Opinion
No. 20-0079
05-20-2022
JAMES CONSTRUCTION GROUP, LLC and Primoris Services Corporation, Petitioners, v. WESTLAKE CHEMICAL CORPORATION, Respondent
Lisa Erin Hobbs, Kuhn Hobbs PLLC, Austin, Karlene Dunn Poll, Slate & Associates, Houston, for Amici Curiae Associated General Contractors-Texas Building Branch, Associated General Contractors Houston Chapter, Associated General Contractors Austin Chapter, TEXO The Construction Association, Associated General Contractors San Antonio Chapter. Anthony T. Golz, Houston, Roger D. Townsend, Gregory M. Cokinos, Houston, Robert Naudin Jr., for Petitioner. Warren W. Harris, Walter Simons, Bracewell LLP, Houston, Shawn D. Blackburn, William R. H. Merrill, Ryan V. Caughey, Susman Godfrey LLP, Houston, for Respondent.
Lisa Erin Hobbs, Kuhn Hobbs PLLC, Austin, Karlene Dunn Poll, Slate & Associates, Houston, for Amici Curiae Associated General Contractors-Texas Building Branch, Associated General Contractors Houston Chapter, Associated General Contractors Austin Chapter, TEXO The Construction Association, Associated General Contractors San Antonio Chapter.
Anthony T. Golz, Houston, Roger D. Townsend, Gregory M. Cokinos, Houston, Robert Naudin Jr., for Petitioner.
Warren W. Harris, Walter Simons, Bracewell LLP, Houston, Shawn D. Blackburn, William R. H. Merrill, Ryan V. Caughey, Susman Godfrey LLP, Houston, for Respondent.
Justice Lehrmann delivered the opinion of the Court, in which Justice Young joined in full, in which Chief Justice Hecht, Justice Devine, Justice Busby, and Justice Bland joined as to Parts I and II(D), and in which Justice Boyd, Justice Blacklock, and Justice Huddle joined as to Parts I, II(A), II(B), II(C), and II(E). This case arises out of a construction contract dispute and involves competing claims of breach stemming from the owner's replacement of a contractor for safety violations and the owner's claimed entitlement to excess costs incurred in having to change contractors. The jury found that both the owner and the contractor breached the contract in various respects and awarded damages and attorney's fees to both. The principal issues raised in this Court are: (1) whether the owner's entitlement to recover contract damages associated with a termination of the contractor for default hinged on strict (or only substantial) compliance with the written-notice conditions precedent to such recovery; (2) if substantial compliance with the notice conditions was sufficient, whether legally sufficient evidence supports the jury's finding of compliance despite the fact that at least two of the required notices were not given in writing; and (3) whether a contractual provision barring recovery of consequential damages merely waived liability for such damages or constituted a covenant not to sue, such that asserting a claim to recover consequential damages amounted to a breach of the contract.
The court of appeals held, among other things, that strict compliance was not required, that legally sufficient evidence supported the jury's substantial-compliance findings, and that the contractual provision governing consequential damages was a liability waiver, not a covenant not to sue. Accordingly, the court of appeals affirmed the portion of the trial court's judgment awarding damages and attorney's fees to the owner but reversed as to the contractor.
We agree with the court of appeals that, as a general matter under Texas law, a party's substantial compliance with contractual notice conditions is sufficient to satisfy those conditions. However, when a contract mandates written notice, a writing is a necessary part of complying with that condition, substantially or otherwise. A contrary holding would allow parties to elude the bargain they freely made and would open the door to a host of factual disputes about whether proper contractual notice was given—the very kinds of disputes that the writing requirement is intended to foreclose.
Because the owner failed to provide the requisite written notices to be entitled to recover expenses associated with a termination for default, and because we disagree with the owner's alternative argument that it was independently entitled to recover those same expenses under a different contractual provision, the judgment awarding them to the owner cannot stand. However, the portion of the judgment awarding the owner damages for the contractor's breach of an indemnity provision in the contract was properly upheld. Further, we agree with the court of appeals that the contract did not contain a covenant not to sue for consequential damages and thus hold that the portion of the judgment awarding damages to the contractor was properly reversed. Accordingly, we affirm the court of appeals’ judgment in part, reverse it in part, and remand the case to the trial court for further proceedings consistent with this opinion.
I. Background
A. Facts and Pertinent Contractual Provisions
In May 2012, Westlake Chemical Corporation, on behalf of its subsidiary Westlake Vinyls Company, L.P., hired James Construction Group, LLC, as a general contractor to perform civil and mechanical construction work on Westlake Vinyls’ chlor-alkali plant in Geismar, Louisiana. Primoris Services Corporation, James's parent company, guaranteed the contract.
Unless necessary for clarity or context, we refer to Westlake Chemical and Westlake Vinyls collectively as Westlake.
The contract itself did not obligate Westlake Chemical to assign James any work. Rather, under Section 1.2, if Westlake wanted James to "perform certain services and/or provide equipment, materials, supplies or other products," and James "agree[d] to perform and/or provide such Work," then Westlake would issue a work order for James to execute. The contract confirmed that "[u]nless and until a Work Order has been executed by the Parties," Westlake was not obligated "to retain [James] for any Work" and James was not obligated "to accept any request for any Work." Further, Westlake was entitled to "retain other contractors to perform comparable work" as it saw fit.
James had five days after issuance to either return the executed work order or advise Westlake as to any issues James had with the order and negotiate in good faith with Westlake to resolve those issues.
Relatedly, James "acknowledge[d]" under Section 15.7 that Westlake "may have the need or desire to enter into other contracts related to the Work or the Project" and "agree[d] to cooperate and coordinate with all other contractors of [Westlake] or its Affiliates."
James was contractually "responsible for the safety and health of its employees and Subcontractors" and "for the adequacy, stability and safety of all operations, construction temporary facilities, construction equipment and the construction site and methods necessary for the performance of the Work." At the same time, the contract gave Westlake certain rights to "intervene" if it had safety concerns. Specifically, Section 17.2 authorized Westlake "to intervene in any appropriate way" if in its reasonable opinion James was, among other things, "performing its duties under th[e] Contract in an unsafe way or manner" that Westlake "believe[d] may cause injury or damage to persons or property." In such cases, Westlake had the "right to require [James] to immediately take remedial action," and James would be "solely accountable for all costs associated with such intervention and remedial action" regardless of who incurred the costs.
Section 21 of the contract governed termination. Under Section 21.2, either party could cancel the contract with sixty days’ written notice. Section 21.5 further authorized Westlake, "at any time," to terminate the contract "for [Westlake's] convenience and without cause." James was required to take certain actions upon receipt of written notice of Westlake's termination for convenience and was "entitled to receive payment for Work executed, and reasonable actual costs incurred by reason of such termination."
Finally, Section 21.3 authorized Westlake to terminate James for "[d]efault" if Westlake determined "in its reasonable opinion" that James, among other things, had "serious safety violations." To terminate under Section 21.3, Westlake was required to give James three notices: (1) notice that Westlake had determined there were serious safety violations, triggering a seventy-two-hour window for James to "begin to remedy" the violations; (2) notice that Westlake was "not reasonably satisfied with the pace and the quality of the remediation effort"; and (3) notice that Westlake had elected to terminate the contract or a portion of the work. Per Section 9.1, all notices given pursuant to the contract were required to be in writing. Upon termination of the contract under Section 21.3, Westlake had the "right to take possession of the Work or the portion thereof terminated" and to complete that work, with James being responsible for "[a]ny extra costs in excess of the Contract Price incurred by [Westlake]."
Other grounds authorizing termination for default were: James was "willfully or in bad faith violating" the contract; James was failing to perform the work "with promptness and diligence"; James filed for bankruptcy; and James "fail[ed] to perform any material obligation under" the contract.
Following the contract's execution, James performed both civil and mechanical work on the project on a cost-reimbursable basis in accordance with work orders issued by Westlake. The record shows that James had several safety incidents between May 2012 and April 2013—when Westlake transferred all remaining mechanical work to another contractor—including multiple "OSHA-recordable" injuries and "near misses." Though the parties dispute the precise nature, severity, and cause of many of the safety incidents, it is undisputed that James was cited for a serious safety violation that occurred on December 28, 2012, when James employee Gregory Price suffered a fatal injury on the job.
Price was on a ladder leaning against a large truck when another James employee flagged the truck forward without checking to make sure no one was on the ladder. Price fell and sustained a fatal head injury. OSHA later cited James for the incident as a serious violation.
Immediately following the incident, the parties began discussing James's safety record. In an internal Westlake email to project manager Abram Kuo and others, Westlake Vice President Andrew Kenner began inquiring about James's Total Recordable Incident Rate and proposed a safety review with James to "show us how" James would prevent further such incidents, saying that "[t]his was completely preventable." Kuo forwarded that email to other Westlake employees and copied James's project site manager Rusty DeBarge, adding "see Andrew's comment" and stating that "[w]e have to develop preventive safety mind set [sic] with some extraordinary measure[s] on job safety." Kuo further noted in the email that he would be at the project office on January 2, 2013, for a safety meeting that James's management had "been asked to attend." Kenner testified that the meeting's focus was on improving safety performance "to make sure we didn't have another serious incident."
After the meeting, Westlake internally discussed the possibility of moving a portion of the mechanical work to another contractor "so that James could have a better chance to manage their scope and keep their project safe." The next day, January 3, Kuo contacted Turner Industries Group, LLC, about potentially taking over some of that work.
For James's part, on January 9, a week after the meeting, DeBarge sent an email to several Westlake employees summarizing James's pre-accident safety procedures and listing several additional post-accident procedures that James had implemented or was planning to implement. On January 18, he sent Kuo another email stating that he was aware of talk that Westlake was considering "changes in the execution of the project going forward." DeBarge asked Kuo to consider the email an "appeal" of that consideration and emphasized James's safety improvements and ability to successfully manage and coordinate future work. He advocated for James receiving as much potential work as possible, but he admitted that the addition of certain offsite work would "be a challenge to our group" because it would require an "attention level" that had "the potential to affect our efforts within the plant boundaries," such that he did "not see a negative effect on the project if those scopes of work were given to another contractor."
Kuo responded to DeBarge's email the same day, agreeing that "we have done many good things and set up very good programs" on the project, including with respect to safety, and stating that "a lot of credit[ ] has to go to [James] and its demonstrated willingness to work on [the] project." He confirmed the "decision to introduce possible [sic] another contractor" for the purpose of "ensuring Westlake/[James] will be successful" on the project and stated that Westlake "[n]ever intended to wipe out what [James] has been doing well for the project thus far especially the areas mentioned by" DeBarge's email. He further stated that he saw it "necessary" to "separat[e] out independent jobs such as EDC [ethylene dichloride] and pipelines" to address DeBarge's admitted concern that they "ha[d] the potential to affect [James's] efforts within the plant boundaries." About two weeks later, on January 30, Westlake Vinyls and Turner executed a formal contract very similar to the one between Westlake Chemical and James, and Westlake began allocating offsite EDC and pipeline work to Turner. There is no dispute that the contract between Westlake and James authorized Westlake to contract with Turner to perform that work regardless of Westlake's satisfaction with James's performance.
Kuo testified that James's safety performance improved in January but deteriorated again in February. Westlake's site manager, Scott Campbell, testified that starting in January, James had brief periods without incident followed by regression into old patterns. Internal Westlake emails—which were not sent to James—stressed James's unacceptable Total Recordable Incident Rate and Westlake's dissatisfaction with James's safety improvements, while internal James emails reflect concerns about Westlake's "unrealistic expectations and misperceptions regarding their own impact on our performance." In any event, James removed DeBarge as site manager in late February at Westlake's request and replaced him with Mark Lammon.
On March 6, Kenner informed Kuo in an internal Westlake email that "I think we need to let James Construction know that we are considering removing them from the job and putting them on notice." However, nothing in the record reflects that Westlake communicated as much to James at that time. In a March 22 internal Westlake email, Kenner communicated that James's Total Recordable Incident Rate for the entire project was "2.2+"—higher than the industry standard—but he also noted a recent safety audit reflecting that "James has stepped up their safety monitoring and performance." Kuo responded, again internally, that since December 2012, Westlake had "seen a trend in poor performance of [James's] safety record as well as its productivity in general coupled with indications of quality issue[s] on piping (excellent in civil and structural and equipment setting)." Kuo further stated that Westlake had assigned more mechanical work to Turner "to spread the job out so that [James] can be more focus[ed] on addressing all the issues mentioned," that lightening James's load had allowed it to focus on those issues, that James's new site manager "has made differences as even our corporate people have noticed," and that Turner should be set up "as a strong back up if [James] continues the poor performance after the scope splitting so that project [sic] will not be in danger of delay."
According to Westlake, additional incidents after that internal March 22 discussion as well as scheduling delays led Campbell to recommend on April 2 that Westlake remove "the remaining mechanical work" from James and assign it to Turner. Kuo agreed. On April 11, James and Westlake representatives had an in-person meeting. According to Campbell's description of the meeting, he informed James:
[W]e have tried to get y'all to improve your safety, we've done everything we can do, y'all brought another project manager in here, you are falling back into the same pattern. We want you to – I think I said, you have five days to get your remaining piping and mechanical people off the job.
James VP Conrad Bourg testified by deposition that the meeting was "very brief," and that Westlake told James at the meeting that "they were reassigning our work to Turner."
It is undisputed that Westlake sent no written notice of termination before or after the April 11 meeting. The record also contains no other written communication from Westlake to James memorializing the actions taken at that meeting. Nevertheless, James ceased mechanical work and confirmed via email on May 8 that at Westlake's direction, James "has discontinued mechanical work on the Chlor-Alkali project and ... completed the demobilization of the mechanical forces." Westlake allocated the remaining mechanical work to Turner and ultimately paid James in full for the mechanical work it had already completed. James also retained and completed the civil work on the project and was paid for that work. Turner completed all remaining mechanical work on October 31, 2013.
B. Procedural History
In December 2014, Westlake sued James and guarantor Primoris for breach of contract, seeking damages in the form of costs associated with transferring work from James to Turner. Initially, Westlake alleged that James was responsible for those costs under Section 21.3 of the contract following its termination for default. Westlake subsequently amended its petition to allege that James was responsible for the costs under both Section 21.3—the provision governing termination for default—and Section 17.2—the provision governing Westlake's right to intervene if it determined James was performing unsafely. Westlake also claimed that James breached its duty to indemnify Westlake under Section 19.1 of the contract for the costs Westlake incurred in defending itself in a wrongful-death suit brought by Price's family.
Westlake sued other contractors as well, and James asserted claims against various third-party defendants. Those claims have all been dismissed or severed and are not at issue here.
Section 19.1 required James to indemnify Westlake against all claims and liabilities, as well as defense costs, arising out of or related to James's performance of the work, but only to the extent of James's "negligence, strict liability or other legal fault." (Capitalization removed).
James denied that Westlake had terminated the contract for default but alternatively counterclaimed for breach of contract, alleging that Westlake breached Section 21.3 by improperly terminating James without the required notices. James also alleged that Westlake breached Section 26 by making claims for consequential damages that the contract expressly prohibited.
James also moved for partial summary judgment, arguing that a significant portion of the damages Westlake sought qualified as consequential damages barred by Section 26 of the contract, entitled "Waiver of Consequential Damages." The trial court granted James's motion "only as to Westlake's chlorine costs"—that is, the trial court found as a matter of law that those costs constituted consequential damages that were barred by the contract—and denied the motion as to Westlake's other alleged damages. The case proceeded to a jury trial on Westlake's contract claims under Sections 17.2, 19.1, and 21.3 and on James's counterclaims under Sections 21.3 and 26.
The jury found that James failed to comply with Section 17.2 (the intervention provision), that the failure was not excused, and that Westlake was entitled to $1,054,251.81 in damages in the form of the costs associated with its intervention. As to Westlake's claim under Section 21.3, the charge asked the jury three predicate questions—3A, 3B, and 3C—to determine whether Westlake provided the three requisite notices under that provision. Questions 3A and 3B each asked the jury (1) whether Westlake "provided written notice in strict compliance with this notice provision," (2) whether Westlake "notified James in ‘substantial compliance’ with this notice provision," and (3) whether "[s]trict compliance with this notice provision would have been ‘futile.’ " Question 3C, regarding the third required notice, asked only whether Westlake substantially complied with the provision. To answer "yes" to the substantial-compliance questions, the jury had to find that "James received actual notice from Westlake," the "form of actual notice to James did not severely impair the purpose of this notice provision," and the form "caused no harm to James."
Westlake had asked the jury to award it $8.5 million.
The jury answered "no" to the portions of 3A and 3B asking whether Westlake provided written notice in strict compliance with the first two notice provisions and whether strict compliance would have been futile, but it found that Westlake substantially complied with all three notice provisions. The jury went on to find that James failed to comply with Section 21.3, that the breach was not excused, and that Westlake was entitled to damages in the same amount that the jury had awarded for James's breach of Section 17.2. The jury also found that James failed to comply with Section 19.1, that the breach was not excused, and that Westlake was entitled to recover damages comprising its costs and reasonable attorney's fees incurred in defending the Price litigation.
The jury was instructed that James failed to comply with Section 21.3 if:
• Westlake Chemical discovered or determined in its reasonable opinion that James had serious safety violations[;] and
• Westlake Chemical was not reasonably satisfied with the pace and the quality of the remediation effort; and
• Westlake Chemical terminated the Construction Contract or a portion of the Work, and took possession of the Work or the portion thereof terminated and purchased and/or hired materials, tools, supervision, labor, and equipment for the completion of the Work; and
• James has not paid Westlake Chemical for some or all of the extra costs in excess of the Contract Price incurred by Westlake Chemical in regards to taking possession of the Work or the portion thereof terminated and purchasing and/or hiring materials, tools, supervision, labor, and equipment for the completion of the Work.
Because the jury found that Westlake substantially complied with Section 21.3's notice provisions and James failed to comply with Section 21.3, the jury was instructed not to answer the questions regarding James's counterclaim for Westlake's breach of that section or the question of which party "failed to comply with a material obligation of the Construction Contract [not including Sections 19.1 and 26] first." As to James's counterclaim for breach of Section 26, the jury found that Westlake failed to comply with that provision, that the breach was not excused, and that James was entitled to $1,270,962.89 in damages consisting of attorney's fees James had incurred in defending against both chlorine costs and any other consequential damages, plus additional damages for appellate attorney's fees.
The trial court rendered judgment, largely on the jury's verdict, that: (1) Westlake recover from James and Primoris, jointly and severally, $1,157,019.50 in contract damages, plus court costs and prejudgment interest; (2) Westlake recover from Primoris $2,923,600.50 in attorney's fees (plus conditional appellate attorney's fees); (3) James recover from Westlake $1,270,962.89 in contract damages (plus conditional appellate attorney's fees); and (4) James take nothing on its Section 21.3 counterclaim. The court also ordered post-judgment interest on the various damage awards. All parties appealed.
The 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. 594 S.W.3d 722 (Tex. App.—Houston [14th Dist.] 2019). On Westlake's claims, the court unanimously held that the doctrine of substantial compliance applied to Section 21.3's notice requirements and that the evidence was legally sufficient to support both the jury's findings that Westlake substantially complied and the damages award. Id. at 746, 748–50. Because it upheld the award under Section 21.3, the court of appeals did not reach James's challenge to the jury's finding that Westlake was entitled to the same damages under Section 17.2. The court further affirmed the judgment as to James's liability for failure to comply with the contract's indemnity provision. Id. at 754. As to Westlake's attorney's fees, the court held in pertinent part that Westlake was not required to segregate its fees and that the fees were not excessive. Id. at 766. On James's counterclaim, a divided court held that Westlake did not breach the contract by seeking consequential damages because Section 26 was a liability waiver rather than a covenant not to sue; the court thus rendered a take-nothing judgment on James's counterclaim. Id. at 764–66. The dissent opined that Section 26 contained a covenant not to sue and would have affirmed the trial court's judgment on that claim. Id. at 767 (Frost, C.J., dissenting). James petitioned for review of the court of appeals’ judgment, asserting that the court erred in several respects. On Westlake's claims, James argues that the court of appeals erred in concluding that Westlake could satisfy Section 21.3's notice requirements by "substantially complying" with them, that Westlake did not comply with those conditions and thus may not recover damages for James's purported breach of Section 21.3, and that the jury's findings regarding Section 17.2, which the court of appeals did not address, do not provide an independent basis to affirm its judgment. James also argues that Westlake's "prior material breach" of Section 21.3's notice requirements excused its obligation to indemnify Westlake for defense costs incurred in the Price litigation. As to James's breach-of-contract counterclaim under Section 26, James contends that Section 26 did not merely waive its liability for consequential damages but also contained a covenant not to sue, which Westlake breached by seeking such damages in this suit. Accordingly, James argues that the court of appeals erred in reversing the judgment in James's favor on that claim. Finally, James seeks reversal with respect to the award of Westlake's attorney's fees, asserting that Westlake failed to segregate recoverable and unrecoverable fees and that the fee award is excessive.
James also argues that no evidence supports the jury's liability finding on this claim, which hinged in part on a finding that Westlake Chemical incurred extra costs as a result of James's breach, because it was undisputed that Westlake Vinyls , not Westlake Chemical , had incurred the pertinent costs. The court of appeals held that because the jury found that "Westlake Chemical enter[ed] into the Construction Contract in its own name, to obtain construction services by James, on behalf and for the benefit of Westlake Vinyls, and with authority to act on behalf of Westlake Vinyls," Westlake Chemical had the right—as Westlake Vinyls’ agent—to recover damages suffered solely by Westlake Vinyls. Id. at 737–39. James argues that the jury was not instructed as to the effect of its agency findings on the liability question and thus could not have found James liable based on the charge as submitted. Because we hold that Westlake may not recover under Section 21.3 for other reasons, we need not reach this issue.
Westlake complained in the court of appeals that the trial court's judgment found only Primoris liable for Westlake's attorney's fees and argued that it was also entitled to recover those fees from James under Texas Civil Practice and Remedies Code Section 38.001. 594 S.W.3d at 766. The court of appeals affirmed that portion of the judgment, holding that Chapter 38 does not permit recovery of attorney's fees from a limited liability company. Id. Westlake cross-petitioned this Court for review of that portion of the court of appeals’ judgment but subsequently filed a motion to dismiss the petition, which we granted.
II. Analysis
Because this case involves the parties’ contractual rights and obligations, we begin by highlighting applicable general legal principles governing contract interpretation. Texas has a strong public policy favoring freedom of contract. Chalker Energy Partners III, LLC v. Le Norman Operating LLC , 595 S.W.3d 668, 672–73 (Tex. 2020). "When a contract's meaning is disputed, our primary objective is to ascertain and give effect to the parties’ intent as expressed in the instrument." URI, Inc. v. Kleberg County , 543 S.W.3d 755, 763 (Tex. 2018). We construe the language of an unambiguous contract according to its plain meaning, attempting to give effect to all provisions. See id. at 763–64 ; J.M. Davidson, Inc. v. Webster , 128 S.W.3d 223, 229 (Tex. 2003). Texas courts regularly enforce unambiguous contract language agreed to by sophisticated parties in arms-length transactions. See Chalker Energy , 595 S.W.3d at 673. To that end, we do not protect parties "from the consequences of their own oversights and failures in nonobservance of obligations assumed." Dorroh-Kelly Mercantile Co. v. Orient Ins. Co. , 104 Tex. 199, 135 S.W. 1165, 1167 (1911).
A. Compliance with Written-Notice Conditions Precedent
James first argues that Westlake failed to comply with express contractual conditions precedent to its right to recover costs associated with terminating James for default under Section 21.3. "A condition precedent is an event that must happen or be performed before a right can accrue to enforce an obligation." Solar Applications Eng'g, Inc. v. T.A. Operating Corp. , 327 S.W.3d 104, 108 (Tex. 2010) (citation omitted); see also CDI Eng'g Grp., Inc. v. Admin. Exch., Inc. , 222 S.W.3d 544, 548 (Tex. App.—Houston [14th Dist.] 2007, pet. denied) ("If the condition is not fulfilled, the contract or obligation attached to the condition cannot be enforced."). The conditions precedent to which James refers are the written notices mandated by Section 21.3, which states in pertinent part:
Right of Company to Terminate for Contractor Default. If Company [i.e., Westlake] discovers or determines in its reasonable opinion that ... Contractor [i.e., James] has serious safety violations ... then [1] Company may so notify Contractor. Upon receipt of any such notice, Contractor shall begin to remedy the breach or defect cited within seventy-two (72) hours. If at any time, Company is not reasonably satisfied with the pace and the quality of the remediation effort, [2] Company will so notify Contractor and Company may thereafter, at its sole discretion, elect to either terminate this Contract or a portion of the Work by [3] providing notice to that effect. After providing such notice, Company shall have the unrestricted right to take possession of the Work or the portion thereof terminated and to purchase and/or hire materials, tools, supervision, labor, and equipment for the completion of the Work or of the unremedied condition, as Company elects. Any extra costs in excess of the Contract Price incurred by Company in this regard shall be at the expense of Contractor. This right is in addition to any other remedies Company may have hereunder.
The parties do not dispute that Section 21.3 contemplated the provision of three separate notices to James: (1) notice that Westlake had determined in its reasonable opinion that James had serious safety violations, triggering a seventy-two-hour window for James to begin to remedy the violations; (2) notice that Westlake was not reasonably satisfied with the pace and quality of the remediation efforts; and (3) notice that Westlake had elected to terminate the contract or a portion of the work. Nor do they dispute that all notices under the contract, including those mandated by Section 21.3, were required to be in writing. Moreover, the parties agree that the notices constituted express conditions precedent to Westlake's right to enforce James's obligation to pay Westlake's excess costs incurred in transferring the work.
Other than the intervention provision (Section 17.2), discussed below, this is the sole provision on which Westlake relies to recover its costs incurred in changing contractors.
James argues that strict compliance with express conditions precedent is required and that the jury's failure to find strict compliance as to the first two notices, along with Westlake's undisputed failure to strictly comply with the third, forecloses Westlake's right to recover. Alternatively, James argues that legally insufficient evidence supports the jury's findings that Westlake substantially complied with the three notice conditions. Westlake responds that under well-established Texas law, substantial compliance with a contract's notice requirements is sufficient to satisfy them. Westlake further argues that the evidence supports the jury's findings that Westlake substantially complied.
We hold that substantial compliance is the appropriate standard when evaluating whether a party complied with a contractual notice condition. However, we also hold that substantial compliance with a condition precedent requiring written notice may not be achieved without a writing in some form. Here, Westlake provided no writing at all with respect to at least two of Section 21.3's required written notices and thus failed to substantially comply with the provision's conditions as a matter of law.
We do not address whether substantial compliance is the appropriate standard for satisfying conditions precedent that do not involve notice.
Texas recognizes a distinct doctrine of "substantial performance," which allows a contractor that "has substantially performed a building contract ... to recover the full contract price less the cost of remedying those defects that are remediable." Vance v. My Apartment Steak House of San Antonio, Inc. , 677 S.W.2d 480, 481 (Tex. 1984). Our decision today does not address the application of that doctrine when the contractor fails to comply strictly with an express condition precedent requiring written notice.
1. Substantial Compliance and Written Notice
This Court has not had occasion to address whether some form of a "substantial-compliance doctrine" applies to contractual notice provisions like the one at issue here. In a somewhat analogous context, we have applied a "notice–prejudice rule" in insurance disputes in which timely notice of a claim is a condition to a policy's coverage. See Prodigy Commc'ns Corp. v. Agric. Excess & Surplus Ins. Co. , 288 S.W.3d 374, 375 (Tex. 2009). Under that rule, which flows from the more general principle that "an immaterial breach does not deprive the insurer of the benefit of the bargain," "an insured's failure to timely notify its insurer of a claim or suit does not defeat coverage if the insurer was not prejudiced by the delay." PAJ, Inc. v. Hanover Ins. Co. , 243 S.W.3d 630, 631–32, 636 (Tex. 2008). We applied the rule in Prodigy , in which the insured failed to give notice "as soon as practicable" after the covered incident, as the policy required, but did give notice within the policy's outer boundary of ninety days. 288 S.W.3d at 376–77. We held that the insured's failure to meet the "as soon as practicable" requirement did not defeat coverage absent prejudice to the insurer, concluding that the requirement was not a "material part of the bargained-for exchange." Id. at 378, 382. In PAJ , we noted that requiring strict compliance with such provisions would have "draconian consequences for even de minimis deviations from the duties the policy places." 243 S.W.3d at 636.
The courts of appeals have more broadly applied the "doctrine of substantial compliance" to excuse "exactitude in the performance of contractual duties ... where any deviations or deficiencies do not seriously impair the purpose underlying the contractual provision." In re G.D.H. , 366 S.W.3d 766, 771 (Tex. App.—Amarillo 2012, no pet.) ; see also, e.g., Burtch v. Burtch , 972 S.W.2d 882, 889 (Tex. App.—Austin 1998, no pet.). In G.D.H. , for example, which involved an agreed custody-modification order, the parents agreed that if one of them intended to travel internationally with their child, that parent would give written notice to the other containing various details of the trip, and the other parent would then execute any necessary consent forms. 366 S.W.3d at 768. In reviewing an enforcement order rendered after the father refused to execute a consent form, the Amarillo Court of Appeals rejected the father's argument that his duty to execute had not been "triggered" because the mother's notice did not contain "each detail" required by the notice clause. Id. at 770–71. The court explained that although the notice was deficient in some respects, it contained "the bulk of the requisite information" such that "it would be unreasonable to conclude that the trial court erred in holding [the mother] substantially complied with her duty." Id. at 771.
The Dallas Court of Appeals has similarly applied the substantial-compliance doctrine to notice requirements. In Barbier v. Barry , the court examined the effectiveness of a party's written notice of cancellation of a contract that, though undisputedly received by the other party, was not sent by registered mail as the contract required. 345 S.W.2d 557, 562 (Tex. App.—Dallas 1961, no writ). The court held that "the failure to send [the notice] by registered mail did not destroy its effectiveness as notice" and that the cancelling party substantially complied with the contract. Id. Similarly, in Texas Utilities Electric Co. v. Aetna Casualty & Surety Co. , the court of appeals held that Aetna substantially complied with a surety bond's cancellation requirements by sending the requisite written termination notice to Texas Utilities’ office in Mesquite, where an authorized agent of Texas Utilities actually received the notice, despite the bond's provision that notice be sent to the company's office in Allen. 786 S.W.2d 792, 793 (Tex. App.—Dallas 1990, writ denied) ; see also S. Tex. Elec. Co-op v. Dresser–Rand Co. , 575 F.3d 504, 507 (5th Cir. 2009) (citing Barbier and Texas Utilities to hold that under well-established Texas law, "the doctrine of substantial compliance [applies] to contractual notice provisions").
We agree with the doctrine described and applied in these cases as a general principle of Texas law: a party's minor deviations from a contractual notice condition that do not severely impair the purpose underlying that condition and cause no prejudice do not and should not deprive that party of the benefit of its bargain. PAJ , 243 S.W.3d at 636 ; see also J.M. Davidson , 128 S.W.3d at 229 ("[T]he primary concern of the court is to ascertain the true intentions of the parties as expressed in the instrument."). Moreover, the doctrine serves the important purpose of preventing parties from engaging in bad-faith "gotcha" tactics to avoid their own contractual obligations based on a technicality. James cites various treatises and other secondary sources to support its contention that strict compliance with express conditions precedent is required, particularly in the construction context, but references no Texas law to that effect. Further, James dismisses our opinions in P.A.J. and Prodigy as limited to the insurance context, where unique policy concerns are presented. However, the reasoning in those cases and the purposes served by applying the substantial-compliance doctrine are not limited to a particular category or type of contract.
That said, while Texas law generally recognizes substantial compliance as a proper standard by which to evaluate satisfaction of contractual notice conditions, we have found no Texas cases holding that a party's provision of oral notice complies, substantially or otherwise, with a requirement of written notice. Indeed, both our own precedent and that of the courts of appeals hold the opposite, and the results in those cases did not depend on whether the failure to provide written notice prejudiced the other party. We held over sixty years ago in Shaller v. Commercial Standard Insurance Co. that oral notice of an insurance policy's cancellation was insufficient in the face of a written-cancellation requirement, barring waiver of that requirement. 158 Tex. 143, 309 S.W.2d 59, 61, 64–66 (1958). In arguing that it had effectively cancelled the policy, the insurer in Shaller relied on Austin Fire Insurance Co. v. Polemanakos , 207 S.W. 922 (Tex. Comm'n App. 1919, judgm't adopted), in which the court had held that oral notice of cancellation was sufficient. Shaller , 309 S.W.2d at 65. But we distinguished Polemanakos on several grounds, most notably including that the policy at issue in that case, unlike in Shaller , "had no provision for a written notice of cancellation." Id.
Our holding regarding substantial compliance with contractual notice conditions should not be read to undermine well-established, black-letter legal principles regarding breach of covenants. Specifically, a party is subject to liability for a breach of contract that causes damages regardless of whether the breach was material. Bartush-Schnitzius Foods Co. v. Cimco Refrigeration, Inc. , 518 S.W.3d 432, 436 (Tex. 2017) (explaining that while only a material breach excuses the other party from further performance, a nonmaterial breach that causes damages still gives rise to a cause of action for breach of contract).
The courts of appeals have similarly held, in a variety of contexts including construction contracts, that oral notice does not satisfy a contract's written-notice requirement. For example, in Emerald Forest Utility District v. Simonsen Construction Co. , Emerald hired Simonsen to construct a sewer line that failed shortly after construction. 679 S.W.2d 51, 52 (Tex. App.—Houston [14th Dist.] 1984, writ ref'd n.r.e.). Simonsen asserted that wet sand conditions caused the line failure and that it could not be held liable because it had notified Emerald of the problem and requested that the design be modified, but Emerald refused. Id. at 54. The Houston Fourteenth Court of Appeals acknowledged that had Simonsen given such notice in writing, it would have been relieved of liability under the contract. Id. But it was undisputed that Simonsen did not give written notice as the contract required, and the court held that Simonsen had failed to comply with a condition precedent and so was not relieved of liability. Id. The Dallas Court of Appeals similarly held that a lessee could not show it had met conditions precedent to recovering for breach of contract where the contract mandated written notice of an alleged breach and all notices provided were oral. Cheung-Loon, LLC v. Cergon, Inc. , 392 S.W.3d 738, 744–45 (Tex. App.—Dallas 2012, no pet.). Finally, in Tennessee Gas Pipeline Co. v. Technip USA Corp. , the Houston First Court of Appeals addressed a construction contract's requirement that the owner, as a condition precedent to recovery for breach of warranty, provide written notice of any work it deemed defective and additional written notice, upon the contractor's failure to cure the defect, that the owner would repair the defect at the contractor's expense. No. 01-06-00535-CV, 2008 WL 3876141, at *18 (Tex. App.—Houston [1st Dist.] Aug. 21, 2008, pet. denied). The court held that the contractor's "actual notice of defects" was insufficient in the face of a requirement that the notice be in writing. Id. at *20.
The courts’ unfailing refusal to deem oral notice compliant with a contractual condition requiring written notice, like the doctrine of substantial compliance as a general matter, is consistent with our repeated affirmation that "[a]bsent compelling reasons, courts must respect and enforce the terms of a contract the parties have freely and voluntarily entered." Shields Ltd. P'ship v. Bradberry , 526 S.W.3d 471, 481 (Tex. 2017) (quoting Phila. Indem. Ins. Co. v. White , 490 S.W.3d 468, 471 (Tex. 2016) ). The bargained-for requirement of written notice necessarily serves a purpose beyond actual notice; otherwise, its inclusion is useless. See Shaller , 309 S.W.2d at 66 ; Emerald Forest , 679 S.W.2d at 54 (holding that actual notice does not overcome the absence of written notice). For one thing, a writing eliminates after-the-fact disputes about exactly what notice was given. Parties may still disagree about whether a writing is sufficient, but unlike with an alleged oral conversation, they cannot disagree about what has actually been said. For another, in the context of large-scale contracts like the one at issue here, involving millions of dollars and significant consequences in the face of termination under certain circumstances—such as responsibility for excess costs incurred in completing the project—a party should not have to guess whether those consequences are being triggered in the absence of a writing when one is required.
We long ago highlighted the significance of a statutory written-notice requirement in Berry v. McAdams , in which we examined the mechanic's lien statute's requirement of written notice to the property owner as a prerequisite to a materialman's enforcing such a lien. 93 Tex. 431, 55 S.W. 1112, 1114 (1900). We explained that "[t]he policy of the law is to relieve the owner from demands upon the ground of actual knowledge and constructive notice, because he could rarely defend himself from such claims." Id. Accordingly, we rejected the materialman's argument that written notice was not required when the owner had actual knowledge of the claim, explaining that "[w]ritten notice is certain and definite information upon which the owner must act." Id. ; see also Moore v. Brenham Ready Mix, Inc. , 463 S.W.3d 109, 114–16 (Tex. App.—Houston [1st Dist.] 2015, no pet.) (holding that actual notice of a lien claim did not qualify as substantial compliance with the mechanic's lien statute's requirement of "timely written notice"). Westlake summarily dismisses such precedent as "inapposite cases involving what constitutes substantial compliance in the context of statutory requirements for perfecting a lien." But while the context is different, our recognition of the significance of a writing requirement is not so limited. As such, Texas law has addressed the specific issue presented here: whether in the face of a contractual written-notice requirement, oral notice can suffice.
CHIEF JUSTICE HECHT'S dissent, however, suggests that guidance from the Fifth Circuit is necessary, glossing over this Court's strong language on written notice in Shaller. Post at ––––. The fact that Shaller involved cancellation of an insurance policy and discussed the timing of the notice as well as its form does not diminish its central holding: where the provision at issue requires written notice, unless "a notice in writing [is] waived ... an oral notice, insufficient in law when given, [can] not mature into an effective cancellation of the [policy]." 309 S.W.2d at 66. In other words, absent waiver, oral notice does not satisfy a written-notice requirement as a matter of law. Id.
Moreover, even if state law had not definitively addressed the issue, the Fifth Circuit has not either. While we wholeheartedly agree that the Fifth Circuit offers useful (and appreciated) guidance on matters of state law that Texas jurisprudence has not yet addressed, federal law does not fill in the purported gap here. Notwithstanding the dissent's assertion that the Fifth Circuit answered the question presented here in South Texas Electric , it simply did not.
To begin with, we do not disagree with South Texas Electric. On the contrary, we agree with the Fifth Circuit's conclusion that Texas law recognizes the doctrine of substantial compliance with respect to written-notice conditions, as we have articulated above. S. Tex. Elec. Co. , 575 F.3d at 507. However, we part ways with the dissent's reading of South Texas Electric as it relates to whether substantial compliance is possible when no writing has been provided. In that case, Texas Electric hired Dresser to install a steam turbine, which Dresser warranted to repair if there were defects. Id. at 506. The warranty required Dresser to repair defects after receiving written notice from Texas Electric and allowed Texas Electric to remedy the defects itself if it provided Dresser ten days’ written notice. Id. The turbine experienced problems "immediately following its installation." Id. Texas Electric notified Dresser of the issues "early on," but over the course of the next two years Dresser failed to make repairs. Id. During that time, Texas Electric hired a third party to conduct tests, of which Dresser was "aware" and agreed to cover the costs. Id. Texas Electric subsequently hired another third party to repair the turbine "without providing Dresser further written notice." Id. (emphasis added). The opinion's description of the background facts reveals that writings were involved. See id. (stating that Texas Electric "wrote" to Dresser about the tests and that the repair work was done without "further written notice"). As such, the court's focus was not on the lack of a writing, and the opinion does not offer definitive guidance thereon.
Therefore, we hold that, barring waiver, when a contract requires written notice as a condition precedent to the right to enforce an obligation under the contract, substantial compliance with that requirement may not be achieved in the absence of a writing. With the proper standard enumerated, we turn to the evidence of the contractual notice required and provided in this case.
2. Application to Westlake's Notices
Westlake was required to give James three notices in order to terminate James for default under Section 21.3 and recover excess costs associated with the termination: (1) notice that Westlake had determined in its reasonable opinion that James had serious safety violations; (2) notice that Westlake was not reasonably satisfied with the pace and quality of James's remediation effort (which James was required to undertake within seventy-two hours of the first notice); and (3) notice that Westlake had elected to terminate the contract or a portion of the work. Each of those notices was expressly required to be in writing. At best, only the first one was.
With respect to the first two notices, the jury failed to find that Westlake gave written notice in strict compliance with the contract. This could mean the jury concluded there was no writing at all, or it could mean the contents of the writing were deemed insufficient to amount to strict compliance.
As noted, on December 28, 2012, following the Price incident, Westlake's project manager (Kuo) forwarded an email from Westlake VP Kenner to other Westlake employees and cc'd DeBarge, James's site manager. Kenner's email stated that the incident was "completely preventable" and discussed having a safety review with James—which subsequently occurred on January 2—to "show us how" it would prevent such incidents from happening again. Kuo added, "We have to develop preventive safety mind set [sic] with some extraordinary measure[s] on job safety." As James notes, the email did not mention Section 21.3, default, "serious safety violations," the commencement of a seventy-two-hour window for James to begin remediation efforts, or a warning about termination for default if those efforts were deemed insufficient. Westlake points to no other written communications relevant to the first notice requirement.
While Section 21.3 does not require the use of specific words, certainly the notice needed to communicate sufficient information to enable James to reasonably conclude that the section was at play and that the seventy-two-hour clock was ticking. Given the seriousness of the incident, Westlake understandably raised concerns about safety measures and the need to focus on preventing future incidents and injuries. But expressing safety concerns does not necessarily equate to triggering Section 21.3. At trial, when Kenner was asked when the seventy-two-hour period for James to begin remediation under that section began, he testified:
A. Again, this is the one – we've acknowledged we don't have as many written notices here. You've got several notices. We've got – you have to go through your e-mail chain. So there's a notice on a couple e-mails where James personnel are included in the e-mail. So, clearly, you can say a 72-hour period started at that time. But we're not using the word "notice," and we're not using the word "default." We are talking about serious safety violations.
Q. And you're saying there's no – so you can't testify to this jury when that 72-hour period began, can you, sitting here today, can you?
A. No. We met with them multiple, multiple times.
Q. You met with them? The 72 hours called for in the notice provision, you can't tell this jury when that clock started to run?
A. It was, you know – Rusty [DeBarge]’s office from our people was, like, past the men's room, three offices down on the left. So they were going down and talking –
[Attorney]: Objection. Nonresponsive.
A. No, I cannot testify.
If Westlake could not determine from the various communications when the seventy-two-hour period under Section 21.3 began, we fail to see how James could reasonably be expected to do so. Thus, although Kuo's email characterized the incident as "preventable" and stressed the need to develop additional safety procedures, we find it questionable whether the email qualified as the requisite first notice under Section 21.3.
Even if it did, see City of Keller v. Wilson , 168 S.W.3d 802, 827 (Tex. 2005) (evidence is legally sufficient if it "would enable reasonable and fair-minded people to reach the verdict under review"), two more written notices were required and were not provided. As to the second notice—that Westlake was not reasonably satisfied with the pace and quality of James's remediation effort—Westlake points to the January 18, 2013 email from Kuo to DeBarge, which was a response to DeBarge's email addressing rumors that Westlake was considering assigning offsite EDC and pipeline work to another contractor. Kuo's email stated:
Dear Rusty:
Thanks for the email.
I agree[ ] that in this project we have done many good things and set up very good programs from safety, cost/productivity control measures to all procedural systems for a well executed project; and
a lot of credit[ ] has to go to [James] and its demonstrated willingness to work on Westlake CA [chlor-alkali] project.
I also agree[ ] that we all would like to be judged by our intentions and efforts; we are in fact judged by the results. And the results / final judgment has yet to come which only due [sic] when we have completed and started up the project safely and successfully without any more serious safety incident[s].
The intent of the decision to introduce possible [sic] another contractor to take care of EDC and Pipeline jobs is to help ensur[e] Westlake / [James] will be successful in the CA project. Never intended to wipe out what [James] has been doing well for the project thus far especially the areas mentioned by your E mail below.
We all make mistakes and we all need to learn from it and our responsibilities as leader[s] includes take [sic] proactive action(s) deem[ed] necessary preventing [sic] re-occurrence; besides what we have implemented of safety enhancements after the incident, separating out independent jobs such as EDC and pipelines is what I see necessary so that we can avoid, as you have said it, "This attention level does have the potential to affect our efforts within the plant boundaries. For this reason, I [DeBarge] do not see a negative effect on the project if those scopes of work were given to another contractor."
I trust that you understand where I am coming from and will have your continued supports [sic] and commitment as an individual and as a company working together with Westlake, CDI, and other potential contractors as a team for a safe and successful project.
In this email, Kuo praised James's progress on safety, stated that the "final judgment" on safety "has yet to come," and explained why Westlake had decided to give EDC and pipeline work to another contractor—which it was undisputedly entitled to do under Section 1.2 of the contract. As with the first notice, this email did not mention Section 21.3, default, or termination. Nor did it say more generally that Westlake was not reasonably satisfied with the pace and quality of James's remediation effort. If anything, it seemed to express Kuo's opinion that the two companies were both doing what was necessary to ensure a "safe and successful project."
Westlake has never alleged that excess costs associated with its assignment of mechanical work to Turner before April 11 are recoverable as damages under Section 21.3. Nor has James ever alleged that Westlake breached the contract by giving Turner such work.
That conclusion is consistent with Kuo's trial testimony that James's safety performance temporarily improved in January 2013. It is also consistent with evidence showing that in February, Westlake assigned James $10,000,000 in additional mechanical, civil, and installation work on the project. An internal Westlake document from the "CA Project Team" requesting management approval for the additional work stated that "[b]ased on James's performance, improved safety programs, quality of work completed, and meeting current construction schedule, the CA Team recommends continuing to issue work order [sic] based on the T&M [Time & Materials] base rate to James Construction for Phase IV of the chlor-alkali project." Based on the substance of Kuo's January 18 email and Westlake's subsequent actions, the email provides no indication that Westlake was dissatisfied with James's efforts, let alone that the circumstances had progressed to the point that Westlake had determined it had the right to terminate James for default and recover any excess costs incurred in completing the project.
To be sure, internal Westlake communications reflect Westlake's renewed concern with James's safety record, with Kenner going so far as to say on March 6, well after the January 18 email on which Westlake now relies, that "I think we need to let James Construction know that we are considering removing them from the job and putting them on notice." But again, Westlake fails to cite evidence showing that it followed through on that plan, and the email reflects Westlake's opinion that James was not "on notice" at that time. Indeed, on March 22, Kenner identified a recent safety audit indicating that "James has stepped up their safety monitoring and performance." In light of all this evidence, the January 18 email cannot qualify as the second required notice under Section 21.3, and Westlake identifies no other writing that can.
Finally, it is undisputed that Westlake did not provide the third requisite written notice: that it had elected to terminate the contract or a portion of the work for James's default. Internal Westlake emails indicate that on April 2, following an onsite incident the previous day that resulted in a broken finger, Westlake made the decision to transfer the remaining mechanical work to Turner because James had failed "to improve their safety performance" and was "continuing to fall further behind in their schedule." On April 11, Westlake and James had a meeting at which, according to Campbell, he told James's representative that James was "falling back into the same pattern" with respect to safety and instructed him "to get your remaining piping and mechanical people off the job." Campbell and Kuo both testified at trial that safety was the primary reason for transferring the remaining mechanical work to Turner. Westlake sent no letter, email, or other writing to James memorializing the actions taken at the meeting.
On March 21, Westlake informed James via email that some additional mechanical work would be transferred to Turner as of April 15. However, the email further stated that the plan was to focus James's efforts on a specific area "in an effort to meet our current end date" and that the transfer of work "is not an indication of your efforts to date. A noticeable change in your staff, field supervision, and craftsman is clearly vi[si]ble." Moreover, Westlake has never alleged that this email constituted either a default notice or a termination notice. And again, Westlake has never alleged that James is responsible for costs associated with work assigned to Turner before the April 11 meeting.
As Westlake points out, there is no dispute that James ceased all mechanical work after the April 11 meeting. Westlake thus contends that the lack of a written termination notice is immaterial because James's actions demonstrate it knew that it had in fact been terminated. However, as explained, actual notice is not a substitute for written notice. Moreover, the contract allowed Westlake to assign work to other contractors as it saw fit, and the contract could also be terminated for any number of reasons. Only termination for default under Section 21.3, however, triggered James's obligation to pay "[a]ny extra costs in excess of the Contract Price incurred by [Westlake]" in completing the work. Again, James was entitled to the requisite written notice that would give rise to that obligation, but no such notice was given.
As noted, Westlake did not transfer any of the civil work that had been assigned to James, and James completed that scope of work.
Westlake presented evidence that James VP Conrad Bourg lost his temper at the meeting and complained that Westlake was penalizing James even though "[e]very contractor has fatalities." Such comments are certainly distasteful and hurtful, but they do not demonstrate that Westlake provided the requisite notice of termination for default under Section 21.3.
James cites DeBarge's testimony that James would have reacted differently had it known that Westlake considered James to be in default or indicated that it would terminate the contract for that reason. The jury appears to have rejected this testimony given its finding that James was not prejudiced by the form of notice. Regardless, as explained, when written notice is required, lack of prejudice does not override the absence of a writing.
CHIEF JUSTICE HECHT'S dissent focuses on two writings to support the conclusion that Westlake provided the requisite notice: (1) the December 28 email in which Westlake expressed safety concerns; and (2) the January 18 exchange between DeBarge and Kuo. Neither supports the dissent's position.
As discussed above, while the December 28 email expresses a belief that there were safety problems, it did not mention Section 21.3, default, the commencement of a seventy-two-hour window for James to begin remediation efforts, or a warning about termination for default if those efforts were deemed insufficient. But assuming that email satisfies the first notice requirement, no writings satisfy the second or third. Contrary to the dissent's description, not only does the January 18 email from Kuo express no dissatisfaction with James's safety efforts; it commends James on its progress in that regard. Finally, the absence of a third written notice is uncontroverted. That is, Westlake undisputedly never provided James with written notice that James was actually terminated from the project for default. The dissent's suggestion that James's writing—its email to Westlake after the April meeting acknowledging that James had discontinued its mechanical work on the project—can satisfy Westlake's obligation to provide notice to James turns the notice provision on its head. While this communication may serve as some evidence that James had actual notice of its termination, it does nothing to satisfy Westlake's obligation under Section 21.3. Moreover, it is doubtful that the email even reflected actual notice of termination. Since Westlake had discretion to allocate work to other contractors without terminating the contract, James's acknowledgment that it had discontinued mechanical work does not equate to an acknowledgment that it had been terminated for default.
In sum, because the contract required Westlake to give three written notices as conditions precedent to the right to enforce James's obligations under Section 21.3, and because at least two of those notices were not given, James had no obligation to pay Westlake's excess costs, and the jury's award of breach-of-contract damages under that provision cannot stand. In so holding, we give effect, as we must, to the contractual language the parties chose.
B. Intervention Under Section 17.2
Westlake argues that even if it is not entitled to the $1,054,251.81 in contract damages the jury found for James's failure to comply with Section 21.3, the trial court's judgment awarding Westlake those damages may nevertheless be upheld because the jury independently awarded the same amount for James's failure to comply with Section 17.2, which contains no "notice" requirement. That section, entitled "Intervention," states:
Company [Westlake] shall at any time during the execution of the Work by Contractor [James] have the right to
intervene in any appropriate way, if in the reasonable opinion of Company, ... (c) Contractor is performing its duties under this Contract in an unsafe way or manner in which [sic] Company believes may cause injury or damage to persons or property. In such cases Company shall have the right to require Contractor to immediately take remedial action to the satisfaction of Company. Contractor shall be solely accountable for all costs associated with such intervention and remedial action, whether incurred by Contractor, Company or any third party.
Westlake contends that pursuant to this provision's authorization "to intervene in any appropriate way," it "intervened by trying to get James to improve its safety performance and then, when James's safety did not improve, informing James that Westlake would be transitioning the remainder of James's mechanical work to Turner." James responds that Section 17.2 allows Westlake to require James to take remedial action and bear the associated cost, but it does not provide a mechanism to terminate any portion of the work and shift the cost of hiring replacement contractors to James. If it did, James contends, then Section 21.3 does nothing. We agree with James.
Section 17.2 broadly allows Westlake to intervene "in any appropriate way," but it goes on to focus on Westlake's authority to require James to take remedial action and bear the cost, and it implies that those costs will be incurred "during the execution of the Work," not later. Even if Westlake is authorized to intervene in other ways, Section 17.2 does not purport to encompass terminating the contract or any portion of the Work. To the contrary, the contract details very specifically how work is to be terminated, and construing the intervention clause as Westlake does improperly reads those provisions away entirely. See J.M. Davidson , 128 S.W.3d at 235 ("Contracts are to be read as a whole, and an interpretation that gives effect to every part of the agreement is favored so that no provision is rendered meaningless or as surplusage."). As discussed above, Section 21.3 allows Westlake to terminate James for default for "serious safety violations" and to recover the costs associated with hiring another contractor to complete the work, but only after satisfying specific notice requirements and giving James an opportunity to engage in remediation efforts. If Section 17.2 authorizes recovery of those same costs, but without the required notice and opportunity to cure, then as James argues, there would be no reason to invoke Section 21.3 at all because "intervening" would be far easier. In other words, Section 17.2 would swallow Section 21.3 entirely.
In sum, we do not interpret Section 17.2 as allowing an end-run around the more stringent requirements to terminate for default and recover costs under Section 21.3. Accordingly, the jury's award of damages for James's failure to comply with Section 17.2 cannot stand and thus does not serve as an independent basis for upholding a portion of the court of appeals’ judgment.
C. Indemnity Provision
Although most of the contract damages awarded to Westlake—$1,054,251.81—do not survive the above analysis, Westlake was also awarded $102,767.69 in damages for James's failure to comply with Section 19.1, the indemnity provision. As noted, those damages consist of litigation costs Westlake incurred in defending the Price litigation. James argues that Westlake's improper termination of James for default under Section 21.3 constituted a prior material breach of the contract that excused James's continued performance, including satisfying its obligations under the indemnity provision. The court of appeals rejected this argument, as do we.
As James itself argues, the notice provisions in Section 21.3 were conditions precedent, not covenants. A covenant "is an agreement to act or refrain from acting in a certain way." Solar Applications , 327 S.W.3d at 108. A breached covenant gives rise to a cause of action for damages, and a material breach excuses the other party from performance. Bartush-Schnitzius Foods Co. v. Cimco Refrigeration, Inc. , 518 S.W.3d 432, 436 (Tex. 2017) ("It is a fundamental principle of contract law that when one party to a contract commits a material breach of that contract, the other party is discharged or excused from further performance." (citation omitted)). By contrast, a "condition precedent is an event that must happen or be performed before a right can accrue to enforce an obligation," and "if an express condition is not satisfied, then the party whose performance is conditioned is excused from any obligation to perform." Solar Applications , 327 S.W.3d at 108. The contract gave Westlake the right to terminate the contract for any reason it chose and, even in the absence of termination, to assign work to any contractor it chose. But James's obligation to pay Westlake the excess costs it incurred in doing so was conditioned on Westlake's satisfying Section 21.3's written-notice requirements. Because Westlake failed to do so, as discussed above, it may not enforce James's obligation to pay those costs.
However, this did not excuse James from complying with other provisions of the contract. That is, Westlake's failure to provide the requisite notice did not constitute a material (or nonmaterial) breach of the contract that "affect[ed] the enforceability of the remaining provisions." Id. Again, as James itself argues, Westlake had authority to reassign the work without terminating James at all, let alone for default. And James's primary position is that it was not terminated but simply removed from the mechanical work. Indeed, after purportedly being "wrongfully terminated," James was paid for its mechanical work and continued to perform civil work under the same contract. While we do not disagree with the general principle that wrongful termination of a contract can constitute a material breach, see, e.g., STR Constructors, Ltd. v. Newman Tile, Inc. , 395 S.W.3d 383, 388 (Tex. App.—El Paso 2013, no pet.) (holding sufficient evidence supported the jury's finding that STR materially breached by terminating the contract without proper cause), that principle does not apply here because noncompliance with a condition precedent simply precludes the noncomplying party from enforcing its conditional right. Westlake's actions foreclose its entitlement to recover under Section 21.3, but they do not amount to a material breach of the contract excusing James from all further performance. We therefore hold that the court of appeals properly affirmed the portion of the trial court's judgment awarding Westlake damages for James's failure to comply with Section 19.1.
For the same reason, we reject James's assertion that it is entitled to judgment as a matter of law on its Section 21.3 counterclaim.
D. Section 26: Waiver of Consequential Damages
The parties agree that under Section 26 of the contract, neither party is liable for consequential damages. The issue presented is whether Section 26 also contains a covenant not to sue for such damages, such that it may provide the basis for a breach-of-contract claim. Taking the position that it does and that Westlake "made claims against James for consequential damages as expressly prohibited by Section 26," James counterclaimed for breach of contract. As noted, the jury found that Westlake failed to comply with Section 26 and awarded James damages for its "reasonable and necessary attorney's fees" incurred "in defending against any consequential damages." The court of appeals reversed the trial court's judgment on that portion of the verdict, holding that Section 26 only waived liability for consequential damages and did not give rise to a contractual obligation not to sue for such damages. 594 S.W.3d at 766.
Section 26 provides:
WAIVER OF CONSEQUENTIAL DAMAGES
Neither [Westlake] nor [James] shall be liable to the other for any consequential, incidental, indirect or punitive damages ... arising under this Contract or as a result of, relating to or in connection with the Work and no claim shall be made by either [Westlake] or [James] against the other for such damages REGARDLESS OF WHETHER SUCH CLAIM IS BASED OR CLAIMED TO BE BASED ON NEGLIGENCE OR STRICT LIABILITY (INCLUDING SOLE, JOINT, ACTIVE, PASSIVE, CONCURRENT NEGLIGENCE OR GROSS NEGLIGENCE) OR ANY OTHER THEORY OF LEGAL LIABILITY, AND INCLUDING PRE-EXISTING CONDITIONS BUT EXCLUDING GROSS NEGLIGENCE AND WILLFUL MISCONDUCT.
James argues that Section 26 constitutes a clear covenant not to sue because it plainly states, in an independent clause, that "no claim shall be made" for consequential damages. Westlake responds that the provision clearly functions solely as a waiver of consequential damages that prevents a party from recovering them, not a covenant not to sue that prohibits a party from seeking certain damages merely because a court may ultimately conclude that they are consequential. We agree with Westlake.
First, we have held that "headings and titles provide context and can inform the meaning of the sections they label," and that "[g]enerally, courts should construe contractual provisions in a manner that is consistent with the labels the parties have given them." RSUI Indem. Co. v. The Lynd Co. , 466 S.W.3d 113, 121 (Tex. 2015). The title of Section 26 is simply "Waiver of Consequential Damages," not "Waiver of Consequential Damages and Covenant Not to Sue" or words to that effect.
Second, while "no claim shall be made" is contained in an independent clause from "[n]either [party] shall be liable," it is followed by language clarifying its scope: "no claim shall be made ... for such damages regardless of whether such claim is based or claimed to be based on negligence ... or any other theory of legal liability ... excluding gross negligence and willful misconduct." (Capitalization removed). Thus, the parties have relinquished a claim to any consequential damages to which they might be entitled in the event of a lawsuit, which the paragraph explicitly contemplates; they have not relinquished the right to bring a suit in the first place. We therefore disagree with James's contention that limiting Section 26 to a waiver renders any of its language superfluous. Indeed, if anything, construing the second clause as a covenant not to sue for consequential damages—such that it prevents a claim for consequential damages in the first place—renders the language waiving liability for such damages superfluous. Third, the nature of the purported covenant not to sue informs our discussion. See Dillon Gage Inc. of Dall. v. Certain Underwriters at Lloyds Subscribing to Policy No. EE1701590 , 636 S.W.3d 640, 643 (Tex. 2021) ("We determine the parties’ intent through the terms of the [contract], giving words and phrases their ordinary meaning, informed by context."). As Westlake notes, none of the cases James cites involve covenants not to sue for consequential damages, and we have been unable to locate any. Rather, such covenants typically foreclose a party from bringing suit at all or, more commonly, from asserting causes of action arising from or related to specific incidents—often incidents that were the subject of a prior, settled lawsuit. When those types of covenants are at issue, whether a party has brought a prohibited suit or claim is fairly discernible from the outset of the litigation. That is not the case with an agreement not to sue for consequential damages given that legitimate disputes often arise, as they did in this case, regarding whether contractual damages sought are properly classified as "direct" or "consequential." See, e.g., San Antonio River Auth. v. Austin Bridge & Road, L.P. , 601 S.W.3d 616, 630–31 (Tex. 2020) ; Dallas/Fort Worth Int'l Airport Bd. v. Vizant Techs., LLC , 576 S.W.3d 362, 373–74 (Tex. 2019). Indeed, the line between direct and consequential damages often is not a bright one. Thus, a party seeking damages that it believes in good faith, but ultimately incorrectly, are direct rather than consequential will not know whether it is in breach by asserting a claim until the nature of the claim has been determined on the back end of the suit.
Palestine Contractors, Inc. v. Perkins , 386 S.W.2d 764, 765 n.1 (Tex. 1964) ("[W]e, the undersigned, do hereby covenant and agree not to sue, make claim, or institute any action or proceeding directly or indirectly against [the other parties] to recover damages of any kind or character.").
Robertson v. Trammell , 37 Tex.Civ.App. 53, 83 S.W. 258, 260 (1914, writ ref'd) ("[Plaintiff] hereby agrees and covenants never to make the matters and things set out and the circumstances described in plaintiff's petition herein, the basis of a suit against said defendant in any court, and never to bring or to maintain an action because thereof against said defendant."); Pape Equip. Co. v. I.C.S., Inc. , 737 S.W.2d 397, 400–01 (Tex. App.—Houston [14th Dist.] 1987, writ ref'd n.r.e.) ("[Dow] agrees and covenants not to sue, claim or make claims or institute any action or proceeding directly or indirectly against I.C.S., Inc. ... to recover damages of any kind or character, ... received in or resulting from ... [a specific] accident...."); Leong v. Wright , 478 S.W.2d 839, 840 (Tex. App.—Houston [14th Dist.] 1972, writ ref'd n.r.e.) (describing the covenant at issue as an agreement not to "institute any action or proceeding" against the other party "for any damages which may have resulted to the plaintiffs from the incident made the basis of the suit").
We recently reiterated that direct damages " ‘are the necessary and usual result of,’ and ‘flow naturally and necessarily from’ " a contractual breach, while "consequential damages ‘result naturally, but not necessarily,’ from the defendant's breach, and are not ‘the usual result of the wrong.’ " Vizant Techs. , 576 S.W.3d at 373 (quoting Arthur Andersen & Co. v. Perry Equip. Corp. , 945 S.W.2d 812, 816 (Tex. 1997) ) (emphasis removed). This distinction is not always so easily applied in practice.
Of course, if consequential damages are barred and a party seeks to recover them in bad faith or by making groundless and frivolous arguments, it is subject to sanction like any other party who asserts a frivolous claim. See Tex. Civ. Prac. & Rem. Code §§ 10.001 –.002; Tex. R. Civ. P. 10.
That appears to be exactly what happened here. Westlake alleged that James breached various sections of the contract and sought to recover its "actual damages." The parties litigated whether a portion of the costs Westlake sought qualified as (recoverable) direct damages or (unrecoverable) consequential damages, and James obtained favorable rulings as to some of those costs. If Section 26 contains a covenant not to sue, the consequence of Westlake's taking an erroneous, but by no accounts frivolous, position on the nature of its claimed damages is that it has breached the contract by even making the argument. While parties are free to agree to that consequence, however unusual or impractical, we do not read Section 26's plain language to reflect that intent here.
Because Section 26 waives liability for consequential damages but is not a covenant that Westlake breached by seeking damages that were determined to qualify as consequential, the court of appeals properly rendered judgment that James take nothing on its counterclaim.
Westlake argues that several independent grounds exist to uphold this portion of the court of appeals’ judgment, but we need not address those arguments.
E. Attorney's Fees
What remains of the trial court's judgment is an award to Westlake of (1) $102,767.69 in damages for James's failure to comply with the contract's indemnity provision and (2) $2,923,600.50 in attorney's fees, plus conditional appellate fees. As Westlake is a prevailing party and was awarded damages on a breach-of-contract claim, it is entitled to recover its reasonable attorney's fees under Civil Practice and Remedies Code Section 38.001. Mustang Pipeline Co. v. Driver Pipeline Co. , 134 S.W.3d 195, 201 (Tex. 2004). However, in light of the significantly reduced damages award and the fact that the jury's award of attorney's fees was based in part on the "results obtained," the part of the trial court's judgment awarding Westlake its attorney's fees cannot stand, and the court of appeals erred in affirming it. Barker v. Eckman , 213 S.W.3d 306, 314 (Tex. 2006) (reversing an award of attorney's fees and remanding for further proceedings because of the significant appellate adjustment to the amount of damages awarded). Accordingly, we reverse the court of appeals’ judgment as to Westlake's attorney's fees and remand to the trial court for further proceedings.
III. Conclusion
We hold that Westlake did not comply with the written-notice procedure under Section 21.3 of the contract and thus failed to satisfy conditions precedent to its right to recover damages for James's failure to comply with that provision. We further hold that Westlake may not recover those same damages under Section 17.2. However, Westlake is entitled to recover damages for James's breach of Section 19.1 because Westlake's failure to satisfy Section 21.3's notice requirements did not constitute a prior material breach. Finally, we hold that Westlake did not breach Section 26 by making a claim for consequential damages because that provision waives liability for such damages but does not contain a covenant not to sue. We affirm the judgment of the court of appeals in part, reverse it in part, and remand the case to the trial court for further proceedings on Westlake's attorney's fees.
Chief Justice Hecht filed an opinion dissenting in part, in which Justice Devine, Justice Busby, and Justice Bland joined.
Justice Boyd filed an opinion dissenting in part, in which Justice Blacklock and Justice Huddle joined.
Chief Justice Hecht, joined by Justice Devine, Justice Busby, and Justice Bland, dissenting in part.
Gregory Price, 55, suffered a fatal injury while working on a construction project in December 2012 as a result of a serious safety violation by his employer, James Construction. Price's death was all James’ fault. Price was standing on a ladder leaning against a truck when a co-employee flagged the truck forward without checking to see if Price was clear, even though that violated standard protocol and common sense. Price fell, suffered a closed head injury, and died. His tragic injury was entirely preventable, and OSHA issued James multiple citations.
That was not the first time project owner Westlake Chemical had to deal with James’ safety problems. In eight months as a general contractor on the project in 2012, James had been cited multiple times for safety violations. And despite Westlake's repeated insistence that James improve its record, safety violations continued even after Price's death. By April 2013, Westlake could take no more. Its managerial team met with James’ team to tell them James was terminated for chronic, serious safety violations. This upset James’ vice president. "[E]verybody kills somebody on the job", he said, "why are you penalizing us?" That was the last straw for Westlake. A few days later, James acknowledged in writing that it had been terminated.
The Court dismisses the statement as "distasteful". Ante at 412 n.20. Westlake's team was shocked. "It blew us away", said one.
Section 21.3 of the parties’ contract authorized Westlake to terminate James for serious safety violations. The provision required notice to James of the violations, Westlake's dissatisfaction with remediation efforts, and termination. Section 9.1 required that notices be in writing. The Court acknowledges that "[s]ubstantial compliance is the appropriate standard when evaluating whether a party complied with a contractual notice condition." Notice can be untimely, deficient, sent in the wrong manner, or misdirected, and still be effective. "[A]s a general principle of Texas law", the Court declares, "a party's minor deviations from a contractual notice condition that do not severely impair the purpose underlying that condition and cause no prejudice do not and should not deprive that party of the benefit of its bargain."
Id. at 404–05.
Id. at 405–06.
Id. at 406.
The single exception, the Court holds, is the form of notice. If a contract calls for a party to give written notice of a matter, then there must be a writing of some kind, even if deficient, else the party forfeits all contractual benefits, even though the opposing party was fully aware of the matter and was not prejudiced in any way by the lack of a writing. The Court professes to have found no Texas case to the contrary, while misreading a Fifth Circuit case and relying on dicta and inapposite cases. Importantly, the Court altogether ignores a fundamental rule of Texas law, that "[f]orfeitures are not favored in Texas, and contracts are construed to avoid them."
Id. at 409.
Aquaplex, Inc. v. Rancho La Valencia, Inc. , 297 S.W.3d 768, 774 (Tex. 2009) ; see Sirtex Oil bIndus., Inc. v. Erigan , 403 S.W.2d 784, 788 (Tex. 1966) (noting that "the law abhors a forfeiture").
Even if the Court were correct that parties must strictly comply with the form of notice called for in their contract, Westlake met the Court's requirement of a writing, and the contents and manner of its notices satisfy the substantial compliance standard the Court applies—as found by the jury. The Court admits that Westlake's emails regarding safety violations, especially following Price's death, may have been sufficient for the first of three required notices. The Court faults continuing email traffic between Westlake and James as being too encouraging and not expressive of Westlake's dissatisfaction, though the only reason for the emails was James’ continuing safety violations and Westlake's resulting concerns. And the Court concludes there was no written notice at all of James’ termination, despite its project manager's letter to Westlake, stating: "Per the direction of Westlake[,] [James] has discontinued mechanical work on the ... project...." James’ written acknowledgment of termination should satisfy any requirement of a writing.
With sleight of hand, the Court tries to make the issue whether there were writings, then hold that there was at best only one of the three the contract required because the writings that were indisputably exchanged were deficient. The substance of Westlake's notices is governed, as the Court acknowledges, by the substantial-compliance doctrine, and the jury found that Westlake satisfied it. The issue the Court must address, yet avoids, is whether there is any evidence to support the jury's findings. There is.
This flaw in the Court's analysis illustrates the difficulty of carving out an exception to the substantial compliance rule generally applicable to construction contracts. In some situations there may be no writings at all, so that the issue is the form of the notice. But in many, as here, there are writings, and the issue is not form, but substance, to which the substantial-compliance doctrine applies.
The Court seeks to justify strict compliance with the form of written notice by arguing that it "eliminates after-the-fact disputes about exactly what notice was given." But that is precisely why the usual substantial compliance rule should apply. There are no such credible disputes in this case. James’ safety violations were not "done in a corner." James had a terrible safety record and knew it. Even after a fatal injury for which it was wholly at fault, and which was entirely and easily preventable, James’ attitude was: "[E]verybody kills somebody on the job". This record does not contain even the slightest hint of dispute about James’ safety record or the reason for its termination. The jury affirmatively found that Westlake's actual notice to James did not "impair the purpose" of written notice "and caused no harm to James."
Ante at 408.
See Acts 26:26.
On the other hand, the Court observes that the substantial-compliance doctrine "serves the important purpose of preventing parties from engaging in bad-faith, ‘gotcha’ tactics to avoid their own contractual obligations based on a technicality." Again, that is precisely why the doctrine should apply in this case. Though James knew full well everything of which Westlake repeatedly gave notice, the Court allows James to escape its contractual obligation to pay the $1 million costs Westlake incurred because of James’ termination. By the Court's reasoning, Westlake could have scribbled "terminated" on a napkin and handed it to James’ angry project manager, and the result in this case would be completely different. The absence of one word labeling what everyone knew was happening results in a $1 million forfeiture of contractual benefits awarded by the jury. Finally, the Court holds that one provision of the parties’ contract must be strictly enforced while another, which would also allow Westlake to recover the same damages, does not mean what it says. Section 17.2 gave Westlake, during James’ work, "the right to intervene in any appropriate way," particularly for safety's sake. The Court concludes that this remedy is subject to the notice requirements of Section 21.3, ignoring the clear statement in Section 17.2: "This right is in addition to any other remedies [Westlake] may have [under the contract]." Because the provision authorizes Westlake to require James to bear the cost of the intervention, the Court concludes that the provision "implies" that James will still be on the job after the intervention, even though the fact—not the implication—is that Westlake claims James must bear the cost of the intervention after it left the project. So: "written" means written, no matter what, but "any appropriate way" means some appropriate way, not including termination. The Court does not take notice of the inconsistency, much less the irony, in its positions.
Ante at 406–07.
The jury found that James’ breaches of Sections 21.3 and 17.2 cost Westlake $1,054,251.81, which the contract required James to reimburse. Though James was well aware of its repeated, serious safety violations and angry at Westlake for insisting on a safe jobsite, the Court orders that Westlake forfeit its contractual rights for lack of a writing that the jury found did not harm James. I disagree that Westlake failed to comply with the notice requirements of Section 21.3 and that it cannot recover its excess costs in completing the work under Sections 21.3 and 17.2. I therefore respectfully dissent.
I
The Court holds that the rule of substantial compliance applies to contractual notice conditions in two ways. First, the rule applies to the substance of the notice. In the example the Court cites, one parent's notice to the other of proposed international travel, required before the other was required to consent, substantially complied with the divorce decree even though it omitted significant information—like where they would stay and when they would return.
Id. at 405–06 (citing In re G.D.H. , 366 S.W.3d 766, 771 (Tex. App.—Amarillo 2012, no pet.) ).
Second, the rule applies to the method of notice. In the Court's examples, notice need not be sent by registered mail, as the parties contracted, or to the location directed in the contract, as long as it was received. In the Court's view, the content of the notice—which, after all, is the very point of requiring that notice be given—and the manner of the notice's delivery need only substantially comply with the parties’ agreement. But if a contract calls for written notice, the Court decrees, then there must be a writing, even if the parties’ contract does not insist on strict compliance, and even if notice is completely ineffectual where, as here, notice confers no information not already indisputably known to both parties.
Id. at 406 (citing Barbier v. Barry , 345 S.W.2d 557, 562 (Tex. Civ. App.—Dallas 1961, no writ) ).
Id. (citing Tex. Utils. Elec. Co. v. Aetna Cas. & Sur. Co. , 786 S.W.2d 792, 793 (Tex. App.—Dallas 1990, writ denied) ).
As rationales for its new rule, the Court offers precedent and policy. A
As for precedent, the Court says it has found "no Texas cases holding that a party's provision of oral notice complies, substantially or otherwise, with a requirement of written notice." Actually, there is one, which the Court has found but does not recognize: South Texas Electric Cooperative v. Dresser–Rand Co. , decided by three Texas judges on the federal appeals court applying Texas law.
Id. at 406–07.
575 F.3d 504 (5th Cir. 2009) (opinion by Haynes, J., joined by Jones, C.J., and Higginbotham, J.).
In South Texas , Dresser contracted to repair any defects in the electric turbine it sold the Co-op after the Co-op provided written notice of such defects. If Dresser failed to make the repairs, the Co-op, after a second, ten-day written notice to Dresser, had the right to repair the defects itself at Dresser's expense. From startup, vibrations in the turbine impaired its use. Dresser knew of the problems, and for two years the parties emailed back and forth about them. Finally, the Co-op, "without providing Dresser further written notice, employed outside consultants to do the repair work."
Id. at 506.
"[T]he jury found that [the Co-op] substantially complied with the contract's notice provisions", and the Circuit held that was sufficient to allow it to recover. The Circuit rejected Dresser's argument that the substantial-compliance doctrine did not apply to a contractual requirement for written notice. Further, the Circuit held that "Dresser's arguments are contrary to well-established Texas law, recognizing the applicability of the doctrine of substantial compliance to contractual notice provisions." Dresser knew that the Co-op was consulting with experts, even though the Co-op did not give Dresser written notice that the experts would repair the turbine at Dresser's expense. The Circuit concluded: "[T]he evidence here supports a conclusion that the underlying purpose of the ten-day notice requirement ... was fully served by the actual notice received by Dresser."
Id.
Id. at 507.
Id. at 508.
This Court dismisses South Texas as inapposite because the Circuit stated that the Co-op had hired outside consultants to repair the turbine "without providing Dresser further written notice", noting that the parties had exchanged writings on the need for repairs. But the Circuit's opinion clearly states, and the Co-op did not dispute, that the Co-op did not give Dresser the contractually required written notice that repairs were to be made. Dresser argued on appeal that whatever it may have known about the Co-op's use of experts, it was entitled to the written notice for which it contracted. This Court says that the Circuit's "focus was not on the lack of a writing", but that was the very focus of the entire case. The Circuit's opinion refers to "written" notice five times. The parties’ contract required written notice. None was given. The Circuit applied the substantial-compliance doctrine and held, as the jury had found, that the Co-op satisfied it.
Ante at 409 (quoting S. Tex. Elec. Coop. , 575 F.3d at 506 ).
Id.
The Court also dismisses South Texas because "federal law" is not needed to "fill in [a] gap" in Texas jurisprudence. With respect, the Court's statement makes no sense. South Texas did not apply federal law; it applied Texas law to a Texas case. There was no "gap" in Texas law; the applicability of substantial compliance to contractual written notice provisions was "well-established". The Court can certainly disagree with South Texas ; it cannot dismiss it.
Id. at 408–09.
S. Tex. Elec. Coop. , 575 F.3d at 507.
The Court cites four cases in support of its holding. Two, Cheung–Loon, LLC v. Cergon, Inc. , and Tennessee Gas Pipeline Co. v. Technip USA Corp. , have nothing whatever to do with substantial compliance. Both denied recovery because no notice of any kind was given. In the former, the court stated that "appellees point to no evidence that any of the alleged notifications informed [the opposing party] of their position [or] the contractual right they now claim was breached." In the latter, a case factually similar to the present one, the court rejected the argument that "no notice is required" of one party's intent to repair defective workmanship at the other's expense. Neither the words "substantial compliance" nor the concept appear in either case.
392 S.W.3d 738 (Tex. App.—Dallas 2012, no pet.).
No. 01-06-00535-CV, 2008 WL 3876141 (Tex. App.—Houston [1st Dist.] Aug. 21, 2008, pet. denied).
Cheung–Loon , 392 S.W.3d at 745.
Tennessee Gas Pipeline , 2008 WL 3876141, at *20.
In a third case, Emerald Forest Utility District v. Simonsen Construction Co. , the court stated that "[t]he controlling issue is whether [a party] warranted the sufficiency of the design of the sewer system." In dicta, the court noted that "[w]hen a contract provides for a particular form of notice, compliance with such provisions is a condition precedent to invoking the contract rights which are conditioned on the notice." But the court did not state that substantial compliance does not apply. Again, neither the words nor the concept appear in the opinion.
679 S.W.2d 51, 52 (Tex. App.—Houston [14th Dist.] 1984, writ ref'd n.r.e.).
Id. at 54.
The fourth case the Court cites is Shaller v. Commercial Standard Insurance Co. , a decision of this Court. The jury in the case found that the insureds had not consented to the cancellation of two insurance policies, but the court of appeals reversed judgment on the verdict, holding that consent was established as a matter of law. This Court reversed, holding that the insureds had no notice at all their policies would be cancelled, and therefore whether the insureds consented was a fact question for the jury. The Court added that a policy provision requiring prior written notice of cancellation should be enforced absent waiver, agreement, or estoppel, but it did not discuss substantial compliance. Neither the words nor the concept appear in the opinion.
158 Tex. 143, 309 S.W.2d 59 (1958).
Id. at 66.
Id.
The Court can hold that the substantial-compliance doctrine applies to construction contracts generally and notice provisions in particular and carve out a single exception for the form of notice. What it cannot do—or at least what it cannot do legitimately —is claim for its authority cases that do not discuss substantial compliance while dismissing a contrary case that does.
B
The Court argues that its exception to the substantial compliance rule is good policy because it avoids after-the-fact disputes over what notice was given and what the parties actually knew. But while such disputes are certainly worth avoiding, none exist in this case. Before and after an on-the-job death, Westlake and James were in constant conversation about how to improve safety on the project and whether James could continue on as a contractor.
In this situation, there is a stronger countervailing policy: the law's abhorrence of forfeitures and construction of contracts to avoid them. The Court agrees that Westlake would have strictly complied with the written notice requirement if it had scribbled only a few words, like "21.3" plus "safety", "dissatisfied", and "terminated". For want of a few words, Westlake forfeits the more than $1 million in damages found by the jury. And words would have added nothing to the parties’ awareness of the safety problems and the unavoidable consequences.
The Court apologizes that it must read contracts the way the parties write them, but in this case, that is simply not true. Parties need only substantially comply with the substance of a contract's notice requirements. The Court demands that formal requirements must be read as written, but not substantive requirements. Here are the Court's words:
The courts’ unfailing refusal to deem oral notice compliant with a contractual condition requiring written notice, like the doctrine of substantial compliance as a general matter, is consistent with our repeated affirmation that "[a]bsent compelling reasons, courts must respect and enforce the terms of a contract the parties have freely and voluntarily entered." The bargained-for requirement of written notice necessarily serves a purpose beyond actual notice; otherwise, its inclusion is useless.
Ante at 407–08.
How is the application of substantial compliance in this case inconsistent with respecting and enforcing the parties’ terms as written? A bargained-for requirement of written notice is not useless, any more so than a bargained-for requirement of registered mail or destination. The requirement sets the standard for the parties’ desired certainty. Allowing notice sent by regular mail or to a different office does not disrespect the parties’ right to contract. Rather, it assumes the parties contracted in good faith and not with the intent to spring technical "gotchas" on each other to avoid their obligations. Notice tantamount to written notice, which James clearly had, should be sufficient.
II
In the end, the Court's rule that parties must strictly comply with a contractual requirement for the form of notice is of little significance to a decision in this case. The issue is not whether there were writings, but what they contained. On this issue, the Court is bound by the jury's findings that Westlake substantially complied with the contract unless there was no evidence to support them.
Westlake hired James in May 2012 as a general contractor to work on Westlake's chlor-alkali plant, only their contract did not require Westlake to assign James work, or James to accept an assignment. Westlake was free to retain other contractors to do work James could do.
The chlor-alkali process produces chlorine and caustic soda by the electrolysis of brine.
Section 21.3 of their contract provided:
If [Westlake] discovers or determines in its reasonable opinion that ... [James] has serious safety violations[,] then [Westlake] may so notify James. Upon receipt of any such notice [James] shall begin to remedy the breach or defect cited within seventy-two (72) hours. If at any time [Westlake] is not reasonably satisfied with the pace and the quality of the remediation effort, [Westlake] will so notify [James] and [Westlake] may thereafter, at its sole discretion, elect to either terminate this Contract or portion of the Work by providing notice to that effect. After providing such notice [Westlake] shall have the unrestricted right to take possession of the Work or the portion thereof terminated and to purchase and/or hire materials, tools, supervision, labor, and equipment for the completion of the Work or of the unremedied condition, as [Westlake] elects. Any extra costs in excess of the Contract Price incurred by [Westlake] in this regard shall be at the expense of [James]. This right is in addition to any other remedies [Westlake] may have hereunder.
The provision thus called for Westlake to give three notices: of its opinion that James had serious safety violations, of its dissatisfaction with James’ remediation effort, and of termination of James’ work. The contract required that all notices be written.
On December 28, James’ employee Gregory Price suffered a fatal head injury on the job. He fell from a ladder propped against the side of a truck, helping to load it, when the driver was directed to pull ahead without checking to see that no one was near. OSHA cited James for a serious safety violation. It was the latest in a steady stream of violations.
The same day, Westlake's project manager, Abram Kuo, forwarded to his counterpart at James, Rusty DeBarge, an email Kuo had received from his superior stating that Price's death was "completely preventable", asking for James’ incident rate of safety violations, proposing a safety review for James to show how it would prevent further incidents, and requiring James "to develop [a] preventive safety mind set [sic] with some extraordinary measures on job safety." Kuo followed up in a meeting with DeBarge a few days later, together reviewing James’ safety record and emphasizing the importance of James’ improving its safety performance.
The Court calls it "questionable" whether the December 28 email was the first notice under Section 21.3 because it did not mention that provision and did not specify when James’ 72 hours to remediate began. But the contract required neither. The Court itself holds that the substance of the notice need only substantially comply with the contractual requirement. It certainly did, as the jury found. By any measure, an email stating that a preventable death on the job required a complete safety review expresses a reasonable opinion that there had been serious safety violations.
On January 18, DeBarge emailed Kuo to "appeal" "potential changes in the execution of the project going forward"—specifically James’ removal from the project. Kuo emailed back the same day, confirming that Westlake might bring another contractor onto the project. Quoting DeBarge's email back to him, Kuo agreed that everyone "would like to be judged by [their] intentions" but "are in fact judged by the results." Kuo added: "we all make mistakes and we all need to learn from [them]." On January 30, Westlake transferred work from James to a new contractor.
The Court concludes that this email was not the second notice called for by Section 21.3 because, like the December 28 email, it did not mention that provision, and because it acknowledged steps James had taken to improve safety and did not express dissatisfaction with James’ performance. But the email exchange was precipitated by rumors DeBarge had heard that Westlake was going to switch to another contractor. Westlake was not terminating James because it was satisfied with James’ work. The email exchange was premised on Westlake's dissatisfaction, and Westlake terminated part of James’ work a few days later.
As with the December 28 email, the Court concludes that the January 18 email did not qualify as written notice under Section 21.3, not because it was not written, but because it was lacking in substance. But again, that must be determined under the substantial-compliance doctrine, and the jury found for Westlake. There was clearly some evidence in the January 18 email of Westlake's dissatisfaction with James’ safety performance, which unquestionably existed. The Court never addresses the jury's verdict.
Finally, on April 11, after additional incidents even under a new site manager, James and Westlake representatives met in person. Westlake told James that its work was being reassigned to a different contractor and that James had "five days to get [its] remaining piping and mechanical people off the job." Additionally, James was told that Westlake had "done everything [it could] do", and despite Westlake's efforts to help James, James "[fell] back into the same pattern" of safety problems. James’ vice-president responded angrily: "[E]verybody kills somebody on the job[.] [W]hy are you penalizing us?" James immediately withdrew from the project.
On May 8, DeBarge emailed Westlake that "[p]er the direction of Westlake site management, [James] has discontinued mechanical work on the Chlor-Alkali project and we have completed the demobilization of the mechanical forces." The Court rejects this writing as complying with Section 21.3 because it was not sent by Westlake, but in reciting the notice Westlake gave at the earlier meeting, paired with James’ withdrawal from the project, it served the same purpose as if coming from Westlake. Indeed, it showed James’ own understanding of the situation.
The writings between Westlake and James satisfy the requirements of Section 21.3. Certainly, they substantially complied with those requirements, as the jury found.
III
The Court holds that Section 21.3 of the contract must be read as written, but not Section 17.2. That provision states:
[Westlake] shall at any time during the execution of the Work by [James] have the right to intervene in any appropriate way, if in the reasonable opinion of [Westlake], (a) [James’] performance is likely to lead to (i) defective Work, (ii) a material breach of this Contract, (b) the progress achieved by [James] is insufficient or likely to result in the Work not being completed by the completion date stated in any Work Order or (c) [James] is performing its duties under this Contract in an unsafe way or manner in which [Westlake] believes may cause injury or damage to persons or property. In such cases [Westlake] shall have the right to require [James] to immediately take remedial action to the satisfaction of [Westlake]. [James] shall be solely accountable for all costs associated with
such intervention and remedial action, whether incurred by [James], [Westlake] or any third party.
The Court concludes that intervention "in any appropriate way" does not mean requiring safety improvements and termination without notice, otherwise Section 21.3 would be meaningless. But Section 21.3 itself expressly states that the right it gives Westlake to intervene in James’ work with notice "is in addition to any other remedies Westlake may have hereunder." Despite this plain statement, the Court reads Section 21.3 to confer an exclusive right to intervene, not an additional one.
Neither section need be read to trump the other. They provide alternative ways for Westlake to proceed. But, according to the Court, Section 17.2 prevails over Section 21.3 because "Texas courts regularly enforce unambiguous contract language agreed to by sophisticated parties in arms-length transactions." The Court cannot have it both ways. If "written" must be read literally, then so must "any appropriate way".
Ante at 403.
* * * * *
I would not except the form of notice required by construction contracts from the substantial-compliance doctrine, which applies to the rest of the contract. I would not insist that part of a contract must be read literally and that another part cannot be. I would hold that there is evidence to support the jury's findings that Westlake substantially complied with the contract's notice requirements. And I would not forfeit the $1 million damages awarded Westlake by the jury for want of a word or two. Therefore, I respectfully dissent.
James raises an additional ground for reversal related to agency. The Court did not reach the issue because it held that Westlake may not recover under Section 21.3. Ante at 403 n.10. I would affirm the court of appeals’ holding on the issue in Westlake's favor. Additionally, as to Part II(C) of the Court's opinion, I agree with the result that Westlake can recover on its indemnity claim, but I disagree with the Court's rationale that Westlake failed to comply with Section 21.3's notice requirements. Cf. id. at 415–16.
Justice Boyd, joined by Justice Blacklock and Justice Huddle, dissenting in part.
I agree with the Court that substantial compliance can satisfy a written-notice requirement but oral notice cannot constitute substantial compliance. I also agree that Westlake cannot recover the costs it incurred when it replaced James because its oral notice failed to substantially comply with the contract's written-notice requirement and the contract did not otherwise entitle Westlake to recover those costs. But I conclude that the parties’ agreement that "no claim shall be made" for consequential damages constitutes a covenant not to sue for such damages. Because I would reverse the court of appeals’ holding as to the consequential-damages provision, I respectfully dissent in part.
The contract plainly stated that neither party "shall be liable to the other for any consequential ... damages ... and no claim shall be made by either [party] for such damages. " [Emphasis added.] The Court gives undue weight to the contractual language explicitly forbidding claims for consequential damages being "an independent clause." Ante at 416. This grammatically inconsequential detail pales in comparison to the binding power of the conjunctive "and," which links the waiver of consequential damages to the covenant not to sue for such damages, ensuring both are valid, independently enforceable provisions. The Court's rationales for its interpretation are unpersuasive. Its premier argument relies on the title of the contract section at issue ("Waiver of Consequential Damages"), ante at ––––, and disregards the fact that the substantive text of the section clearly records the parties’ more expansive intent. See Enter. Leasing Co. of Hous. v. Barrios , 156 S.W.3d 547, 549 (Tex. 2004) ("Although we recognize that in certain cases, courts may consider the title of a contract provision or section to interpret a contract, ‘the greater weight must be given to the operative contractual clauses of the agreement.’ " (quoting Neece v. A.A.A. Realty Co. , 159 Tex. 403, 322 S.W.2d 597, 600 (1959) )). The contract spells out the parties’ agreement to both waive consequential damages and covenant not to sue for such damages. And if the section's title does not fully capture this manifestation of intent, the contract's text must nevertheless control. The difference between these provisions is paramount because the mutual waiver of consequential damages simply bars recovery, while the promise not to sue constitutes a covenant that, if breached, enables the other party to recoup its costs incurred in defending that suit. These provisions are not duplicative, as the Court's reading would ensure; rather, they accomplish different goals and avoid surplusage and superfluity.
The Court attempts to rely on the distinction between a "claim" and a "suit," asserting that relinquishing "a claim to any consequential damages to which [the parties] may be entitled in the event of a lawsuit" is not the same as relinquishing "the right to bring a suit in the first place." Ante at 416. But the contract bars both collecting consequential damages and making a claim for such damages. Westlake breached the contract when it asserted a claim against James for consequential damages.
Finally, the Court errs by depending on the somewhat unpredictable line between direct and consequential damages, arguing that because a court might ultimately categorize damages as consequential when a party believed them to be direct, the contract here could not have barred suit for consequential damages. Ante at ––––. But Westlake's subjective belief that the damages it sought were direct, rather than consequential, was subject to judicial review and interpretation. To whatever extent judicial characterization of damages as direct or consequential impeded Westlake's ability to safely predict whether it was violating a covenant when it sued James, that does not alter the contract's plain language. Whether it knew or not, Westlake was suing for consequential damages, which its contract straightforwardly forbids.
Because Westlake breached the contract's covenant not to sue for consequential damages, I would reverse the court of appeals’ contrary holding and reinstate the jury's award of the attorney's fees James incurred in defending against Westlake's claims for consequential damages. Because the Court does not, I respectfully dissent.