Ok, I didn’t get a written change order and now the owner is disputing payment for the work, what should I do?
While obtaining written change orders prior to performing change order work is always the best practice, should a contractor perform change orders without a written change order, there is still an opportunity to collect on such change orders in some circumstances.  In Buxani v. Nussbaum, the owner and contractor entered into a construction contract which stated, “Any alteration or deviation from above specifications involving extra costs will be executed only upon written change orders, and will become an extra charge over and above the estimate.”   The evidence in such case showed that the owner of the project ordered the extra work orally and that the owner accepted such extra work.   When the contractor sued the owners for the unpaid amounts, the owners counter-sued for breach of the original contract requiring change orders to be in writing.   Does this factual scenario sound familiar?  I know you’ve all been there.  It might make you feel better to know that the trial court found that an oral contract existed for the goods and services which were not contemplated by the written contract.  The owner argued that mutual assent (a requirement for a contract, whether oral or written) could not be implied when an express contract covering the subject matter already existed.   In response the court stated, “The Buxanis, however, fail to take into account the differences between their written contracts and the oral agreement.  The extra items and services were above and beyond what was included in their written contract with Nussbaum.”   The appellate court held that the parties entered into an additional oral agreement that did not breach the original contract.

Will a promissory note to pay out the change orders protect me from the Owners’ later denying payment?
Another consideration in attempting to enforce a change order which was not executed in writing can be whether the owner later ratifies an oral agreement regarding a change order.  ”A ratification rests upon a person’s assent to a prior act or an act of another.”   Such ratification can be expressed or it can be implied from one’s conduct.   “Ratification of a contract occurs when a party recognizes the validity of the contract by acting under the contract, performing under the contract, or affirmatively acknowledging the contract.”  A party cannot withdraw the ratification and avoid the agreement, once the agreement has been ratified.   Also, when a party’s actions are inconstant with an intent to avoid an agreement, such actions have the effect of ratifying the agreement.   The Court used this reasoning to hold that an owner could ratify an oral request, acceptance and promise to pay for such services, by later confirming its promise to pay or by partially paying for such services.  When faced with this situation, it is advisable that Contractors who are owed money by an Owner, obtain verification, in writing, in the form of a promissory note so that the evidence does not come down solely to a he said she said situation.

My contract requires change orders to be in writing, however, I complied with a request from the owner for an on-the-job change without getting prior written approval.  Can the owner’s now deny paying me by arguing that I can’t enforce our agreement because it was not in writing?
Another consideration in attempting to collect on a change order which was not approved in writing prior to the performance of such change order is whether a contractual provision requiring written change orders was waived by the owner. “Waiver, the voluntary relinquishment of a known right, is sometimes spoken of as intentional conduct inconsistent with assertion of a known right.”   “Silence or inaction, for so long a period of time as to show an intention to yield the known right, is enough to prove waiver.”

In Travis-Williamson County Water Control and Imp. Dist. v. Page, the construction contract at issue specified that no claim for extra work would be allowed unless ordered in writing.   The evidence in the case showed that the owner of the project ordered the extra work orally and that the owner accepted such extra work.   The court held that such evidence constituted waiver as a matter of law.   By orally requesting, accepting and promising to pay for goods and services from a contractor, which were not contemplated by the written contract on the project, without requiring that such additional agreements be reduced to writing, an owner can be considered to have engaged in voluntary and intentional actions which were inconsistent with an assertion of a contractual provision that requires written change orders.

Courts throughout Texas have held that a change order provisions in construction contracts can be waived: Generally, a provision in a construction contract providing that any alterations or deviations must be executed in writing is binding, and there can be no recovery unless the writing requirement is met. State v. Martin Bros., 138 Tex. 505, 160 S.W.2d 58 (1942); D. H. Overmyer Co. v. Harbison, 453 S.W.2d 368 (Tex.Civ.App. El Paso 1970, no writ); Stave v. F & C Engineering Company, 438 S.W.2d 647 (Tex.Civ.App. Houston (14th Dist.) 1969, writ ref’d n.r.e.). However, such a provision can be waived by the actions and conduct of the parties. Mood v. Methodist Episcopal Church South, of Cisco, 296 S.W. 506 (Tex.Comm’n App.1927, holding approved); Travis-Williamson County Water C. & I. Dist. v. Page, 358 S.W.2d 158 (Tex.Civ.App. Austin 1962), rev’d in part on other grounds, 367 S.W.2d 307 (Tex.Sup.1963); Housing Authority of City of Dallas v. Hubbell, 325 S.W.2d 880 (Tex.Civ.App. Dallas 1959, writ ref’d n.r.e.).  The court went on to hold that an award of costs of extra goods and services was warranted under the theory that the written change order provision had been waived and that recovery was proper under the theory of quantum meruit.

Are there any practical hints you can provide me to help me collect monies owed on my change orders?
Despite the fact that a contractor may be able to collect on change orders which were not executed in writing prior to the performance of such change orders, there are some things that contractors should consider in such circumstances.  When a contractor performed a change without a prior written change order, the contractor should invoice such changes as soon as possible.  A contractor should not wait until the end of a project to request payment for a change order.  Moreover, when a change order is performed without a change order, it is also important for the contractor to carefully examine any lien releases which it executes pursuant to a payment on the project.  If the contractor is asked to sign a lien release which states that the contractor has been fully paid up to a particular date, the contractor must not sign such lien release unless the payments include all change orders performed as of the date indicated in the release, as well a contractual work, or the lien release specifically excludes change orders.

CHANGE ORDERS – The Good, The Bad, and The Ugly – Part 2 is a post from: Kelly M. Davis & Associates, LLC - Dallas Construction Attorney

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

CHANGE ORDERS – The Good, The Bad, and The Ugly – Part 1 is a post from: Kelly M. Davis & Associates, LLC - Dallas Construction Attorney

In order to answer this question and how it was able to work out for my client, you have to know something about the recording process in Texas.  All deeds, liens, releases, and property records are filed in the records department of the county in which your property is located.  Most counties try to cross reference all document recordings through a Grantor, Grantee, and Property index.  What this means is that the document has a filer (which is the Grantor), a person to whom the record is being filed against (which is the Grantee), and attaches to a particular property through legal description and/or address.  In the mechanic’s lien context, the person filing the lien is the Grantor and the person or company to whom the lien attaches (who owns the property) is the Grantee.

Next, it is important to know how documents that have been filed are removed.  First of all, they are never really “removed.”  You can always see what was filed throughout the history of the property.  However, there are various instruments that can be filed to “release” a lien, “waive” rights to a claim, “cancel” a deed of trust, or “order” a lien to be invalid.  So, the question remains “What happens when you file a lien on a property which is not resolved through payment or release and which was never foreclosed upon?”

Throughout time, many people have given their legal opinion on this.  Legally, you have a deadline to file for foreclosure of your lien.  If you fail to foreclose, your lien is oftentimes considered “invalid.”  But is it truly “invalid?”  What happens if a first lien holder forecloses before you?  The law says that your lien is “foreclosed” out.  But does the lien go away?

The answer is that the only way to clear the title and “remove” the lien is to file a document removing such lien.  If you fail to timely foreclose on your lien, your lien document is still on file and is still attached to that property.  If a bank forecloses its’ superior lien, your lien technically is supposed to be foreclosed out, yet it is still on file in the county records and attached to that property.

So, as you can see, this is very complicated in practice.  What the law says is not necessarily what happens in reality.  The county clerk’s office does not have someone pulling liens that are no longer considered valid or that have been foreclosed out.

So, where does this leave you?  Many times, it leaves you with some bargaining power down the line.  Often times, I will have a title company contact me asking for a payoff amount for a lien I filed years before.  In this situation, there is rarely an argument as to whether the lien is still valid just how much my client will accept to release its lien.  This was the situation for the client I mentioned earlier in the post.

Other times, a bank will call us.  They foreclosed on their lien but there is still a cloud on the title which they need to remove (i.e. my client’s lien).  At that point, we enter into negotiations on how much it will take for my client to release the lien.

There are also those times where a demand is made upon you to remove your lien because you have failed to foreclose and the statute of limitations have passed.  In those situations, the lien claimant often times removes their lien without being paid.

Every situation is different.  There are some wins and some losses.  However, by understanding the filing process it helps mechanic’s lien holders understand that there are options past foreclosure.

Didn’t foreclose on your Mechanic’s Lien? What should you do now? is a post from: Kelly M. Davis & Associates, LLC - Dallas Construction Attorney

Being an Attorney for many clients in the construction industry I get a broader industry perspective than the lone sole contractor, sub-contractor or supplier.  For instance, I usually know if residential construction projects are having more payment problems than commercial projects or vice versa.  I know what bond companies are easy to work with and which are not.

So the other day I was talking to a client about one matter when he just mentioned that he ‘may’ have another one for me.  I inquired more about it and when he was done, I told him that his ‘may’ was actually a ‘sure thing’.  His potential matter related to a specific General Contractor building an anchor store in Houston.  He was ‘promised’ that he would get paid and to just give it a month (which would have put him past his lien deadline).  What he didn’t know is the previous week I had filed a lawsuit to foreclose on a property in Dallas that the same General Contractor had built for the same retail chain.   So the odds that he would give up his lien rights and not get paid were actually pretty high.

So, yes, people can try and do liens themselves or use a online service to preserve their rights, but they give up something important (beyond probably not doing it right).  When you go to a law firm, experienced in the area of construction litigation and commercial collections, you have the added benefit of a wealth of knowledge regarding the financial viability of particular projects and General Contractors, Builders, Subcontractors and Suppliers in and around the DFW area and even in some cases, throughout the State of Texas.   Many times, we know who is paying, who is not, what jobs are having funding problems, which parties are known to be “slow pays,” “no pays,” or even continuously in litigation.  To most clients, this information is almost invaluable and is a benefit you can get from your law firm without having to spend any additional money.

Are You Going to Get Paid? Ask a Construction Lawyer is a post from: Kelly M. Davis & Associates, LLC - Dallas Construction Attorney

To meet the definition, the work performed must be considered to be a fixture or financial benefit to increase the value of real property. For example, dental equipment, dish satellites, lawn mowing, property security, etc. would not increase the value of the property. Lawn mowing simply helps the aesthetic appeal of the property, property security provides a benefit to the owner and perhaps the contents within the property, and dental equipment is a benefit to the dentist but certainly not the property. Now, if sod had been planted or security cameras had been added, that would have improved the value of the property.

In these situations, the most the person would have would be a right to collect the monies due through civil litigation such as a demand letter or through small claims court.

Does Your Work Meet the Requirements for a Mechanic’s Lien? is a post from: Kelly M. Davis & Associates, LLC - Dallas Construction Attorney

This month, I wanted to discuss warranty claims.  Many clients believe that warranty claims can extend their mechanic’s lien deadlines.  For most clients, this would be generally untrue because the deadlines for their work performed or material supplied would not be calculated pursuant to the Substantial Completion rule, discussed below.  However, there is what may be referred to as a “loophole” that can be used to extend deadlines in very particular situations.  This would never be something I would recommend or could rely on with certainty as a court of law would have to determine its applicability to the particular circumstances.

That being said, in order to clear up some of the myths that are circulating relating to the extension of deadlines by warranty claims, it is important to understand the distinctions.  Most lien deadlines are calculated from the date that work was first performed.  Thus, doing more work does not generally extend the deadline. However, the lien deadlines are calculated by the earlier of the 3 / 4 months after work was performed (depending on whether it is considered a residential or commercial project) OR WITHIN 30 DAYS AFTER SUBSTANTIAL COMPLETION OF ENTIRE THE PROJECT (not just your portion), whichever is sooner.

So, while most subcontractors and suppliers fall within the normal mechanic’s lien deadlines, if you perform work at the end of the project (such as landscaping, which is generally one of the last aspects of a construction project), your lien deadline can be shorter than the typical 3 / 4 month time frames (as set forth in the “Deadline” portion of this email).

If you believe you are late on your mechanic’s lien or notice letter, there is quite a bit of case law that attorneys can and do use to argue around the deadlines. One such case law relates to warranty work. Warranty work can, in some instances, be the basis for arguing that substantial completion has not occurred, and thus a claimant is not late on a lien. Some courts have extended substantial completion deadlines to include punch and warranty work.

So, what does this mean to you?  If you are a subcontractor or supplier that performs work or supplies during the first or middle portion of the construction project, it means absolutely nothing because your lien deadlines are not dependent on substantial completion of the project.  However, if you perform work on what might be considered the later part of the project (about the last 4 months), your deadlines might be shorter than normal but, on the other hand, any warranty work that may have been performed on the project could possibly be used to extend the timeframe for you to properly perfect your lien.

There are a lot of companies out there filing their own liens and/or notice letters. As you can see, there is not one exact formula to the mechanic’s lien process. It depends on a variety of circumstances, all which must be taken in consideration to determine your deadlines and filing requirements. The best business practice is to meet with an attorney that understands your business and how your work fits within these deadlines. While the use of loopholes to extend your deadlines can be beneficial it certainly cannot be relied upon on a day to day basis.

Mechanic’s Lien Reminders Tip of the Month – Warranty Claims is a post from: Kelly M. Davis & Associates, LLC - Dallas Construction Attorney

Did you know that if you are having any retainage withheld from your draws that you are required to send an additional Retainage Notice?  This is generally ONE notice that gets sent out towards the beginning of the project that protects your rights to lien the retainage later down the line if the Owner or General Contractor fails to pay it.

Like the other Mechanic’s Lien laws, there are specific deadlines you must follow:

• First Tier-Notice to the Owner by the 15th day of the second month following FIRST MONTH of delivery / work
• Second and Below Tiers-Notice to the Owner and the General Contractor by the 15th day of the second month following FIRST MONTH of delivery / work.

It seems like lately, and in this declining economy, contractors are “writing off their retainage” more and more frequently.  They are having a harder time getting paid the retainage amounts.  If, you do not want to lose the right to your retainage (which, a lot of times, are quite large amounts), you have to follow the retainage statute.  If you are having any retainage withheld and are not sending a Retainage Notice letter at the beginning of the project, as set forth above, you are not protecting your rights to this money!

A lot of people don’t understand this portion of the mechanic’s lien law.  The best way I can explain it is that the “typical” mechanic’s lien notice letters are not practical for retainage funds that are withheld.  Because most contractors submit multiple payment applications, instead of sending a notice letter every month (because you won’t get paid on the retainage until the completion of the job which is past all bond or lien deadlines), the code allows you to simply send one letter at the beginning of the project to cover all the monies withheld for retainage.  Then, if for some reason you are not paid upon final completion, you can make a bond or mechanic’s lien claim for the retainage amounts AND you have already fulfilled your “notice letter” requirements pursuant to the Texas Property Code.

Without following these rules, you have basically given the GC your retainage. As a matter of fact, I know GCs in Lewisville that count on the fact that you aren’t going to get this right when you contract with them. This is how they are able to underbid city jobs time and time again. Does this sound familiar?

Retainage Claims is a post from: Kelly M. Davis & Associates, LLC - Dallas Construction Attorney

These clauses are highly frowned upon by the courts and typically found to be invalid if the clause is indefinite.  The case law for provisions such as these only goes to timing; the Principal or general contractor cannot withhold payment indefinitely if it is not paid by the Owner.  The clause simply goes to timing of payment, not whether payment will be forthcoming at all.  Gulf Coast, Co., Inc. v. Self, 676 S.W.2d 624, 627-628 (Tex. App. Corpus Christi 1984), writ refused n.r.e., (Mar. 20, 1985).  These clauses may only be relied on for a reasonable amount of time. Id.  It is up to a judge or jury to determine what is “reasonable”.  However, the determination of reasonableness behind clauses such as these, coupled with the Texas Prompt Payment Statute, Texas Property Code Chapter 28, gives us a good starting point as to how long it is considered reasonable to withhold payment.  Texas courts have determined that conditional words such as “if” or “provided that” can be used to enforce clauses such as this. Id.

The Texas Legislature passed a Senate Bill, adding Section 35.521 to the Texas Business and Commerce Code.  Section 35.521 states that a contingent payment clause is not effective against a subcontractor or supplier in the following situations:

1)      If the owner fails to pay the contractor because of the conduct or work of the contractor, unless the nonpayment is the result of the subcontractor or supplier’s failure to meet the needs of the contract.

2)      When the contingent payment clause would be unconscionable if enforced. For example, the contractor must provide the following information to the subcontractor to minimize the possibility of the clause being deemed unconscionable:

1. Name and contact information of project owner;
2. Legally sufficient property description;
3. Surety information; and
4. Project lenders’ names and contact information.

Further, a contingent payment clause may be invalidated or suspended during the project if the subcontractor subject to the clause has not been paid within 45 days after submitting written request for payment that is in substantial compliance with the pay application, it may send written notice to the contractor objecting to the further enforceability of the clause.  Thereafter, the contractor or its surety may not continue to rely on the clause for any work or material provided by the subcontractor after the notice becomes effective.

With this legislation and case law comes an avenue of collection for subcontractors and suppliers where, in the past, those same subcontractors and suppliers just “wrote it off” if they signed a contract with one of these clauses and didn’t get paid.  Are you owed money on a project that has not been paid because of a contingent pay clause such as the “paid when paid” or “paid if paid” clause?  Now is the time to look into fighting these clauses and collect the money that is owed to you!

“Paid When Paid” – “Paid If Paid”: Really? is a post from: Kelly M. Davis & Associates, LLC - Dallas Construction Attorney

• One who works directly for, or supplies materials directly to, the original contractor
• Has a contract, written or not, with the original contractor, but not with the owner

2nd Tier Claimant:

• One who works directly for or supplies directly to any first tier or other lower tier subcontractor
• Has a contract, written or not, with a first tier or lower tier subcontractor

If you have a contract directly with the Owner, technically, under mechanic’s lien laws, you are considered an original contractor.  Pursuant to the lien laws, the project can have many original contractors on a job.

Once you know what type of Claimant you are refer to the Deadline Chart, within this email, for the current timeline on the lien process which depend on the type of property the work was performed on – Commercial or Residential.

REMEMBER -   IF YOU ARE A 2ND TIER CLAIMANT, YOUR NOTICE LETTERS AND AFFIDAVITS ARE DUE 1 MONTH EARLIER THAN 1st TIERED CLAIMANTS ON COMMERCIAL PROJECTS.

October Mechanic’s Lien Reminder is a post from: Kelly M. Davis & Associates, LLC - Dallas Construction Attorney