Contractors & the Law: Change order provisions
By Erin CuttsConstruction Law
Understanding the change and amendment provisions of contracts to ensure payment.
Many construction contracts contain change and amendment provisions governing the circumstances under which change orders will be authorized. More often than not, these change provisions require that payment for work performed outside of the base scope of the contract will only be authorized when both parties to the contract agree and have confirmed that agreement in writing.
In some cases, the change or amendment provisions go a step further and require that only certain individuals or types of personnel within an organization are authorized to approve and sign off on changes and contract amendments.
Such was the case in Whissell Contracting Ltd. v Calgary (City), 2017 ABQB 204 (CanLII), an Alberta Court of Appeal decision considering the circumstances surrounding the proper authorization of changes and amendments in the context of a summary judgment application.
The case involved a subcontract that was entered into between a contractor and its subcontractor on a unit rate basis, with the subcontractor’s overhead and profit being included in the unit rates. The subcontractor alleged that shortly after commencing the work it discovered that the scope of work and site conditions varied significantly from what was expected at the time its bid was submitted. As such, the subcontractor argued that the unit rates included in the original contract were no longer applicable.
At the beginning of the project, the subcontractor submitted field verification sheets to the contractor summarizing the labour, equipment and materials used in respect of the work; however, in the fall of 2010, the subcontractor began issuing force account summaries to the contractor, which included language suggesting that the subcontractor would be paid force account rates, which are typically significantly higher than agreed unit rates, for the work performed in the summaries and that such force accounts were over and above the unit rate values contemplated in the original contract.
These force account summaries were executed by the contractor’s field staff who, according to the contractor, believed that they were executing the summaries solely to verify that the work had been completed.
The contractor admitted that the force account summaries which purported to amend the payment terms had been executed by its field staff, however, it argued that the subcontract required that only certain personnel were entitled to authorize such amendments and that those amendments had not been properly authorized in accordance with the terms of the subcontract.
Furthermore, the contractor argued that as soon as it became aware of the language purporting to amend the payment terms of the subcontract in the force account summaries, it disputed the validity of the subcontractor’s attempt to amend the payment terms. The subcontractor admitted that the notations on the force account summaries it was relying upon to support the purported amendment had not been negotiated or otherwise discussed with the contractor’s personnel.
Ultimately, the court concluded that the contractual basis upon which the subcontractor was to be paid was not sufficiently clear to award summary judgment. In doing so, the court commented, “There was an issue as to whether or not [the subcontractor] had any reasonable expectation that the notations attached to the force account sheets would operate under these circumstances to amend the written contract.”
In particular, the court appeared to be concerned that the notations on the force account summaries purporting to amend the payment terms of the subcontract had not been negotiated or specifically brought to the attention of the contractor and, in particular, had not been discussed with the personnel that had been involved in negotiating the original subcontract.
Fundamentally, this case emphasizes the importance of understanding the provisions in a contract that govern from whom amendments or changes are to be requested and the steps that must be taken in order to ensure that any amendments or changes are contractually authorized prior to the work being carried out.
As the court was considering a narrow issue for the purposes of a summary determination, it did not consider the impact that might be suffered by the subcontractor in the event that the purported amendments to the payment terms of the subcontract were, in fact, invalid.
Of course, depending on the circumstances of the contract at issue, it is always a possibility that a contractor who carries out change work without proper authorization risks being denied payment for the unauthorized work.
Accordingly, it is important that contractors understand the change and amendment provisions of their contracts and follow the required processes under those provisions prior to undertaking any work outside of the base scope of their contract.
Erin Cutts is a partner in the construction group at Borden Ladner Gervais LLP. This article provides an overview and is not intended to be exhaustive of the subject matter contained therein. Although care has been taken to ensure accuracy, this article should not be relied upon as legal advice.