ConstructionPro Week, Volume: 4 - Issue: 26 - 07/10/2015

Noncomplying Change Orders

By Stephen Hess

 

2500 years ago, Greek philosopher Heraclitus of Ephesus said “You could not step twice into the same river.” His point was simple: a river changes constantly and your second step is necessarily into a somewhat different river.  The same might well be said of construction projects: although the change is not as continuous as a river’s, construction projects never get executed exactly as planned. 

 

The changes that are visited on construction projects – planned or otherwise – alter the scope, cost, and/or time of construction and necessitate some reallocation of the parties’ rights and responsibilities.  Contracts include change order provisions to set out an orderly mechanism by which this reallocation is to be implemented. A typical pattern is that a change is identified (or even dictated), the general contractor proposes new price and perhaps schedule terms, and the parties either (a) agree, resulting in a formal change order, or (b) disagree, resulting in the continuation of work with postponement of determination of the changed terms under specific claim provisions. 

 

Every day, however, thousands of changes are made in construction projects that are accomplished without strict attention to the contractual change order procedures. By the end of the job, the contractor has experienced substantial changes for which it believes it is entitled to significant price or schedule concessions, but its position is not evidenced by written change orders or even by contemporaneous discussions about the possible impact of the changes. This is true of the contractor-subcontractor relationship as well, where a subcontractor appears at the end of the job with a sheaf of papers and a demand for money without ever having respected the written change order process.  

 

How does the law treat such change orders that do not comply with the written change order requirements of the construction contract? If your intuition is that an owner should not be forced to pay for changes or to grant additional time in the absence of a contractually blessed change order (or the timely assertion of a claim where the change order is disputed), you may be right. Some courts adopt bright-line rules to the effect that a change order clause is perfectly enforceable as written, and a contractor’s (or subcontractor’s) failure to comply with the process to which the parties agreed in their contract serves to bar any claim.

 

Of course, if this bright-line rule were all there were to the story, that would be the end of this article and eliminate a pretty big chunk of the practice of many construction attorneys and claims professionals. So what is the rest of the story?

 

There are many circumstances in which courts feel that it would be unjust to enforce blind denial of additional time or compensation for changes because of noncompliance with change provisions. In particular, many courts feel that denial of contract adjustments is unfair where the party to be protected by the change order notice provisions – the owner or contractor – is not “prejudiced” by the noncomplying change order request. In words that are commonly invoked by courts that feel that ultimate justice requires some inquiry into the equities of a noncomplying change order, blind enforcement of change order provisions “exalts form over substance.” 

 

That does not mean, however, that litigation of noncomplying change orders is a free-for-all without predictable rules or standards apart from what one jurist may feel is “just.” Rather, even those courts that are not inclined to enforce change order provisions strictly still invoke definable and predictable rules to resolve disputes over noncomplying change orders.

 

Some of those rules are bound up in the notion of “prejudice” and what kinds of prejudice to an owner or contractor may serve to bar relief for a noncomplying change order. Other rules are simply adaptations of general contract principles that give courts some room to exercise their judicial discretion. Indeed, even courts that generally prefer a strict interpretation of change order provisions have found ways of granting relief under such doctrines as “substantial compliance,” or through the invocation of principles of waiver or estoppel.

 

What this all means for diligent construction parties is that they cannot simply negotiate a detailed change order clause and then rest comfortably on the assumption that they will not be liable for changes in the absence of a proper change order. That is a good start, of course, but there are additional clauses that can add further protection, and proper contract administration can enhance enforceability of a change order clause even in jurisdictions that apply a “strict” enforcement standard.

 

Editor's Note: All of these topics will be discussed in more detail in Noncomplying Change Orders on July 21, 2015. The webinar will begin by discussing the difference between the “strict” and “prejudice” approaches to change orders, and will address what constitutes “prejudice” and how it can be proven. The program will then walk through some of the approaches that courts adopt to avoid the potentially harsh consequences of the ”strict” enforcement of change order clause, and will conclude with a description of how parties can enhance the enforceability of change order clauses both through additional contract terms and through appropriate contract management practices. Click here for more information or to register.

 

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