As most readers know, typical change order clauses in construction contracts contain numerous procedural requirements that contractors must follow to obtain cost and schedule relief.
These requirements often include giving owners written notices of potential claims and supporting costs and schedule information within specific periods. Many clauses also provide that if contractors fail to meet these requirements, their rights to change orders will be deemed waived.
Further reading:
- Emails can define the legal standard of care, leaving design-builders at risk
- What are contractors’ legal options when public agencies claim immunity?
- For design professionals, it’s critical that contracts define ‘consequential damages’
Unfortunately, many contractors do not strictly comply with change order requirements, which inevitably leads to a dispute over whether they have lost their claim rights. The answer is complex.
Contractors working with the federal government have leeway. They can argue that the federal government was not prejudiced by their failure to strictly comply, and it is incumbent upon the government to show that it was prejudiced.
Case law in many states mirrors the federal view of looking at whether the owner was prejudiced. But some states have case law that strongly upholds the sanctity of the contract, requiring parties to live up to their commitments, regardless of whether the owner has been prejudiced. This often means that contractors in these jurisdictions lose their claim rights when they are late with notices or fail to provide appropriate backup information to support their change order requests.
Does this mean that a contractor in a “strict compliance” state is out of luck if it does not comply with the contract? Not always. Courts in most states consider the conduct of the parties in administering the contract to assess whether it would be appropriate to strictly enforce provisions in light of that conduct. A recent decision from the Supreme Court of New Hampshire, RJH Builders LLC v. Robert Thistle & a., provides an excellent example of this principle.
The case
In September 2018, Robert and Priscilla Thistle entered into a fixed-price construction contract with RJH Builders for the construction of their custom home. The contract price was $510,000, and the work was to follow plans and specifications dated August and September 2018. The contract’s change order clause provided, among other things, that any changes to the work had to be agreed upon in writing and signed by both parties and that RJH would be paid for any additional costs before commencement of the changed work.
After signing the contract and shortly after construction began, Robert Thistle asked RJH owner Robert Harrison via text message how much it would cost to finish the home’s bonus room, which the specifications described as being an unfinished room. Thistle told Harrison that he would pay him directly to finish the bonus room rather than involving the bank that had provided a construction loan.
RJH did the work, as well as other extra work requested by the Thistles, including adding windows and a dormer above the garage. The Thistles paid for this work in August 2019, even though there were no written change orders for any of this work.
After making payment for the above-referenced extra work, the Thistles requested other modifications and additions, including custom-built curved stairs supported by a post; a sunroom beam; custom closets and shelving; extra crown molding; several doors, balusters, and rail parts; custom kitchen paint; exterior decking; and other items. RJH performed the work and, in November 2019, issued an invoice for charges related to these and other items.
The Thistles refused to pay this invoice, claiming they had received no prior notice from RJH that these items would incur additional costs, disputing the price of certain items, and contending that some of the items were included under the contract. They also did not pay RJH for base construction work, even though the bank inspected and approved this work. This prompted RJH to stop work on the project and eventually sue the Thistles.
A three-day trial took place in May 2024. One of the Thistles’ main defenses was that RJH had failed to comply with the change order process and was not entitled to be paid for the November 2019 invoice. They also argued that RJH breached the contract by stopping work.
Citing the Thistles’ informal requests to make changes during construction of the home and RJH’s subsequent issuance of invoices after completing the requested work, the trial court found in favor of RJH, concluding that the conduct of both parties demonstrated that they waived the requirements of the contract’s change order clause. The Thistles appealed to the New Hampshire Supreme Court.
The ruling
Among the appeal issues raised by the Thistles was the argument that the trial court erred in finding a waiver because the contract had provisions which stated that: A) no provision could be amended or waived except in a written document signed by the parties; and B) the failure of either party to insist upon strict compliance with any provision of the contract could not constitute a waiver of that provision. The state supreme court disagreed, generally finding that the trial court’s decision was grounded in the overall conduct of the parties, and not a “mere failure to insist upon strict compliance with the provision.”
The higher court concluded that the change order provision imposed duties on each party for the benefit of the other. This required that RJH give written notice to the Thistles of any cost changes so they would not be surprised by overruns. It also required that the Thistles pay in full beforehand for any work performed by RJH in accordance with a change order.
The evidence demonstrated that during construction, the Thistles requested multiple changes that both parties should have known were to be covered by the change order provision. Yet each party chose to forgo the change order process repeatedly throughout construction. The Thistles made changes but never requested written descriptions or disclosures of the associated costs, nor did they inquire whether delays would result. RJH never requested that the Thistles pay for the extra work before it began.
The court was influenced by the fact that in August 2019, several months into construction, RJH provided the Thistles with an invoice for extra work completed at the Thistles’ request and the Thistles paid it. It was also influenced by the fact that neither party invoked the change order provision after that payment and the November 2019 invoice despite evidence that RJH and its subcontractors continued or began work during this time period that the Thistles requested and that was beyond the scope of the contract.
In summary, the upper court found that the evidence supported the trial court’s finding of a waiver. Likewise, the court concluded that the trial court had not abused its discretion in awarding RJH the costs it claimed for labor and materials in performing the extra work under the November 2019 invoice as well as the base contract work that was approved by the bank.
Takeaways
While we do not ordinarily discuss homeowner cases in our columns, we found this one to be directly on point with the type of issues that arise on larger projects. It provides a cautionary tale about the dangers of informal modifications in construction projects and demonstrates that even the strongest contractual protections can be waived through mutual conduct. Based on the facts of the decision, it is hard to see how a court could find the Thistles’ behavior to be reasonable or that RJH should suffer the financial consequences of performing additional work requested by them for nothing.
Does this mean that every contractor can overcome a failure to abide by the strict requirements of a change order provision by arguing course of dealing or conduct? Absolutely not. Contractors almost always argue this point in strict compliance jurisdictions, and they frequently lose. This case had an owner who openly ignored the change order clause, perhaps to overcome issues with its bank.
So what is the best way to avoid losing one’s change order rights? The answer is straightforward: Comply with the contract requirements in the first place.
