By Eugene Polyak
Changes in the work are common on construction projects. But not all changes are handled in strict accordance with the contract’s changes clause. For contractors, it is essential to be paid for the extra work caused by changes. This can become a problem if the change has not been expressly authorized by the owner or the owner’s designated representative. Before doing extra work, contractors should make sure that the work has been properly authorized. This also does not always happen. Performing extra work without obtaining proper authorization is risky—it diminishes the likelihood of getting paid for the extra work. All, however, is not necessarily lost. This article demonstrates how the legal concepts of express, implied, and apparent authority can facilitate payment for changed work performed on a project.
The simplest way to be paid for changed work is to follow the written directions of someone expressly authorized to issue changes to the work. Ascertaining proper authorization starts with the contract. Every contract should set forth the names of the parties’ authorized representatives and should detail the extent of their authority. Ascertaining express authority is particularly important in public contracting where contractors are held to very strict standards by the courts in order to prevent misuse of public funds.
Consider the following scenario. Contractor begins work clearing the site and discovers that actual conditions do not match the site plan. The contractor calculates the discrepancy will require clearing and grading an additional acre of ground. The contractor needs a change order.
The contract states:
The owner shall designate in writing a representative who shall have express authority to bind the owner with respect to all matters requiring the owner’s approval or authorization.
The contractor checks its file and determines the owner has never designated a representative. The contractor, who has been dealing with the owner’s architect, tells the architect there is an issue with the plans and the extra clearing and grading is going to cost more money. The architect does not agree that the plans are erroneous, but tells the contractor to do the work and states that payment will be taken care of at the end of the job. The contractor bills the owner for the changed work at the end of the job. The owner refuses to pay on the grounds that the architect did not have authority to order changes to the work.
The above hypothetical demonstrates the importance of verifying that changed work has been properly authorized. Unless the contract delegates express authority for the architect to bind the owner, the contractor should obtain the owner’s written authorization to proceed with extra work.
Having failed to obtain express authorization, the contractor may still assert implied authority; apparent authority; or ratification or estoppel to demonstrate that the work was in fact authorized and should be paid for. The bad news: the contractor will probably need to hire a lawyer to make these arguments.
Showing that the architect had implied authority to bind the owner is one avenue for recovery in the scenario presented above. Implied authority is actual authority inferred from circumstances. For example, if the owner, as principal, has the architect perform acts on behalf of the owner, this may demonstrate the owner’s consent to have the architect act as the owner’s agent. Implied authority can be inferred when the actions of the architect are incidental to the authorized conduct and further the owner’s interests. Generally, an agent is authorized to do anything which is reasonably incidental to the work specifically directed or which is usually done in connection with such work. To demonstrate implied authority in the above scenario, the contractor would need to show that it was entitled to draw an inference from the particular relationship and conduct between the owner and architect. For example, the contractor might show that the architect had previously approved change orders with the owner’s knowledge and consent.
Another way to establish that the work was properly authorized is to prove that the architect had apparent authority to bind the owner. Apparent authority exists when a principal, here the owner, holds another party, the architect, out as having authority to bind the principal. If the owner held out the architect as its agent with authority to approve changes to the work, apparent authority can be established. Apparent authority will not help, however, if the above fact pattern involved a public contract. This is because public bodies are not bound by the apparent authority of their agents. In public contracts, proper authorization to execute change orders must be based on express authority.
Other theories facilitating recovery for extra work
In addition to express, implied, and apparent authority, principles of ratification and estoppel can be used to recover the cost of changed work. Ratification may occur when the owner expressly approves the contractor’s unauthorized acts. Ratification may also occur when the owner has full knowledge of the architect’s acts and fails to disavow the architect’s authority to perform those acts. Estoppel can be found when the contractor has changed his position in detrimental reliance on the owner’s actions or inactions, in which case the owner may be prevented from taking a contrary position after the fact. Under the scenario presented above, suppose the contractor notified the owner in advance that it was proceeding with the changed work based on the architect’s instructions and the owner allowed the contractor to proceed or simply did not respond. Under such facts, the owner may be estopped from denying that it authorized the contractor to proceed.
Failure to obtain proper authorization before performing changed work is risky business. The safest way for a contractor to get paid is to not perform extra work without a properly authorized change order. There will be times, however, when the overall circumstances dictate that the work must proceed. In such cases, the contractor may need to rely on the doctrines discussed above to get paid for the changed work.
This article was published in the July 31, Smith Currie & Hancock newsletter Common Sense Contract Law.
Eugene Polyak is an Associate in the Fort Lauderdale office of Smith, Currie & Hancock LLP. Polyak focuses his practice on complex commercial litigation. He practices in all areas of civil litigation in state and federal courts with a focus on the construction and real estate investment industry. He can be reached at [email protected] or 954.769.5335.