Have you ever managed a contract that was in trouble and behind schedule? There is a legal principle — waiver — that procurement professionals should understand. Some actions (or inactions) can compromise the ability to exercise contract remedies. This article will examine two United States cases that illustrate application of waiver principles in a context of a supply and construction contract.

This article does not cover Canadian law. Given the common origins of Canadian and United States law, though, the application of waiver principles likely is similar.

How does a buyer avoid unwittingly waiving a performance requirement — a delivery date, for example?

Waiver under the Uniform Commercial Code

A Massachusetts case illustrates the application of the waiver doctrine in contracts for goods governed by the Uniform Commercial Code. [Dynamic Mach. Works, Inc. v. Machine & Elec. Consultants, Inc., 831 N.E.2d 875 (Mass. 2005)] In that case, Dynamic Machine Works agreed to purchase a specialized lathe for its manufacturing operations from Machine & Electrical Consultants. Production of the lathe was delayed, and the parties agreed to an extension in the delivery date. Production problems continued, and the lathe was delivered about a month late after the extension. Two months after delivery, Dynamic notified the seller that the delivered lathe did not meet specifications. In that letter, Dynamic gave the seller 10 days as "one last and final deadline for the machine to be fully and unconditionally commissioned."

Two days later, after getting additional information that the lathe probably never would meet specifications, Dynamic retracted the 10-day extension deadline. Dynamic revoked the acceptance of the lathe, demanded return of the down payment and later filed suit alleging breach of contract.

The seller counterclaimed for breach of contract. One of seller's claims was that Dynamic had waived the delivery date.

The appellate court in the Dynamic opinion noted the relevance of two distinct theories. First, Massachusetts's commercial code, which is based on the Uniform Commercial Code, permits bilateral modifications without consideration (e.g. extension of delivery dates without a reduction in price, for example). Second, even if a modification does not technically satisfy the requirements of the code, the attempt may operate as a "waiver" under the code.

A modification is the result of bilateral agreement between the parties and cannot be retracted unilaterally. A waiver, on the other hand, is a unilateral action that can be revoked unless there has been material change of position by the other party (sometimes called "detrimental reliance"). The trial court had found that the seller did not rely in any material way on the 10-day extension deadline during the two-day period between the letter's issuance and revocation. Thus, Dynamic argued that its letter was a waiver that could be retracted. The seller argued that it was a modification that could not.

Ultimately, the court in Dynamic found further fact-finding necessary to determine whether the parties agreed to the 10-day delivery extension. The lesson for us is that, had the seller relied to its detriment on the extension letter and incurred significant expense before it received the retraction, a waiver likely would have been found by the court.

Other application of the waiver doctrine

Compare that analysis with waiver in contracts not covered by the state's commercial code, services (or construction) contracts, for example. [State of Florida v. United States, 81 F.3d 1093 (Fed. Cir. 1996)]

In State of Florida, the state's department of insurance became a receiver of an insolvent surety company who had bonded a construction contract with the United States Postal Service. The contract required the construction of a postal facility in Florida. When the contractor did not make progress, the Postal Service terminated the contract for default. The surety proceeded to finish the project under the bond.

The surety, however, did not make sufficient progress either. In fact, for several months the surety did little work on the project. The Postal Service sent notices to the surety complaining about the failure to complete the project on time. Eventually, the Postal Service provided a final notice, giving the surety 10 days to report on the status of the project. The surety informed the Postal Service that a completion contractor had been selected and provided a completion date. Three months prior to the completion date, the building still had no roof, and there was no work proceeding inside the building. Moreover, the surety did not respond to Postal Service requests for updated status requests. Eventually the Postal Service terminated the surety for default for its failure to make progress. The surety became insolvent and eventually went into receivership.

As the receiver, the state assumed the rights of the surety, stepping into its shoes and retaining the surety's defenses and claims. The state as receiver submitted a claim against the United States for $465,000, alleging breach of contract.

The state argued that the Postal Service had waived its right to terminate the contract for default because it had allowed the contractor to continue to perform under circumstances showing "waiver," and thereafter had failed to establish a reasonable completion schedule.

The United States Court of Appeals for the Federal Circuit found against the state of Florida. The court acknowledged legal precedent finding waivers of the government's right to terminate a contract for default when the government allows a delinquent contractor to continue substantial performance past a due date under circumstances that justify a conclusion that the delivery date has been waived. The purpose of the waiver doctrine is to protect contractors who are led to believe that time is no longer of the essence and undertake substantial efforts after the performance date specified in the contract has passed. Further, when a party waives a deadline, it must set a new, reasonable deadline for performance.

In this case, however, both the trial court and appellate court found no waiver by the United States. The Postal Service had continued to remind the contractor and surety that contract liquidated damages would be assessed. The Postal Service continued to express dismay in writing about the schedule and seek assurances that the surety would promptly complete the building. Months had gone by without any progress at all, and the limited progress made in the three months before the termination only advanced the project by 10 percent. The court also highlighted the fact that the surety essentially ignored Postal Service attempts to seek information about progress of the project. The appellate court affirmed the trial court's conclusion that the Postal Service was justified in terminating the contract.

Avoiding unwitting waivers

As shown by these cases, waiver is difficult to establish. Waiver does not occur just because a party takes a reasonable time (one case permitted 41 days) to examine the situation and decide on remedies. Expressions of willingness to discuss settlement does not establish waiver. And in federal procurement, the assessment of liquidated damages has not as a matter of law precluded terminations for default based on not meeting scheduled completion dates. (But check your jurisdiction's law; there may be other decisions that view the availability of liquidated damages in a contract as a signal that time is not "of essence.")

Get early legal advice about how to deal with performance and schedule issues. Sometimes contractors are entitled to extra time under the contract. Some termination clauses (and other contract provisions known as force majeure clauses) grant time extensions for various conditions not within contractor control. Unusually severe weather or differing site conditions at a construction site are examples. Other contract clauses may entitle the contractor to additional performance time (even an adjustment in price) if the government does not provide resources on time as contemplated in the agreement.

Communicate early regarding delinquent performance obligations. Do not simply ignore them. Use some caution, however, with respect to use of "show cause" letters. Many contracts require them before contract terminations, for example, for the purpose of gathering information to permit the proper exercise of discretion. A show cause letter, however, that is issued after delivery and encourages additional performance — as the letter did in the Dynamic case — may invoke the waiver doctrine.

If a delivery date has been waived, get counsel's help to reestablish a reasonable delivery date. Ideally the new date would be established in a written, bilateral contract amendment that also settles all related price adjustment or "changes" issues. And where the project is delivered in phases, reestablish each of the milestone dates.

Supply and service (construction) contracts have somewhat different rules regarding performance and remedies. But waiver is a lurking landmine for the unsuspecting in administration of all contracts. Take this article to your lawyer, and discuss with him or her advisable contract administration practices that help avoid the unwitting waiver of a performance requirement.

About the author

Richard Pennington, CPPO, C.P.M., J.D., LL.M. is an NIGP Individual Member. He served as an assistant attorney general (procurement and contract law and litigation) and State Purchasing Director for the State of Colorado.