Change Orders

Engineers, acting as consultants under construction contracts between an owner and contractor, will often be asked to deal with contractors’ claims for compensation for extra work or extensions to the schedule. The claims are due to changes to the scope of work or unforeseen work conditions.

Contractors’ claims can be further complicated when notice of the claim has not been given in the manner, or within the time limits, contemplated by the change order provisions of the prime contract. Because the consultant’s decision on these matters can have an impact on the parties’ contractual rights, the consultant must make the decision reasonably and without bias. But consultants have seen an increasing number of actions against them for allegedly having acted with unreasonable conduct in their role under these agreements. The consultant must, therefore, approach these issues in a manner consistent with the legal parameters established in previous cases.

The way in which the courts deal with contractors’ change order requests that have not been made in strict compliance with the change order provisions of their contracts has become uncertain. Until recently in Alberta a failure to satisfy change order notice requirements was seen as fatal to a contractor’s claim. Such was the finding in 2000 of the Court of Alberta in ANC Developments Inc. v. Dilcon Constructors Ltd.

In the ANC decision, the contractor for the construction of a newsprint mill in northern Alberta had made claims for additional compensation under four contracts. The project had suffered delays and grew in scope. After completion, the contractor wrote to the owner describing claims it had for losses arising from the increased scope and at trial was awarded damages in excess of $10 million. The owner appealed the ruling, including the award to the contractor for loss of productivity, which amounted to approximately $3.8 million.

Common provisions for changes to the work arising from delay were included in the general contract. It specified that if anything occurred which the contractor thought may cause delays, the contractor was obliged to give notice in writing to the owner within seven days of the occurrence. Claims for compensation for such delays had to be submitted in writing no later than six months after the commencement of the delay.

The contractor had raised concerns about delays it was experiencing in site meetings during the course of the work, and its concerns were recorded in meeting minutes. The contractor had also provided written notice of its claim for delay in August 1990. The work had concluded in January 1990.

The Court of Appeal held that the written notice requirements of the contract served several purposes, including the following:

* Although the owner might be expected to know, through its consultant, of delays raised at site meetings, delays caused by the consultant itself might be hidden from the owner in the absence of a written notice;

* Without a written notice, the owner may not be certain if any delay would adversely affect the contractor;

* Written notice crystallized the position of the parties and enabled the parties to deal with the problem immediately, rather than arguing about it later; and

* Written notice enabled the owner to take action to reduce the impact of a delay.

The court found that the contractor did give notice of delay in December 1989, when it first occurred. However, it was not until August 1990, seven months after contract completion, that a claim for costs due to the delay was made. (The court also questioned whether this notice was sufficient to constitute a claim under the contract, as it dealt primarily with other dispute issues.) The contractor had not met the six month deadline for submitting a claim in writing. Notice at site meetings, recorded in the meeting minutes, was not deemed to be sufficient notice of the claim. As such, the court enforced the strict terms of the contract and denied the contractor’s $3.8 million claim for loss of production.

On the basis of the ANC case, therefore, it seems that if the contractor fails to satisfy the strict requirements within a contract for change or claim requests, it could be fatal to that claim. A more recent Alberta case, however, leaves that conclusion in some doubt.

In the 2003 case of Banister v. TCPL, the contractor had claimed more than $500,000 for additional work that the contract documents indicated would not be required. The contractor had advised the owner that it intended to proceed with this work. The contractor did not, however, comply with the contractual requirements to provide a written estimate for the cost of the additional work and to obtain written approval from the owner before proceeding. The owner had advised the contractor of the requirement to comply with the change order provisions.

The court found that the provisions of the contract had not been strictly followed. However, the court also observed that:

* Everyone had assumed that the work was an extra to the contract;

* There was some notice in writing of the need for the extra work;

* The owner was always aware that the contractor was doing the work and that it was necessary for the integrity of the work;

* The owner benefited from the work and would reasonably know that the work would increase the price.

Without referring to the ANC decision, the court found that it would be unfair for the owner to approve the work, watch it being carried out, obtain the benefits of the work and then attempt to rely upon the lack of strict contractual compliance to deny the contractor compensation. The court allowed the contractor’s claim in full.

It is apparent from this decision that an owner or its consultant cannot simply sit back and take advantage of a contractor’s failure to comply with the change order requirements of a contract to deny the contractor’s legitimate claims for extra work. It is incumbent upon consultants themselves to be proactive in ensuring that appropriate change order procedures are followed where work is carried out beyond the contract scope.

Scott J. Hammel, LLB., B.Sc. (Mech. Eng.), is a partner with the law firm of Miller Thomson LLP in Edmonton, with a practice in construction and professional liability litigation.