CHANGE ORDERS – The Good, The Bad, and The Ugly - Part 2 of 2

So last time, we answered some of the most common questions we hear regarding the change order process. This week, I want to concentrate on various cases that have come down in Texas that relate to construction change orders and specifically discuss how these cases affect you the contractor.

While obtaining written change orders prior to performing change order work is always the best practice, should a contractor perform change orders without a written change order, there is still an opportunity to collect on such change orders in some circumstances.  In Buxani v. Nussbaum, the owner and contractor entered into a construction contract which stated, “Any alteration or deviation from above specifications involving extra costs will be executed only upon written change orders, and will become an extra charge over and above the estimate.”^[1]  The evidence in such case showed that the owner of the project ordered the extra work orally and that the owner accepted such extra work.^[2]  When the contractor sued the owners for the unpaid amounts, the owners counter-sued for breach of the original contract requiring change orders to be in writing.^[3]  Does this factual scenario sound familiar?  I know you’ve all been there.  It might make you feel better to know that the trial court found that an oral contract existed for the goods and services which were not contemplated by the written contract.  The owner argued that mutual assent (a requirement for a contract, whether oral or written) could not be implied when an express contract covering the subject matter already existed.^[4]  In response the court stated, “The Buxanis, however, fail to take into account the differences between their written contracts and the oral agreement.  The extra items and services were above and beyond what was included in their written contract with Nussbaum.”^[5]  The appellate court held that the parties entered into an additional oral agreement that did not breach the original contract.^[6]

[1]   Buxani v. Nussbaum, 940 S.W.2d 350, 351 (Tex.App. San Antonio 1997).
[2] Id.
[3] Id.
[4] Id. at 352.
[5] Id. at 353.
[6] Id.

Another consideration in attempting to enforce a change order which was not executed in writing can be whether the owner later ratifies an oral agreement regarding a change order.  “A ratification rests upon a person’s assent to a prior act or an act of another.”^[1]  Such ratification can be express or it can be implied from one’s conduct.^[2]  “Ratification of a contract occurs when a party recognizes the validity of the contract by acting under the contract, performing under the contract, or affirmatively acknowledging the contract.”^[3] A party cannot withdraw the ratification and avoid the agreement, once the agreement has been ratified.^[4] Also, when a party’s actions are inconstant with an intent to avoid an agreement, such actions have the effect of ratifying the agreement.^[5]  The Court used this reasoning to hold that an owner could ratify an oral request, acceptance and promise to pay for such services, by later confirming its promise to pay or by partially paying for such services. When faced with this situation, it is advisable that Contractors who are owed money by an Owner, obtain verification, in writing, in the form of a promissory note so that the evidence does not come down solely to a he said she said situation.

[1] Bocanegra v. Aetna Life Insurance Co., 605 S.W.2d 848, 851 (Tex.1980).
[2] Prudential Ins. Co. of America v. Italian Cowboy Partners, Ltd., 270 S.W.3d 192, (Tex. App.–Eastland 2008, pet. filed).
[3] Verizon Corporate Services Corp. v. Kan-Pak Systems, Inc., 290 S.W.3d 899, 906 (Tex. App.–Amarillo 2009, no pet.).
[4] Prudential, 270 S.W.3d at 206.
[5] Id.

Another consideration in attempting to collect on a change order which was not approved in writing prior to the performance of such change order is whether a contractual provision requiring written change orders was waived by the owner. “Waiver, the voluntary relinquishment of a known right, is sometimes spoken of as intentional conduct inconsistent with assertion of a known right.”^[1]  “Silence or inaction, for so long a period of time as to show an intention to yield the known right, is enough to prove waiver.”^[2]

In Travis-Williamson County Water Control and Imp. Dist. v. Page, the construction contract at issue specified that no claim for extra work would be allowed unless ordered in writing.^[3]  The evidence in the case showed that the owner of the project ordered the extra work orally and that the owner accepted such extra work.^[4] The court held that such evidence constituted waiver as a matter of law.^[5] By orally requesting, accepting and promising to pay for goods and services from a contractor, which were not contemplated by the written contract on the project, without requiring that such additional agreements be reduced to writing, an owner can be considered to have engaged in voluntary and intentional actions which were inconsistent with an assertion of a contractual provision that requires written change orders.

Courts throughout Texas have held that a change order provisions in construction contracts can be waived: Generally, a provision in a construction contract providing that any alterations or deviations must be executed in writing is binding, and there can be no recovery unless the writing requirement is met. State v. Martin Bros., 138 Tex. 505, 160 S.W.2d 58 (1942); D. H. Overmyer Co. v. Harbison, 453 S.W.2d 368 (Tex.Civ.App. El Paso 1970, no writ); Stave v. F & C Engineering Company, 438 S.W.2d 647 (Tex.Civ.App. Houston (14th Dist.) 1969, writ ref’d n.r.e.). However, such a provision can be waived by the actions and conduct of the parties. Mood v. Methodist Episcopal Church South, of Cisco, 296 S.W. 506 (Tex.Comm’n App.1927, holding approved); Travis-Williamson County Water C. & I. Dist. v. Page, 358 S.W.2d 158 (Tex.Civ.App. Austin 1962), rev’d in part on other grounds, 367 S.W.2d 307 (Tex.Sup.1963); Housing Authority of City of Dallas v. Hubbell, 325 S.W.2d 880 (Tex.Civ.App. Dallas 1959, writ ref’d n.r.e.).^[6] The court went on to hold that an award of costs of extra goods and services was warranted under the theory that the written change order provision had been waived and that recovery was proper under the theory of quantum meruit.^[7]

[1] Bocanegra, 605 S.W. 2d at 851.
[2] Rodriguez v. Classical Custom Homes, Inc., 176 S.W.3d 928, 932 (Tex.App.-Dallas 2005, no pet.).
[3]   Travis-Williamson County Water C. & I. Dist. v. Page, 358 S.W.2d 158, 168 (Tex.Civ.App. Austin 1962), rev’d in part on other grounds, 367 S.W.2d 307 (Tex.Sup.1963).
[4] Id.
[5] Id.
[6] Texas Constr. Assoc., Inc. v. Balli, 558 S.W.2d 513, 521 (Tex. Civ. App. — Corpus Christi 1977, no writ).
[7] Id.

Even though a contractor may be able to collect on change orders which were not executed in writing prior to the performance of such change orders, there are some things that contractors should consider in such circumstances.  When a contractor has made a change to their performance without a prior written change order, the contractor should invoice such change as soon as practical. A contractor should not wait until the end of a project to request payment for a change order. Moreover, when a change order is performed without a change order, it is also important for the contractor to carefully examine any lien releases which it executes pursuant to a payment on the project. If the contractor is asked to sign a lien release which states that the contractor has been fully paid up to a particular date, the contractor must not sign such lien release unless the payments include all change orders performed as of the date indicated in the release, as well a contractual work, or the lien release specifically excludes change orders.

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