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CHANGE ORDERS – The Good, The Bad, and The Ugly – Part 1

April 25, 2011 By Leave a Comment

I want to take some time to discuss with you something that comes up daily within the lawsuits we litigate for our contractors.  Change Orders.  I know, it’s a dirty word.  However, through our practice we have commonly dealt with the issues that arise from the Change Orders and believe that we have developed a strategy to help prevent future change order disputes.  Hopefully, this article will help you answer some of the most common questions we hear regarding the change order process.

What is a change order?

Change orders are a common part of construction projects.  Additional goods and/or services on a project (those in addition to the initial contract) should be provided and/or performed only upon approval of the owner.  Unfortunately, it is far too common for contractors to fail to adequately document change orders.   Properly documenting a change order can not only avoid disagreements over additional costs on a project, but, a properly documented change order can make resolving a disagreement over additional costs easier and less expensive to resolve.  Often times, it is only at the end of a project, when a contractor attempts to collect for additional costs that a contractor may realize the importance of a written change order.

What information should a change order include?

The best way for a contractor to insure that it is able to collect on change orders from an owner is to document the change the change order prior to undertaking the work contemplated by the change order.  Unless specified otherwise in the parties’ contract, a written change order does not necessarily need to be in a particular form, but should contain certain essential information.  A change order should contain the following:

  1. The name of the parties, typically the owner and the contractor;
  2. Identity of the scope of the change in as much detail as possible.  The scope of the change should include any additional work to be performed, any additional materials to be provided, and ideally, the reason for the change.
  3. The change order should also identify the price of the change.  If the price of the change is unknown prior to the execution of the change, then the change order should specify that there will be an additional cost and the basis for determining such cost.  For example if the price will be cost plus a specified amount of profit, the change order should specify such.
  4. One of the most important things to include in the change order is the signature of the owner, indicating its approval.
  5. If the project is a residential project, the contractor should have both the husband and wife sign the change order to insure the contractor’s right to lien the property in the event of non-payment.

What should I do if my contract specifies that “all change orders must be in writing and signed by the owner?”

It is extremely important for contractors to carefully examine their initial contracts to determine whether the contract requires written change orders.  Many construction contracts specify that the contractor is not allowed to request additional funds unless a written change order is executed and signed by the owner prior to the change being performed.  If a construction project specifies that all changes must be in writing and signed by an owner, it is even more important for a contractor to execute written change orders before performing additional work or providing additional materials which are not part of the initial contract.  A contractor can count on an owner attempting to avoid paying for a change that was required to be executed in writing but was not.  If the contractor is providing the contract for the project, the contractor should seriously consider removing any provision requiring written change orders just in case a written change order is not executed. A contractor who is not diligent about executing written change orders should not include a written change order provision in their contracts.

There are numerous reasons why it may be inconvenient for a contractor to fully document a change order prior to undertaking the additional work or cost.  If a contract does not require written change orders to be executed, a contractor should still make an effort to document the change orders in the event a dispute arises. The second best option to executing a formal change order is to execute an informal change order.  A contractor should keep a pen and note pad with him with which he can note the scope of the change and the cost or method of calculating the cost and have the owner sign the page.

What should I do if I didn’t obtain a written change order prior to the work being commenced, as set forth in my contract?

Sometimes there may be reasons why it may be impractical to informally execute a written change order.  For example the change may be immediately necessary and the owner may not be available to execute a written change order.  Sometimes the owner is a person or entity which is out town or out of state.  If the contractor cannot obtain a change order executed by the owner prior to proving goods and/or services in addition to those in the contract, the contractor should document such change through more than just an oral communication with the owner. In the event that a dispute arises regarding change orders, some documentation can prevent a judge or jury from having to decide between what a contractor says and what an owner says.  Although not as good as a written change order, following up an orally approved change order with an email that discusses the change and the cost can be helpful.  Even if a contractor merely recites its discussion with the owner regarding the change and cost, it is better than a mere oral communication.  However, a contractor can request that owner approve a change order via email.  I always recommend putting something at the bottom of the email stating “if you disagree with the contents of this email and the change order described herein, please notify me within 24 hours.  Otherwise, XYZ Company will continue to act upon this mutual understanding and this email will constitute our written change order.”

Next time, in Part 2 of this segment, we will discuss various cases that have come down in Texas that relate to construction change orders and specifically discuss how these cases affect you the contractor.  Hint – the case law is helpful for those that didn’t get their change orders in writing.

Written by:  David Fink, Associate Attorney of Kelly M. Davis & Associates, LLC

Filed Under: Construction Law Tagged With: ,

Texas Construction Law Case Update 2011

April 6, 2011 By Leave a Comment

Often times, in my law practice, I come across re-occurring themes and issues with my clients.  They come to me with similar issues that are sometimes unsettled by case law.  Gregory M. Cokinos gave a presentation recently at the 24th Annual Construction Law Conference about the recent judicial decisions that have an effect on construction law in Texas.  I thought it might be helpful to provide a brief summary of some of the cases that were discussed.  For instance:

  • What happens when you bid a contract but later find out that there are site conditions which were unforeseen at the time that you signed the contract?  What if your contract says that you are responsible for these conditions and should discover them through your own on-site inspection?
  • What if you have a disagreement about what should be included within your scope of work?  How does the law normally handle these disagreements?
  • What if you have a written contract but did not get your change orders confirmed through a written change order or new agreement?  Are you able to recover in a lawsuit under Quantum Meruit (which basically is a fairness principle)?
  • Under what circumstances can a contractor require you to sign a Release of Lien prior to getting paid?
  • What happens if you are sued for an accident on the job that occurs long after you had control over that scope of the project?  In what circumstances are you liable for the damages?

Contractors and subcontractors face at least one of these issues on practically every project.  Hopefully, this overview will help give you the current status of where various courts stand on these issues within the State of Texas.

What is a Subcontractor’s Liability for Unforeseen Circumstances Not Discovered During Its On-Site Inspections:

MasTec North America, Inc. v. El Paso Field Services, L.P, 317 S.W.3d. 431, (Tex.App-Austin, 2010, no pet.) (mem. op).

MasTec North America, Inc. (“MasTec”) won a bid to replace gas pipelines owned by El Paso Field Services L.P. (“El Paso”). In the contract, El Paso implied that it had exercised due diligence in locating all foreign crossings within the right-of-way. However, MasTec still agreed to perform a site inspection and use its findings to prepare the bid.

El Paso prepared the specifications and listed 280 crossings. Using these specifications, MasTec inspected the right-of-way for foreign crossings before finalizing its bid. During construction, MasTec encountered approximately 794 foreign crossings. El Paso refused to compensate MasTec for the extra costs caused by the additional crossings, and MasTec subsequently filed suit. The jury found that El Paso failed to exercise due diligence as promised; however, the judge entered a judgment notwithstanding the verdict in favor of El Paso because of the lump sum bid submitted by MasTec and the fact that, according to contractual provisions, the assumption of risk fell on MasTec.  MasTec appealed.

The court of appeals held that, under the contract, it was the responsibility of El Paso to exercise due diligence when locating and listing all the foreign crossings in the specifications and accordingly, MasTec was not required to assume the risk in this situation. MasTec’s representation that it was familiar with the site was limited by El Paso’s failure to exercise due diligence when preparing its specifications.

What Happens When the Language within the Scope of Work Section of a Construction Contract is Ambiguous?

C.A. Walker, Inc. v. Total Roofing Services, Inc., 2010 WL 1505070 (Tex. App-Austin 2010, pet. filed).

General contractor C.A. Walker, Inc. (“Walker”) retained Total Roofing Services (“TRS”) to perform roofing work related to the construction of a grocery store. The section in the scope of work regarding composite metal panels referred to composite metal panels in general as well as tasks specific to roofing.

A dispute quickly arose about whether TRS was responsible for buying and installing all composite metal panels. Walker asserted that the scope of work required TRS to purchase and install all the composite metal panels for the structure, including the panels on the building facade. However, TRS took the position that it was only responsible for installing the panels related to the roofing system. In the end, Walker bought the composite metal panels for the building facade, and TRS installed them. After the project was completed, TRS filed suit against Walker because it had not been paid for installing the additional panels, which was outside its scope of work.

Walker filed a counterclaim, asserting TRS breached the contract first by not providing the composite metal panels for the building facade. During trial, TRS claimed the contract’s scope of work was ambiguous and extrinsic evidence showed the parties did not intend for TRS to provide the composite metal panels for the building facade.

The trial court agreed with TRS and Walker appealed. The court of appeals affirmed the decision of the trial court, finding the contract ambiguous. However, because the scope of work repeatedly mentioned “roofing,” it was reasonable to infer that the scope of work was limited to composite metal panels required to construct the roof.

Is a General Contractor Permitted to Withhold Payment because Subcontractor has not Submitted an Lien Release Affidavit?

Solar Applications Engineering, Inc. v. T.A. Operating Corp., 377 S.W.3d 104 (Tex 2010).

Solar Applications Engineering, Inc. (“Solar”), the general contractor, entered into a contract with TA Operating Corporation (“TA”) for the construction of a truck stop. Section 14.07(A)(2) of the contract stated that the final Application for Payment should include “(i) … (iii) complete and legally effective releases or waivers (satisfactory to [TA]) of all Lien rights arising out of or Liens filed in connection with the Work.”

When the project was nearing completion, a dispute arose between TA and Solar, and TA soon terminated Solar because Solar had filed a lien on the project.  Shortly thereafter, Solar submitted its “Application and Certification for Payment” to TA for the alleged balance.  TA refused pay, asserting that Solar must submit a lien release affidavit in order for Solar to receive payment.

Solar filed suit for breach of contract on the basis of substantial performance.  TA counterclaimed for delay and defective work. The trial court found mainly for Solar, but the court of appeals found that even though Solar had substantially performed, TA was not required to pay the balance because providing a lien release was a condition precedent to final payment.

The Texas Supreme Court of Texas disagreed with the court of appeals. In the absence of conditional language (e.g. “if,” “provided that,” or “on the condition that”), the terms of the contract should be interpreted as a covenant. Because Section 14.07(A)(2) lacked any conditional language, the Supreme Court held that the lien-release provision was a covenant rather than a condition precedent, and the failure to provide such a release could not prevent Solar from recovering.

Can Quantum Meruit be used as an alternative Method of Recovery of Damages in a Construction Situation where there is a Written Contract?

Rasa Floors, L.P. v. Spring Village Partners, Ltd., — S.W.3d. –, No. 01-08-00918-CV, 2010 WL 4676978 (Tex. App.-Houston [1st Dist] Nov. 18, 2010, no pet.).

Spring Village Partners, Ltd. (“Spring Village”) hired Rasa Floors, L.P. (“Rasa”) to replace the floor in an apartment complex based on a bid quote of $1.50 per square foot.  However, no formal agreement was executed.  Rasa completed the work and submitted invoices for payment, but Spring Village refused payment on the belief that the invoices exceeded the bid amount.  Rasa sued Spring Village on a sworn account, and alternatively for breach of contract or recovery in quantum meruit.

The jury awarded $5,000.00 to Spring Village based on its finding that Rasa breached its warranty and $30,000.00 to Rasa under its quantum meruit claim, finding that Rasa performed, and Spring Village accepted the work.  The trial court rendered judgment on the breach of warranty claim, but ignored the jury’s quantum meruit findings. Both parties appealed.

On appeal, Spring Village claimed Rasa’s quantum meruit cause of action was disqualified by the jury’s finding that an express contract covered the claim. The court of appeals disagreed, noting that in construction cases, a breaching plaintiff can recover under quantum meruit for the value of services and materials provided, taking away the amount of damages caused by his breach, even if an express written contract between the parties existed. Thus, Rasa was granted the jury’s award less the $5,000.00 due to its breach of warranty.

When can a Subcontractor be Liable for Damages Resulting in Unsafe Site Conditions?

Foreman v. Allen Keller Co., — S.W.3d. —, No. 04-08-00490-CV, 2009 WL 2767049 (Tex. App.-San Antonio Oct. 1, 2009, pet. granted).

Allen Keller Co. (“Keller”) was hired by Gillespie County to carry out flood and erosion control work at a bridge. Before construction began, there was a small gap between the bridge’s guardrail and a river embankment. The specifications required the gap to be widened by ten feet, thereby extending the gap from five to fifteen feet. In June 2003, the Keller completed performance as specified, and the County inspected and accepted the work. In January 2004, a passenger was drowned when a car lost control and slid into the river through the newly extended gap created by the construction.  The parents of the deceased sued Keller, alleging it created a dangerous condition by extending the gap.  At trial, Keller was granted summary judgment on the basis that it owed no duty as a matter of law as the accident did not occur on the contractor’s property and the work was inspected and accepted by the county.

The court of appeals overturned the decision, citing that in Texas “one who creates a dangerous condition may owe a duty to make the premises safe, even if he is no longer in control of the property at the time of the injury,” and that “an independent contractor who has created a dangerous condition on real property is not relieved of any duty of care to the public merely because his work is accepted.”

Filed Under: Construction Law

Alternative to a Mechanic’s Lien – UCC Filing Part 2

March 7, 2011 By Leave a Comment

I first need to apologize for missing a few months of my reminders. The last few months have been a perfect storm of trials for me and I always put a high priority on making sure I’m as prepared as possible. So, some of the peripheral items do get put on the back burner sometimes.

Last time, I discussed the distinctions between “fixtures” and “non-fixtures” in construction projects and also explained why this distinction is important to a contractor. I also discussed how to perfect a security interest in a non-fixture. In this article, I want to continue this series and discuss ways to perfect your security interests in fixtures and how these UCC filings help you gain priority over other potential claimants (such as banks or other lien holders).

To recap, a “Fixture” means goods that have become so related to a particular real property that an interest in them arises under the real property law of the state in which the real property is situated. In other words, fixtures are, generally, those products which are physically attached to the building. There are numerous examples of this on a construction project – carpet, tile, countertops, and bathtubs.

A party with a security interest in goods which are considered a fixture must perfect this interest by making a “fixture filing.” Such is accomplished by filing a financing statement in the county where a mortgage on the real property would be recorded. In addition to the usual requirements for a financing statement (as were discussed last time - UCC Filing – Part 1), a fixture filing financing statement must contain the legal description of the real property to which the fixture is attached.

Determining priority in relation to these types of filings can be extremely tricky. However, the general rule is that in a contest between a holder of a security interest in a fixture (i.e. you, for example) and a holder of an interest in the real property to which the fixture is attached (i.e. the mortgagor, for example), the first party to file a fixture filing or record its real property interest prevails (which would almost always be the mortgagor).

However, a contractor can prevail over a mortgagor or someone with a prior interest, in the following situations:

1.   The security interest is perfected in any manner authorized by the code PRIOR to affixing the good to the property. In this case, that security interest will prevail over a real property interest if (1) the collateral is a readily removable office or factory machine; (2) the collateral is readily removable equipment that is not primarily used or leased for use in the operation of real property; or (3) the collateral is a readily removable replacement of a domestic appliance that is a consumer good.

2.   A security interest in fixtures, whether or not perfected, has priority over the conflicting interest of an encumbrancer or owner if (1) the encumbrancer or owner has, in an authenticated record, consented to the security interest or disclaimed interest in the goods as fixtures or (2) the debtor has a right to remove the goods against the encumbrancer or owner. This is something that would have to be included within a security agreement contained within your contracts.

3.   And, if you are not dealing with a construction mortgage but instead are dealing with a conventional mortgage or home equity line of credit (such as in remodel situations), a secured party who makes a fixture filing within 20 days after the fixture was attached to the property (i.e. you) will prevail over a real property interest in the same fixture that was recorded prior to affixation (i.e. the mortgagor).

In layman’s terms, what does this mean to you? Those services which are not the initial construction of a residential or commercial project have a high probability of falling within Exception 3, listed above. If you don’t fit into Exception 3, you can easily fit under Exception 2 and protect your interest in the fixtures you supply if you ensure that your contracts have a security agreement within the terms which is signed and consented to by all owners of the property. If you don’t fall within Exception 3 and do not have your contractual language in order, pursuant to Exception 2, the only thing you can do is see if the goods that you are providing to the Project are goods designated in Nos. 1-3 within Exception 1.

Generally, if you provide goods which can be considered a fixture to a construction project, the real point is that you can usually protect your interest but you have to have a plan, which is set prior to the delivery of the goods, as to how you are going to ensure that the goods you provide fall within one of these exceptions and, thus, have priority over other encumberances to the property.

While this might sound very complicated to a non-lawyer, this is a perfect example of why business owners should meet with their attorney, periodically, to discuss their business, what they are doing, what the business goals are, and how they can legally protect all of their interests. A lawyer can usually help make sure that your corporate formalities, contracts, employment policies, financial interests, etc. are all in order where they protect you. The real trick is seeking the advice before the problems arise!!!

Filed Under: Construction Law Tagged With: , , ,

When is a Property Considered a Residential Project in a Mechanics Lien?

December 8, 2010 By Leave a Comment

Over the last couple months I had a few posts  over the ways that you can remove a mechanic’s lien if needed.  This time I would like to go a bit more in-depth about how different types of residential properties effect how a mechanic’s lien may be enforced.

I do think there is a distinction between homestead and non-homestead residential.  Not in terms of what is required, meaning the notice letters and mechanic’s liens or their deadlines, but in whether or not you can truly foreclose on your lien.  As you might know, Texas protects our homesteads!  You could have a ten million dollar homestead but they are not going to make you sell it and give the equity to your creditors.  As a result, a lien claimant is not going to be able to foreclose on a residential property that is homesteaded.  However, I have seen many situations where people were building homes with the intent to live in them as their homestead at some point but were currently residing in another home which already had the homestead exemption.  It has been my position that you can’t homestead 2 properties; therefore, the residence that was currently being built had not become homesteaded yet.

In order for a property to be considered “residential” pursuant to the Texas Property Code, it must be:  (A)  owned by one or more adult persons;  and (B)  used or intended to be used as a dwelling by one of the owners.  If the residential home was actually owned by a corporation (as an investment, flips, etc.), otherwise, it would not qualify as a residential project because it is not owned by one or more adult persons.  One example I see a lot of is a spec home.  While a spec home could obviously be considered a residential development vs. a commercial development, does it really meet the Texas Property Code requirements of a residential project? I don’t believe so: the owner of the property is most likely the company building it and is intending on selling the property, not having an owner of the company living in it.

I know you are all saying, well, this is interesting and all but what difference does it make to me how the Property Code distinguishes the different construction projects????  Well, let me tell you, if you want to properly perfect your mechanic’s liens, you must know what type of project it is pursuant to the Code.  Residential projects have very specific time lines and requirements for their liens and notice letters.  If you miss-characterize a property, chances are you are not properly perfecting your lien.

Filed Under: Construction Law, Mechanics Lien

Alternative to a Mechanic’s Lien – UCC Filing

December 7, 2010 By Leave a Comment

There is a great deal of confusion as to the term “fixtures” in the construction industry and even greater confusion as to what rights a contractor, subcontractor, or supplier has to the fixtures or non-fixtures that are incorporated into a construction project.  Over the next few months, I am going to attempt to explain the difference between a fixture and a non-fixture and provide alternatives to the Texas’ mechanic’s lien process for securing the goods and services provided on a property.

“Fixtures” means goods that have become so related to particular real property that an interest in them arises under the real property law of the state in which the real property is situated.  In other words, Fixtures are generally physically attached to the building.  There are numerous examples of this on a construction project – carpet, tile, countertops, bathtubs, … This should not be confused with the term “removable.”   See http://www.kmdalegal.com/construction-law/foreclosure-of-your-mechanics-lien/

Likewise, “Non-Fixtures” would be those goods which are made a part of a construction project but not permanently affixed as to become an actual part of the property.  For example, furnishings, equipment such as sound systems, tv’s, refrigerators and light fixtures, etc.

You might wonder how this relates to you and how this helps you get paid. I am sure at this point you have either personally been burned or know someone who has been burned by filing a mechanic’s lien on the property only to have your lien “foreclosed out” by the bank leaving your remedies extremely limited.   However, in Texas, there are various filings that you can file with the Secretary of State to secure your interest in the fixture or non-fixture you provide to a property.  This is important to you because, in some situations, you can have priority over a bank that has provided the construction loan for the property thus securing your rights even through a foreclosure.

Now I want to go over how Security Interests in Non-Fixtures works. The Uniform Commercial Code Section (UCC) is the central filing office for certain financing statements and other documents provided for under the Uniform Commercial Code since 1966.  Some of the main documents which are filed are financing statements and certain types of liens.  Securing non-fixtures should be done through the filing of a financing statement with the secretary of state.   The financing statement should state: the name and mailing address of the debtor; the name and mailing address of the secured party; an indication of the collateral covered.   The authenticated security agreement itself may be filed as the financing statement if the parties so desire.  “Authenticated” is defined as signed. The financing statement should be filed as soon as possible but certainly not later than 20 days after the first delivery of goods to the person with whom your contract is with.

I know what you are thinking.  More paperwork?  YES.  With our whole country struggling financially, unfortunately, the primary way to protect yourself is through a paper trail.   The good news is that a financing statement or security agreement are simple forms that you probably can have drawn up one time through an attorney.  This does not have to be complicated but you do have to go through the process of having something customized to your type of business that you can repeatedly use for your various customers and clients.

Next month, I am going to discuss Security Interests in Fixtures and explain how these UCC filings can help you gain priority over other potential claimants

Filed Under: Construction Law Tagged With: , , ,
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