January 9, 2018

Case study: 

Where a written change order is required but not obtained  


BY ROBERT KENNALEY AND JOSH WINTER

Jessco Structural was a concrete forming subcontractor to Gottardo Construction on two building projects. Jessco performed extra work on the projects at the request of Gottardo’s site superintendent, but refused to pay for the extra work because the contract between the parties provided that no changes would be made without a written change order. The contract also provided that “no extras will be considered for any reason whatsoever unless negotiated with [Gottardo] before the work is done. Tickets for labour, equipment, and materials signed by [Gottardo’s] site superintendent are to confirm that the work was done and/or materials were supplied, and is not an agreement that the items signed for are additional to the contract or acceptance of labour rates or material costs.”

On a motion, the motions judge found the Gottardo site superintendent had requested the extra work outside the contract to be performed. The judge determined, however, that as the contract provided that no changes could be made without a written change order, and as there was no written order, “Jessco did not have the contractual obligation to do the work that Gottardo requested.”  As regards the contractual requirement that “no extras will be considered for any reason whatsoever unless negotiated with Gottardo before the work is done,” the motions judge acknowledged the negotiations did not have to be in writing, but held the extras were not “on account of any negotiations between Jessco and Gottardo; rather they were merely requests by Gottardo’s site superintendent.” The motions judge added that Gottardo’s site superintendent signed time sheets “merely confirmed that the work was done and/or materials supplied; they do not constitute an agreement that the items signed for are additional to the contract or acceptance of labour rates or material costs.”

The motions judge did acknowledge that “parties to an agreement may vary the terms of a contract by their conduct, such that they cannot rely on the terms of the contract that require written authorization before any additional work is undertaken.” He concluded, however, that Gottardo’s conduct did not “constitute a waiver of the contract or its acquiescence to Jessco’s non-compliance with it.”

CAN VERBAL REQUESTS BE CONSIDERED WAIVERS OF CONTRACT?
On appeal, Madame Justice Wilson disagreed with the motions judge. She held that “The motions judge did not have the benefit of the presentation of the established case law confirming that verbal requests for extra work outside the scope of the contract establishes waiver of the strict terms of the contract.” She (correctly, in our view) noted that “responsibility for payment of extras is often contentious in construction cases. The usual fight about payment of extras is whether or not the extra as claimed by a subcontractor was included in the contract or not.”  In that regard, she followed prior case law which provided that “the court will imply a promise to pay on a quantum meruit (or ‘actual value of the work’) basis where work is done at the request of the owner and for his benefit without a specific contract for payment.”

“Taken together,” Justice Wilson held, “the courts in Ontario have been clear that when additional construction work not contemplated by the contract is completed at the request of the owner, (or in this case the contractor) the party providing the additional work should be paid, as the party requesting the extra work would reasonably expect to pay for it. Requesting this extra work outside the contract is waiver by conduct.” Her Honour noted the “line of cases relevant to waiver by conduct for payment of extras outside the scope of the contract was not presented clearly by counsel to this court, or apparently to the motions judge at all.”

Justice Wilson found that, on the facts, there was a pattern of conduct by Gottardo waiving the strict terms of the written contract, by verbally requesting extra work in a pattern that went on for some 20 months. She held that it was not until the dispute arose between the parties on bigger issues that Gottardo refused to pay for the extras.  She essentially held that because the contractor’s site super had requested the work, and knew it was being performed, it had agreed to pay for it and had waived any right to object that the subtrade had not received a written change order in the form required by the contract. Makes sense, right? 

Unfortunately for the subtrade, Justice Wilson was only one judge on the Ontario Divisional Court panel which heard the appeal. Her two colleagues disagreed, and held that even though the site super had requested the work, and approved it, the contractor did not have to pay because the formal requirements of the contract had not been followed, and had not been waived.  

ALWAYS FOLLOW THE CONTRACT
There is a lesson to be learned here. You would be surprised how often as construction lawyers we are asked a question about a party’s entitlements in a certain situation and our first response has to be, “what does the contract say?” In our experience, many contractors and subcontractors believe the well-established principals of law will apply, and that what the contract says might not matter. Canadian courts, however, appear to be increasingly reluctant to relieve parties from the terms of the bargains they have made. However, contractors and subcontractors should always review and follow the requirements of their contracts if they believe they may need to ask for additional compensation. The same applies to requests for schedule extensions. While in some circumstances there may be arguments available that will assist you in the event you fail to follow the contract, these arguments may prove difficult to make and are at best uncertain. The easiest way to avoid the need to make such an argument is to follow the contract in the first place. This means having the contractual requirements close at hand and checking them whenever you believe you may need additional compensation or a schedule extension. Indeed, good risk management under a contract requires contractors and subcontractors to be thinking about the contract throughout the life of a project. 

Rob Kennaley and Josh Winter practice construction law in Toronto and Simcoe, Ont. They speak and write on construction law issues and can be reached for comment at 416-700-4142 or at rjk@kennaley.ca and jwinter@kennaley.ca. This material is for information purposes and is not intended to provide legal advice. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard. 

Landscape Trades, November 2017