Extra Work, Changes and Termination of the Contract

Seema LalJanuary 15, 2016

EXTRA WORK AND CHANGES: INTRODUCTION Most legal disputes concerning extras and/or changes to the

work involve:

• Contractual interpretation• A conflict between the parties concerning compliance with

contractual requirements• A consideration of what can be done to resolve the conflict

notwithstanding possible non-compliance

• There is no perfect contract for every job. Knowing the contract is essential to ensuring compliance and resolving conflicts.

CHANGES TO THE WORK

THEORY:•Scope changes are minimized if the original design is well thought through and executed

MISCONCEPTION:•Project designs put out to bid are complete AND if changes are required the design must have been incomplete

REALITY:•Changes cannot be avoided altogether, so be ready for them. •Include contractual terms that provide a formula in order to address changes in scope. FOLLOW the contractual formula in place at the time the dispute arises

CHANGES TO THE WORK CONT.

• Contract typically provides the owner with the authority to order changes.

• Certain contractual terms may restrict the costs that can be claimed: limitations on claims for overhead, profit and/or impacts may have a significant effect on how or if you are paid.

• Certain contractual terms account for the unknown by providing standard formulas to address extra work should it be encountered: e.g., unit price work for contaminated soils

• A good contract anticipates changes and provides for equitable adjustment of prices for materially changed conditions. DO NOT WAIT FOR THE CONDITION TO ARISE TO COME UP WITH THE FORMULA

DISAGREEMENTS CONCERNING CONDITIONS/EXTRA WORKTHEORY•The contract will always provide a means to resolve issues concerning extra work or changed conditions.

MISCONCEPTION•If the contract does not provide a means to resolve issues concerning extra work or changed conditions, the conflict between the parties will inevitably lead to a delay in further works.

REALITY•The Law and Equity Act provides a means to permit progression of the works in the face of a dispute, i.e., “performance under protest.”

“(2) If a dispute arises between the parties to a contract respecting the obligations of a party under the contract, the party whose obligations are disputed (the contractor) may elect to perform the contract in accordance with the requirements of the other party, and the electing party is then entitled to compensation from the requiring party for any

(a) service performed,(b) property supplied or transferred,(c) liability assumed, and(d) money paid

by the electing party in the course of that performance beyond that which the contract required the electing party to do.”

DISAGREEMENTS CONCERNING CONDITIONS/EXTRA WORK (cont.)

LIMITS ON CLAIMS: NOTICE CONDITIONS

THEORY•All changes will be properly documented and all claims will be agreed to and paid.

MISCONCEPTION•There is no need to document or provide notice in accordance with the contract in respect of extras or changed conditions because the parties are “all on the same page”.

REALITY•You are not on the same page…and even if you are now that may not last after the contractor submits its your invoice for payment.

• Most contracts require claims for extras to be made by the contractor or at least identified in writing within a fixed time, often a very short time.

• Adhering to the contractual notice provision is often a pre-condition to the making of a claim by the contractor.

• Non-compliance may bar recovery. If the owner has allowed claims for changes/extras in cases where the contractor has not complied with notice or other provisions relating to changes/extras, it might be difficult for the owner, at a later date, to avoid payment on the basis of the contractor’s failure to comply with such provisions.

• The practice of the parties is often more important than the contractual provisions.

LIMITS ON CLAIMS: NOTICE CONDITIONS (cont.)

DOCUMENTING COSTSTHEORY•Parties to major construction projects are sophisticated parties and have sophisticated and accurate bookkeeping, time keeping and accounting procedures in place.MISCONCEPTION•I am a sophisticated party and have sophisticated and accurate bookkeeping, time keeping and accounting procedures in place.REALITY•I would not have a job if you were right.•Often litigation results in parties having to reconstruct events and costs after the fact. •The reality is difficult to overcome - staff is are too busy building the job to properly document what happened and what it cost.•MISTAKE!•Where significant claims are involved, this can lead to much higher costs down the road, using lawyers and forensic accountants to figure out what happened. •Often, construction claims experts are brought in for this. They prepare opinions of the cost to complete extra work, the delays which resulted, etc. etc. They are expensive and the courts don’t like them.

DOCUMENTING COSTS (cont.)• It is far better and more effective to create and maintain

contemporaneous documentation.

A. Diaries• Far too often they are lost or destroyed before they are needed. • Computer diaries of some kind are easy and much more

permanent.B. Meeting Minutes• Meeting minutes can be important evidence to reconstruct

events and positions taken. C. Correspondence

• Confirm it! It’s easy!

TERMINATING THE CONTRACT: WHEN AND SHOULD YOU?

Ask yourself:

1. Do I have reason to terminate?

2. Am I entitled to terminate?

3. Do I need to terminate?

GROUNDS OF DEFAULT

Termination by the Owner• Insolvency.

• Contractor’s failure to prosecute the Work. Be wary of notice provisions.

Termination by the Contractor• Consultant’s failure to certify payment/Owner’s failure to pay.

• Lengthy suspension of the Work.

• Fundamental change of conditions.

HOW TO TERMINATE

• Strict adherence to contractual procedures

• Notice of default

• Correction or commencement of correction of default

• Notice of termination

• Continue performance until termination

DAMAGES AND WRONGFUL TERMINATION

• Wrongful termination is a breach of contract

• Where contractor terminates there is a risk of claims for recovery by the owner of additional cost to complete and/or delay.

• Where Owner terminates there is a risk of claims for recovery by the contractor for unpaid progress and holdback and lost profit.

ALTERNATIVES TO TERMINATION

• Claim for breach of contract after the fact. Note limitation periods!

• Suspension of the Work

• Performance under protest – Section 62 of theLaw and Equity Act