March, 2019

A recent Kansas Court of Appeals case exposes the danger of failing to exhaust administrative remedies when contracting with a public entity. The court of appeals affirmed the trial court ruling dismissing all claims of the prime contractor for its failure to comply with the Kansas Judicial Review Act (“KJRA”) and its contractually negotiated administrative remedies prior to filing suit. In doing so, the court held the KJRA applies to construction contracts, just as it does to other contracts with public entities.

Kansas State University (“KSU”) and Crossland Construction Company, Inc. (“Crossland”) entered into a contract where Crossland served as the prime contractor in the construction of a new residence hall on the KSU campus. Treanor Architects, P.A. (“Treanor”) entered into a contract with KSU to serve as the project architect and engineer. Crossland entered into a subcontract with Otis Elevator Company (“Otis”) to install the elevator in the new residence hall. A dispute arose between Crossland and Otis regarding the elevator system to be installed. Crossland submitted Otis’s shop drawings that included the elevator system it wanted to use. Treanor rejected those drawings, interpreting the contract to require a different elevator system. Due to the elevator system disagreement, Crossland terminated its subcontract with Otis. Following the termination of Otis, Crossland hired a replacement subcontractor, paying a substantial markup.

Roughly one year after Treanor rejected Otis’s shop drawings, Crossland submitted a Proposed Change Order (“PCO”) requesting over $1.3 million as compensation for the additional expenses it incurred related to the elevator system disagreement. The PCO had to be approved by several parties, including Treanor and KSU. The PCO was denied.

After attempts by Crossland to settle the matter by alternative dispute resolution, Crossland filed suit against KSU, Treanor, Otis and Otis’s insurer, Liberty Mutual (Crossland and Otis along with Liberty Mutual later voluntarily dismissed their claims without prejudice). KSU, joined by Treanor, moved to dismiss Crossland’s Petition for failure to exhaust administrative remedies as required by the KJRA and the parties’ contract. The trial court granted KSU and Treanor’s Motion to Dismiss holding that Crossland was required to appeal its breach of contract claim against KSU, a state agency, pursuant to the KJRA and the administrative remedies provision in its contract. The trial court explained that because Crossland did not follow the administrative remedies provision in the contract, Crossland had failed to exhaust its administrative remedies. Crossland appealed the trial court’s ruling.

The court of appeals affirmed the trial court ruling explaining that the KJRA requires a party to exhaust all administrative remedies available within an agency in a breach of contract case against a state agency before filing a petition for judicial review. Further, parties may contractually include administrative remedies in their contract, which in turn must be exhausted before filing a petition with the trial court. Crossland did not bring its claim to the Director of the Office of Facilities and Procurement Management within 10 days of Treanor’s decision to deny the shop drawings, as required by the contract. Crossland further failed to file its petition for judicial review within 30 days of the agency action. Thus, Crossland did not exhaust its administrative remedies prior to filing its petition. Also, the court of appeals held that the agency action, which triggered the KJRA and the contractual remedies, was Treanor’s denial of the shop drawings, rather than the denial of the PCO. 

As a practical matter, if one has contracted, or intends to contract, with a Kansas public entity, one should seek counsel to determine one’s statutory and contractual obligations regarding contract disputes. Kansas courts have held that failure to comply with the KJRA and other contractual administrative remedies requirements is a waiver of all claims against the public entity. The outcome of the Crossland case may seem counterintuitive, but it stands for the principle that what you don’t know can hurt you, especially if you are doing public work in Kansas.

Case citation: Crossland Constr. Co. v. Otis Elevator Co., 2018 Kan. App. Unpub. LEXIS 1005 (Ct. App. Dec. 28, 2018).