engineer immediately. If Katspan disagreed with the project

engineer's resolution of the protest, it could file an administrative claim. Any cause

of action under the contract was to be brought within 180 days of the final

acceptance and closeout of the project. Pursuant to the contract, failing to follow

the procedures constituted a waiver of the claims. Clerk's Papers (CP) at 47 ("By

failing to follow the procedures of this section [Procedure and Protest by the

Contractor] and Section 1-09.11 [Disputes and Claims], the Contractor completely

waives any claims for protested work."); CP at 55 ("[T]he Contractor's failure to

bring suit within the [180-day] time period provided, shall be a complete bar to any

such claims or causes of action.").

From the beginning, the City was frustrated with Katspan's work -- the City

had to direct Katspan to fix deficient work, and Katspan failed to meet the

scheduling requirements. On April 2, 2001, the City sent Katspan a letter stating

that it considered Katspan to be in breach of the contract, as Katspan had not

completed the work according to the time frame established in the contract. The

City indicated that, pursuant to the contract, it was entitled to collect liquidated

damages from Katspan for the breach. The City also stated that it "reserve[d] its

right to demand strict compliance with all other terms of the contract documents,

including . . . the required procedure for protest by the Contractor." CP at 338. On

April 18, 2001, the City sent Katspan a letter in which the City stated that because

Katspan failed to follow the procedures set forth in the contract, it had waived its

claims. Katspan never disputed this letter.

When the work was finished, the City began the process of finally accepting

the project as complete. On May 10, 2001, the project engineer, Parametrix Inc.

(Parametrix), sent Katspan a letter asking Katspan to submit its final cost proposals

in order to close out the project. Katspan did not respond. On May 25, 2001,

Parametrix sent Katspan another letter, again asking for Katspan to provide the

information by June 4 so it could begin the closeout. Katspan responded on June

11, 2001, saying that it was "in the final stages of compiling data" and that the

requested information "should be ready shortly." CP at 95. Parametrix did not

receive the information, so it reviewed the files and changes to the original contract

and computed what it considered to be reasonable costs for the additional work. On

June 18, 2001, Parametrix sent Katspan a letter with the change order it prepared to

cover the additional work. Parametrix asked Katspan to sign the final payment

estimate and return it if it was acceptable. Katspan never responded, and on July 2,

2001, the City sent Katspan a letter stating that if Katspan did not return the final

payment request, the City would unilaterally establish final acceptance of the

project. The City received no response, and on September 10, 2001, the City

unilaterally closed out the project.

On November 26, 2001, American Safety, surety for Katspan,4 sent the City a

"Request for Equitable Adjustment on Southern Connection Pipeline Project"

(Request). CP at 116-321. The document did not comply with the standards set out

in the contract for filing a claim. American Safety received no response to the

Request until March 14, 2002 (more than 180 days after the final acceptance date),

when American Safety left a voicemail message for the City's counsel, stating that it

had some ideas for "some possible quick solutions." CP at 329.

The City agreed to enter negotiations, but asked American Safety to provide

further information so it could determine whether a quick resolution was possible.

American Safety subsequently sent the City two three-ring binders of documents;

however, it did not include all of the information that the City needed to evaluate the

request. On August 1, 2002, the City sent American Safety a letter in which it

asked for further documentation. American Safety indicated that it was having

trouble obtaining the requested information. On October 2, 2002, the City reiterated

that it was willing to negotiate, but that it would not do so unless American Safety

could provide adequate backup information for its claims. The City received no

response, and on November 12, 2002, sent American Safety a letter in which it

stated that "[w]ithout waiving any of its defenses, LOTT has stated several times

that it is willing to negotiate these claims in order to come to a quick resolution."

CP at 354. The City asked whether American Safety was still interested in

negotiations, as the City had received no response from its last request for

information.

On January 22, 2003, American Safety informed the City that it had received

four or five boxes of documents from Katspan for the City to review. Upon review,

the City discovered that some information was still missing. On April 23, 2003, the

City sent American Safety yet another letter requesting certain documentation. The

City stated that if it did not receive the requested information by May 16, 2003, it

would deny American Safety's claim. On May 14, 2003, American Safety wrote to

the City that although it believed it had provided sufficient information, "we are

presently determining the feasibility of accommodating LOTT's request for

supplemental cost information, or creating the equivalent." CP at 368. The

documentation never arrived, and on May 16, 2003, the City denied American

Safety's Request.

On July 31, 2003, Thomas Presnell, a claims consultant representing

American Safety, e-mailed Paul Pedersen, the City's forensic accountant, asking

him whether they could meet to discuss the project and the information the City

needed to complete its audit. Pedersen responded that he had been given the green

light to discuss the matter. Presnell and Pedersen exchanged a few more e-mails in

which they discussed what form the requested information should be in and when

they could meet. However, no meeting ever took place.

On May 21, 2004 -- more than a year after the City denied American Safety's

claim -- American Safety called the City and said that it had finally obtained the

information necessary for the City to evaluate its Request. The City responded that

the Request did not comply with the procedures set forth in the contract and that the
claim had been denied more than a year prior for lack of information.5

On August 17, 2004, American Safety filed suit against the City in Thurston

County Superior Court. The trial court granted summary judgment in favor of the

City, finding that American Safety did not comply with the contractual provisions

and that the City had not waived its right to demand compliance with these agreed

upon procedures. The Court of Appeals reversed, finding that whether the City had

waived its right to demand compliance with the contractual provisions was an issue

of material fact for a fact finder to decide. Am. Safety Cas. Ins. Co. v. City of

Olympia, 133 Wn. App. 649, 662, 137 P.3d 865 (2006). The City petitioned for

review in this court, which we accepted on June 8, 2007. Am. Safety Cas. Ins. Co.

v. City of Olympia, 160 Wn.2d 1017, 162 P.3d 1130 (2007). We must now decide

whether the trial court was correct in granting summary judgment or whether an

issue of material fact exists as to whether the City waived the contractual

provisions.

II

Analysis

We review an order of summary judgment de novo. Jones v. Allstate Ins.

Co., 146 Wn.2d 291, 300, 45 P.3d 1068 (2002). Summary judgment is proper "if

the pleadings, affidavits, and depositions establish that there is no genuine issue of

material fact and that the moving party is entitled to judgment as a matter of law."

Id. at 300-01.

The City argues that the Court of Appeals erred when it failed to recognize

that the rule of Mike M. Johnson, Inc. v. Spokane County, 150 Wn.2d 375, 78 P.3d

161 (2003), applies. In Mike M. Johnson, we considered whether Spokane county

implicitly waived its right to demand compliance with contractual procedures when

the county entered into negotiations with Mike M. Johnson, Inc. (MMJ) even after

MMJ did not follow the agreed upon procedures. Id. at 377-78. In that case, the

county and MMJ entered into a contract for MMJ to construct two sewer projects.

Id. at 378. Pursuant to the contract, which included the same standard

specifications as those at issue in the instant case, the county could revise the scope

of MMJ's work through a change order. Id. at 378-79. If MMJ objected to the

change order, the contact specified that it must file an immediate protest. Id. at 379.

Under the terms of the contract, failing to follow the contractual procedures would

result in waiver of the claims. Id. at 380.

During the course of the project the county submitted a change order, and

MMJ did not object. Id. at 378-79. MMJ later sent the county a letter addressing

seven points of concern, one of which was the change order. Id. at 380. The letter

indicated that MMJ had to perform additional work to accommodate the change

order, which was causing additional costs and delays. Id. at 380-81. The county

responded to MMJ by stating that if MMJ thought it had a claim for additional

compensation, it must follow the terms of the contract and submit a claim pursuant

to the contractual provisions. Id. at 381. Correspondence between MMJ and the

county continued, and the county stated that it was willing to discuss a settlement

and attempt to avoid litigation but that it did not intend to waive any of its

contractual defenses. Id. at 381-84. The parties were unable to resolve the dispute

out of court, and MMJ ultimately filed a complaint against the county for additional

compensation. Id. at 384. The trial court found that because MMJ failed to follow

the contractual procedures to pursue a claim for additional compensation, its claim

failed as a matter of law. Id. at 385. The Court of Appeals reversed, holding that

an issue of material fact existed regarding whether the county's conduct constituted

implied waiver. Mike M. Johnson, Inc. v. Spokane County, 112 Wn. App. 462,

471, 49 P.3d 916 (2002).

On appeal before this court, MMJ argued that a reasonable fact finder could

determine that the county's act of agreeing to enter into negotiations was evidence

of intent to waive the contractual procedures, and thus summary judgment was

improper. See Mike M. Johnson, 150 Wn.2d at 391. We disagreed. We held that,

absent waiver, failure to comply with contractual procedures bars relief and that

"waiver by conduct 'requires unequivocal acts of conduct evidencing an intent to

waive,'" Id. at 391 (emphasis added) (quoting Absher Constr. Co. v. Kent Sch.

Dist. No. 415, 77 Wn. App. 137, 143, 890 P.2d 1071 (1995)). By repeatedly stating

that it was not waiving its rights, the county clearly did not unequivocally waive

those rights and thus summary judgment in favor of the county was proper. Id. at

392.

In the instant case, the City asserted in correspondence that it reserved its

right to demand strict compliance with the contractual procedures and that it was

willing to negotiate "[w]ithout waiving any of its defenses." CP at 327, 338, 354.

American Safety points out, however, that the City expressly reserved its rights just

twice prior to the end of the project, and just once after the project's completion.

Appellant's Reply Br. at 5. In other correspondence, the City did not reference the

contractual provisions and evidenced a willingness to negotiate in order to avoid
litigation.6 According to American Safety, this distinguishes the case from Mike M.

Johnson, where the county "continuously" asserted its rights. Resp't's Suppl. Br. at

12 (emphasis omitted). The Court of Appeals agreed, finding that because "the City

referred to strict compliance with the contract terms in only three instances," the

City's actions were "equivocal" and thus a finder of fact must decide whether the

City implicitly waived its rights. Am. Safety, 133 Wn. App. at 659, 661 (emphasis

added).

The Court of Appeals misapplied the law. While in some cases equivocal

conduct does create an issue of material fact, in which case it would be improper to

grant summary judgment, such ambiguity here means that the conduct by definition

was not unequivocal, as is required for waiver: "[W]aiver by conduct 'requires

unequivocal acts of conduct evidencing an intent to waive,'" Mike M. Johnson, 150

Wn.2d at 391 (emphasis added) (quoting Absher, 77 Wn. App. at 143). At most,

the fact that the City agreed to consider negotiations -- and we point out that the City

never did enter into negotiations, for it never received the information it required as
a prerequisite to doing so -- constitutes equivocal conduct.7 Equivocal conduct by

definition cannot be unequivocal, and the Court of Appeals thus erred when it found

that "the equivocal nature of the City's conduct" warranted a trial on the merits.

Am. Safety, 133 Wn. App. at 661 (emphasis added). Given that the City three times

expressly asserted that it was not waiving its defenses, a reasonable juror could not

find that the City unequivocally did exactly the opposite. Amicus Washington

School Construction Alliance points out that "[t]he 'unequivocal acts' standard is

demanding for good reason. Waiver permanently surrenders an established

contractual right." Br. of Amicus Curiae Wash. State Sch. Constr. Alliance at 11

(emphasis added). Because American Safety admittedly did not comply with the

contractual provisions, and because the City did not unequivocally waive its right to

demand compliance with these provisions, we find that the trial court was correct in

granting summary judgment to the City.

American Safety also argues that Mike M. Johnson can be distinguished

because there, the county and MMJ were discussing seven different issues, only one

of which concerned the change order and whether MMJ followed the contractual

procedures. Therefore, according to American Safety, "continued negotiations of

the claim [in Mike M. Johnson] were insufficient to create a waiver because those

negotiations related several issues, not just the change order." Appellant's Opening

Br. at 29.

It is unclear why this distinction should result in a different outcome here. In

Mike M. Johnson we noted the fact that the county and MMJ were negotiating

several issues in order to point out that if we found that entering into negotiations

constituted an implicit waiver of contractual rights, then the county likely would

have had to stop all negotiations on all issues for fear of waiving the mandatory

claim provisions. 150 Wn.2d at 392. The same policy consideration is at issue

here. Were we to find that by entering into negotiations a party waives its

contractual rights, we would frustrate the negotiation and settlement process.

Washington law strongly favors the public policy of settlement over litigation. E.g.,

City of Seattle v. Blume, 134 Wn.2d 243, 258, 947 P.2d 223 (1997) ("[T]he express

public policy of this state . . . strongly encourages settlement."); Seafirst Ctr. Ltd.

P'ship v. Erickson, 127 Wn.2d 355, 366, 898 P.2d 299 (1995) (referring to

"Washington's strong public policy of encouraging settlements"); Haller v. Wallis,

89 Wn.2d 539, 545, 573 P.2d 1302 (1978) ("[T]he law favors amicable settlement

of disputes . . . ."). If we found that by agreeing to enter into negotiations the City

waived its rights under the contract, we would deter future parties from attempting

settlement before resorting to use of the courts. Such result would be directly

contrary to established public policy and thus we find that entering into settlement

negotiations, without anything more, does not constitute an implied waiver of

contractual defenses.

Attorney Fees

Because the City has prevailed here, it is entitled to reasonable attorney fees

and costs. RCW 39.04.240; RAP 18.1.

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