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Supreme Court of Texas Takes Notice in James Construction

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By James Leader, Briana R. Falcon, and Jason Onyediri*

Notice provisions outlining the proper method for conveying key information are omnipresent in commercial contracts, but they are also frequently overlooked. This combination makes such provisions a common source of litigation. For example, what happens when a party is required to provide written notice of default before filing suit but conveys that notice orally instead? What about a notice sent by email when certified mail is expressly required? Contracting parties are told to expect that Texas courts will hold them to their contracts as written, but would a court really reject a claim based on a non-prejudicial deviation from a notice provision?

While this may seem like a question of law that should be long settled, the Supreme Court of Texas had previously never addressed whether strict compliance with a notice provision is necessary and, if not, what test should be used to evaluate an incomplete effort. Without on-point guidance, parties looked to Supreme Court authority from the insurance context—where immaterial deviations are forgiven absent a showing of prejudice—and to a substantial-compliance doctrine adopted by many appellate courts. While this authority provided some guidance, the absence of on-point authority from the Supreme Court of Texas resulted in an open question of Texas law.

On May 20, 2022, the Supreme Court of Texas provided answers to this question.  In James Construction, the Court adopted the substantial compliance test applied by a number of appellate courts and held that “a party’s minor deviations from a contractual notice condition that [1] do not severely impair the purpose underlying that condition and [2] cause no prejudice do not and should not deprive that party of the benefit of its bargain.” Id., citing PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630, 631–32, 636 (Tex. 2008). The Court noted that this policy avoids so-called “gotcha” tactics that may be used by parties to avoid obligations “based on a technicality” rather than some actual prejudice or harm.

The facts of James Construction also gave the Court occasion to add an objective carveout to its new, subjective standard. In the case James Construction Group, LLC (“James”) argued that its counterparty had failed to provide the contractually mandated written notice required to terminate James as its contractor. The court of appeals held that James had received oral notice that substantially complied with the notice provision, but the Supreme Court held that oral notice cannot satisfy a contractual provision requiring written notice. The Court reasoned that “written notice necessarily serves a purpose beyond actual notice; otherwise, its inclusion is useless.” One such purpose is eliminating a subjective, testimony-based analysis of the sufficiency of oral notice and allowing courts and parties to focus on written communications.

Interestingly, Chief Justice Hecht concurred in the portion of the opinion adopting a substantial compliance test but dissented from the majority’s categorical rejection of oral notice. The chief justice asserted that a stronger countervailing policy, namely “the law’s abhorrence of forfeitures and construction of contracts to avoid them,” cautions a different approach in this case. The chief justice rejected the majority’s bright-line rule, instead positing that notice tantamount to written notice—which he determined that James had in this case—should be sufficient to constitute substantial compliance with a written notice provision.

The James Construction opinion also studied the contract at issue to determine whether a provision waiving consequential damages constituted an affirmative covenant that could be breached by a party seeking such damages. While the majority held that the waiver provision at issue could not serve as the basis of a breach of contract claim, the opinion does provide useful guidance for contracting parties who seek to deter future claims that might be found to seek consequential damages. As highlighted by a dissent penned by Justice Boyd, the majority’s opinion suggests a contractual bar on a particular type of claim must be very explicit in order to be enforced as an affirmative covenant by Texas courts.

Vinson & Elkins tracks development in Texas jurisprudence, as well as developments impacting commercial litigation throughout United States and abroad. Visit our website to learn more about Vinson &Elkins’ Commercial and Business Litigation practice. For more information, please contact Vinson & Elkins lawyers James Leader or Briana R. Falcon.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.