Court Of Appeal Reminds Industry: Change Orders May Be Approved By Conduct Or Acquiescence

This article first appeared in Build Manitoba, a publication of the Winnipeg Construction Association.

The Manitoba Court of Appeal has issued an important reminder for the construction industry.

Change orders (extra work or modifications to a contract) may be deemed approved, even where strict contractual procedures for approval are not followed.

For example, although a contract may explicitly require formal, signed approval by an owner for all change orders, the owner may still be held responsible for paying despite not personally approving the work. In such circumstances, change orders may be deemed approved if the work was approved or directed by a consultant or contractor who was delegated significant authority, and/or, if the owner remained silent despite awareness that the change order work was proceeding.

Court of Appeal ruling

The Court of Appeal recently affirmed a lower court decision finding a condominium corporation (the "Owner") liable for non-payment of various change orders totaling nearly $1.5 million. This was for an envelope remediation project on a large condominium complex.¹ The denial of the Owner's claim for set-off was also upheld.

The Owner had ceased payment on 30 or more change orders following discovery of alleged defects in the work. The Sub-Contractor brought actions against the Owner and Contractor for, among other things, breach of contract, unjust enrichment and quantum meruit (a legal principle that allows claimants to recover a reasonable amount for services provided). The Contractor brought a similar claim against the Owner.

The bulk of the work under the change orders at issue had been "approved" (i.e. certified) by the Owner's engineering consultant (the "Consultant") through the issuance of various certificates of payments. Work under certain other change orders had been merely directed by the Consultant with certification pending.

Change orders under this particular Prime Contract required specific approval and signatures by the Owner. While the Consultant held various express authorities under the Prime Contract, including authority to act on behalf of the Owner, the authority to approve change orders was specifically reserved by the Owner.

The Court of Appeal affirmed the findings and determinations of the lower court with respect to approval of the change orders and entitlement to payment. Notwithstanding, the Prime Contract's requirement for express approval and a signature of the owner as a pre-condition to change order approval, the circumstances of the case weighed in favour of actual and/or constructive approval of the change orders.

First, the Court of Appeal noted various relevant express authorities of the Consultant under the Prime Contract, including the authority to: (1) administer the contract; (2) interpret the requirements of the contract; (3) make findings regarding claims of a change in contract price; (4) reject non-conforming work; (5) provide supplemental instructions to the Contractor; (6) prepare change orders and change directives; and (7) certify payments for the project.

The Prime Contract further required prompt payment upon certification of the work by the Consultant and contained a dispute resolution mechanism available to all parties.

The cumulative effect of these various express authorities of the Consultant was sufficient, in the view of the Court, to find that the Consultant had authority to bind the Owner through the Consultant's approval of change orders.

The Court of Appeal also upheld the lower court's determination that the Owner had waived the strict contractual provisions requiring owner approval and signatures for all change orders. The Owner had delegated significant authority to the Consultant (who requested or directed work, by change order and otherwise). The Owner knew the Contractor and/or Sub-Contractor was doing extra work or supplying extra materials. And, ultimately, the Owner took the benefit of such work without availing itself of the dispute resolution provisions to challenge the change orders and other work. As such, the Owner had approved the change orders by conduct or otherwise acquiesced to the work and was liable for payment.

The Owner's expert evidence and its claim for set-off were also rejected. The conclusions of the Owner's experts on the work were based on the scope of work of the original contract, and did not consider revised scopes of work and shop drawings. Further, the Contractor and Sub-Contractor had not been provided with sufficient opportunity to repair deficiencies as entitled under their respective contracts.

This case and others serve as a reminder of the following:

1. Owners and contractors should carefully consider the cumulative effect of various authorities delegated to consultants and contractors, to confirm that these authorities are not duplicative of, or otherwise capable of, overwhelming the authority expressly reserved to the owner/contractor under an agreement;
2. Owners and contractors should insist on strict and repeated compliance with contractual change order provisions if they intend to rely on them; and
3. An owner or contractor should promptly challenge any disputed work under contractual dispute resolution provisions to avoid allegations that such work was approved by conduct or was acquiesced to.

In the end, the Court ruled that the Owner had effectively approved the extra work, even without a formal signature. As a result, the Owner had to pay nearly $1.5 million.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.