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Friday, November 26, 2010

Feldman on oral change orders

Our friend Steven Feldman, author of Government Contract Guidebook, 4th Edition and Government Contract Awards::Negotiation & Sealed Bidding knows a lot more about government contracting than we do.  He takes issue with our [i.e., my] analysis of a recent California case that enforced a no-oral-modifications clause in a government contract.  Here's his view:

I read with interest your recent posting regarding the opinion of the Court of Appeals of California in P&D Consultants, Inc. v. City of Carlsbad, 2010 WL 4680800 (Cal. App. 4th Dist. Nov. 19, 2010). In P&D Consultants, the court ruled that California public contracts requiring written change agreements cannot be modified orally or through the parties’ conduct.

I agree with your observation that courts construing private contracts commonly allow parties to modify such terms through conduct and to thereby waive the owner’s protection. But I do not fully accept your critique that the court “gave no apparent explanation for drawing a distinction between the same clause in private and public contracts . . . except to note that one who deals with a public official must at its own peril make sure that the official has the necessary authority.”  While the California court did make this assertion, it also said, “The purpose of including a written change order requirement in a municipal works contract is obviously to protect the public fisc from the type of situation that occurred here.”

Other cases rely on this valid public policy in the control of scarce government resources. The former United States Court of Claims has ruled that the purpose of a standard contract clause requiring an order in writing from the Contracting Officer for extra work is to protect the Government against the cost of extra work ordered by a subordinate acting without authority. Standard Acc. Ins. Co. v. United States, 102 Ct. Cl. 770 (1945). Cf. also Kennedy v. United States, 965 F.2d 413, 420 (7th Cir. 1992)(“[the] government could scarcely function if it were bound by its employees' unauthorized representations”). This point becomes clearer upon the realization that most federal, state and local agencies have numerous employees. Public expenditures would be wholly uncontrollable if otherwise well-meaning employees could issue informal changes to government contracts. Courts in this camp reason that as an expression of sovereign immunity, written change order terms may not be overcome by waiver or estoppel. 64 Am. Jur.2d Public Works and Contracts § 202 (2010).

While the California court’s interpretation of the written change order requirement is the majority rule in the United States, some jurisdictions follow a different path.  These cases allow recovery for alterations or extras without a written change order where it appeared that the work was performed with the knowledge of the proper officers or representatives of the public entity and where other circumstances also tended to show an intention on the part of the public entity to waive or otherwise derogate from the stipulation. C. P. Jhong, Annot., Effect of stipulation, in public building or construction contract, that alterations or extras must be ordered in writing, 1 A.L.R.3d 1273 (1965 & Supp. 2010). Unlike P&D Consultants, these cases do follow the private law concept that “Contractual clauses requiring written change orders can be waived by conduct.” See G.M. Harston Const. Co., Inc. v. City of Chicago, 371 F. Supp. 2d 949, 952 (N.D. Ill. 2005)(citing private law Illinois authority).

The upshot is that the California court in P&D Consultants did correctly construe the contract and its decision was consistent with California public contract law and policy. Nevertheless, some other jurisdictions do follow a more liberal view allowing contractor recovery despite a contractual written change order provision, which means that practitioners should consult applicable law for further guidance.

Steven W. Feldman

http://lawprofessors.typepad.com/contractsprof_blog/2010/11/feldman-on-oral-change-orders.html

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