Five Situations Where You May Be Able To Avoid A Contractually Mandated Written Change Order
By William C Last, Jr.
Almost all written construction contracts require that the contractor obtain a written change order as a condition to payment for the additional work. However, owners customarily direct contractors to perform the work and promise that they will subsequently negotiate a fair price for the work. Almost every contractor can recite an example of such a promise that is then ignored by the owner when the time for payment arises.
Written change order provisions are placed in contracts so that the owner is assured that it will expressly approve any changes to the scope of work. In addition, such provisions are designed to give the owner timely and ample notice of the change in scope so it can investigate the claim and then either avoid the additional cost or take steps to mitigate the additional expense. Courts have routinely upheld such provisions when the additional work was performed without any notice to the owner.
However, the courts will be less inclined to enforce the written change order requirement when the owner has timely notice and orally induces the contractor to perform the changed work. Similarly, courts will not find it equitable to enforce such clauses against subcontractors when general contractors induce them to perform the additional work with a promise that they will be paid for the work at a later date.
The remainder of this article will review five legal theories that have been approved by California courts as a legal basis for avoiding the written change order provision in private works contracts when the owner knowingly approved the additional work. The article will then discuss written change requirements for California public works projects.
1. Oral Waiver of the Written Change Order Provision
The doctrine of waiver has long been accepted by the courts. In essence, the courts treat appropriate action or conduct of the owner as waiver of the written change order provision. Quite simply, if the other party orally approves the additional work, it acts in a manner that is inconsistent with that party’s intent to rely on the change order provision. As a result, the court will treat that conduct as a waiver of the clause and allow the contractor to recover the value of the additional work. (See for example Howard J. White v. Varian Associates (1960) 178 Cal App 2nd 348).
It should be noted that many contracts include additional clauses that seek to avoid such waiver arguments. In addition, some contracts include clauses that state that only certain personnel can approve change orders. For example, the provision may limit the change order approval to home office personnel rather than field personnel. Under appropriate circumstances, such anti-waiver provisions have been upheld by the courts as valid.
2. The Owner May Be Estopped From Relying On The Clause
The doctrine of promissory estoppel has been applied to a number of construction contract disputes. Promissory estoppel occurs when a party makes a promise to the other which the other party would reasonably rely on to take action based on the promise. If the owner promises to pay for the work and then allows the work to proceed it will be estopped from denying the promise to pay for the work.
3. A Requirement For A Written Change Order Can Be Rescinded By The Parties
As in the case of waiver, the parties can effectively rescind the written change order provision by their conduct. If the contractor and the owner orally agree that written change orders are not necessary the courts will treat the provision as being rescinded by the parties.
4. Allowing The Owner To Receive The Improvements Without Compensation Would Unjustly Enrich The Owner
This legal theory is based on the concept that once the work is complete the owner will have the permanent benefit of it and the contractor will not be able to repossess the work. However, the owner can only be unjustly enriched if the contractor was induced to perform the additional work by fraud, coercion, mistake, request or coercion by the owner. Thus the claim must be based on some action of the owner that resulted in the contractor performing the additional work.
5. California Statutory Law Allows A Written Contract To Be Orally Modified
California Civil Code section 1698 allows a written contract to be modified when the oral change order agreement is executed by the parties or if the change order is supported by new consideration. California courts have held that if the contractor fully completes the additional change order the oral modification to the contract is deemed executed by the parties and is thus effective. The section also states that it does not preclude “in an appropriate case the application of rules of law concerning estoppel, oral novation and substitution of a new agreement, rescission of a written contract by an oral agreement, waiver of a provision of a written contract, or oral independent collateral contracts.” Thus, the section does not prohibit the four other legal theories that have been applied by California courts to uphold oral change orders.
California Public Works
California public entity contracts are based on state and local procurement laws. The laws typically require approval for the changed scope of work before it is performed. For example, the Public Contract Code requires the county board of supervisors to approve change orders if the amount exceeds a certain threshold amount. However, the board may authorize the inclusion of a clause in the contract that allows for county employees to approve any work that is necessary for proper completion of the work.
Most public works projects include written change order provisions. The courts will uphold such provisions since they give the public entity timely notice of the change in scope so it can investigate the claim and then either avoid the additional cost or take steps to mitigate the additional expense.
1. A Public Agency’s Misrepresentation Maybe Allow A Contractor To Avoid The Written Change Order Clause
If the public entity was actively negligent in the design of the project or misrepresented the conditions that the contractor would encounter, the courts will not enforce the written change order requirement. Thus, if the contractor can establish that the public agency knowingly and positively misrepresented the site condition such clauses can be avoided. Generally, there is an implied warranty that plans and specifications are complete. If a showing can be made that the plans and specifications were inaccurate and that the public agency provided statements, although unintentional, that mislead the contractor, a contractor can recover the value of the extra work.
2. Reliance On The Statements Of A Public Official May Not Allow A Contractor To Avoid The Written Change Order Provision
While California courts will allow a contractor to avoid a written change order clause if a private owner promises to pay for the additional works, they will not permit a public works contractor to rely on such unauthorized statements to avoid the provision. However, if the contract vests a certain official or the project architect or engineer with the authority to approve the oral change order the courts will enforce the oral change order.
3. If An Unauthorized Public Official Orally Orders The Work, Proceed Under Written Protest
As previously stated, most public works contracts authorize certain public officials to approve change orders so that any additional work that is necessary for proper completion of the work is performed. If an unauthorized public official demands that the change order proceed, the contractor should give prompt notice that such work will be performed under protest. If the contract has a clause that sets forth the method of notifying the public agency of such a change order, those requirements should be followed. If the contractor provides timely written notice that it is proceeding under protest, the courts may not enforce the requirement for a written change order.
Construction contracts typically include a requirement that change orders be in writing. If such a provision exists, a prudent contractor will insist that all change orders be in writing. If the owner, or the prime contractor if the agreement is between a general contractor and a subcontractor, chooses to disregard the requirement of a written change order, confirm the instructions in writing. The written confirmation should be provided to the other party and the architect, if any.
If the contract requires that a specific individual or official approve the change order, a wise contractor should not rely on a lower echelon official oral waiver of a written change order. If you are involved in a public work project where an unauthorized individual is demanding that the additional work be performed, the contractor should give written notice that it is proceeding under protest.
Under certain circumstances you may be able to avoid the requirement for a written change order, but you should not rely on the aforementioned legal theories to avoid the harsh results of failing to comply with the requirement. If confronted with an owner’s promises that it will pay for the change order reduce those instructions to writing. Your field personnel should also be instructed to reduce any oral agreements that they reach in the field with the owner’s field representative and immediately provide a copy to the home office so that it may confirm the change with the owner.
This article, ©2000, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for 20 years. Mr. Last also holds a California A & B contractors license. He can be contacted at 650-425-7679. Other construction law articles that have been written by Mr. Last can be found on his website lhfconstructlaw.com. This bulletin is published periodically to provide general information about current legal issues. If you have a specific legal question or need legal advice, you should contact an attorney.