Who Cares About the Notice Clause in Contracts? You Should!
Authored by Ty Edwards, with contributions from Gabriela N. Smith
What You Need to Know About Notice Provisions In Texas Contracts
Every clause in a commercial contract matters and every clause could end up in a dispute – or in litigation – such as the notice provision in the case James Construction Group, LLC v. Westlake Chemical Corporation, 65 Tex. Sup. Ct. J. 1096 (2022). Notice provisions in commercial contracts can be important negotiating points. Decisions on whether to require notice in writing or orally, through email or certified mail, one week or one month ahead of time, can all be important factors in completing a deal. An important question long unanswered by the Texas Supreme Court was: how strictly would these provisions be enforced?
Notice Provisions and the Substantial Compliance Test
The Texas Supreme Court recently answered this question in James Construction Group, LLC. In the decision issued on May 20, 2022, the Texas Supreme Court adopted the substantial compliance test that had previously been applied by several Texas Appellate Courts. The substantial compliance test holds that “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.” James Constr. Grp., 65 Tex. Sup. Ct. J. 1096 at 1128 (2022).
In the holding, the Supreme Court also created a carve out that oral notice cannot satisfy contractual provisions that require written notice, stating “written notice necessarily serves a purpose beyond actual notice; otherwise, its inclusion is useless.” Id. At 1132.
Requirements for Notice Provisions in Texas
Therefore, when negotiating notice provisions in a contract that selects Texas as the choice of law or that could be litigated in Texas, this rule is something to be aware of. Deviations from the notification process that do not impair the purpose and do not cause prejudice is a very fact specific test for the court to adopt. More pressure is now put on the drafting of these provisions to ensure the purpose of each requirement in the provision can be read from the contract.
The decision of requiring written notice now also has more significance as it can be a hard line on whether the notice provision was complied with or not. The contract should also be consulted before notice is given to a counterparty to make sure that all requirements of the notice provision are being substantially complied with.
Key Takeaways on Notice Provisions in Texas Contracts
The Texas Supreme Court recently ruled that notice provisions in contracts must meet certain requirements of the substantial compliance test, namely:
The notice clause must clearly identify a purpose;
Minor deviations from a contractual notice condition may be allowed if they do not severely impair the purpose underlying the condition;
Minor deviations that do not cause prejudice may be allowed; and
Oral notice cannot satisfy contractual provisions that require written notice.
For more information about Texas contracts, see our Corporate Law and Commercial Transactions Legal Services and Industry Focused Legal Solutions pages.