One of the many contract clauses we see on a daily basis in the construction industry is what some might call the “change order” provision. That provision requires a contractor, before the contractor performs work outside its original scope, to seek prior written approval from the owner.
These “change order” provisions are seen across the industry in many different forms of construction contracts. They are generally regarded as fair. On one hand, they limit the owner’s financial exposure on the project to its negotiated contract price. If the scope of the project expands, the owner should have an opportunity to provide input into the additional work, decide how expensive the work will be, and when the work will be completed. On the other hand, the clause provides an opportunity for the contractor to ensure he or she will be paid. By procuring the owner’s input before work is performed and—even more important—by obtaining the owner’s written promise to pay, the contractor can be confident that he or she will be compensated for their work. Because change order provisions are regarded as fair for both the owner and the contractor, they are routinely enforced here in Ohio and across the country. With some exceptions, both the owner and the contractor will be held to their contract.
However, there is sometimes a bit more to getting paid for change order work than just obtaining the owner’s prior written approval. To see why, consider the following hypothetical.
Assume a contractor is asked to perform additional work outside its original scope. In keeping with the “change order” provision in its construction contract, the contractor seeks the owner’s prior approval of the work and obtains a signed written approval from the owner. The contractor then performs the additional work and does a satisfactory job; the owner is pleased with the work, and accepts the final product.
Now, assume that after completing the work, the contractor sends an invoice to the owner seeking payment for the reasonable cost of the work performed. The owner receives that invoice, but refuses to pay. If the contractor seeks to enforce the owner’s promise to pay in court, this should be an easy case, right? Nine times out of ten, the contractor should prevail.
Not so fast.
On March 11, 2015, the Court of Claims of Ohio ruled against a contractor in that same situation. The court held that the contractor could not enforce an owner’s promise to pay even though the contractor produced a signed, written document—entitled a “Memorandum of Understanding” (MOU)—in which the owner promised to pay “reasonable compensation” to the contractor in exchange for work outside the contractor’s original scope. Even with that MOU in hand, however, the Court of Claims of Ohio was not convinced that the owner should be forced to pay the contractor. Rather than require the owner to pay $136,000—the uncontested amount owed for the additional work—the Court of Claims dismissed the contractor’s claim.
So what went wrong?
The decision is based on a fundamental principle of contract law called a “conditional promise.” A promise is “conditional” when the promise requires another event—a “condition precedent“—to occur before the promise becomes enforceable. Unless and until the “condition precedent” occurs, the promise is not yet enforceable.
The Court of Claims of Ohio reasoned that the owner’s promise to pay under the Memorandum of Understanding was a “conditional promise” with at least two “conditions precedent.” The contractor could not recover without proof that not only (1) the owner authorized the additional work in writing, but also (2) that the Treasury of the School District approved the work with a formal certification. Without satisfying both of those “conditions precedent,” the owner’s promise to pay was simply not enforceable.
Most experienced contractors are, by now, well aware of “change order” provisions that require prior written approval before additional work is performed. Disputes over these provisions are commonplace in the industry; we see them often. But what may be less universally known is that even where prior written approval is obtained from the owner, that approval in some cases might not be enough. If the construction contract requires another event to occur before the contractor can enforce the owner’s promise to pay—i.e. another “condition precedent”—ultimately, the contractor could be prevented from recovering.
Contractors must be diligent (sometimes to an extreme) when pursuing change order related work. Knowing the “conditions precedent” to payment from the owner is essential. Don’t fall into this same trap by paying careful attention to the owner’s promise to pay in the construction contract, deciphering any “conditions precedent” that may exist, and by doing your due diligence to see to it that all conditions precedent are met. Being diligent can often be the difference between getting paid for your change order work and being out thousands of dollars.
The Court of Claims of Ohio opinion can be found here.
