It is surprising how many cases there are in which a consultant or contractor performs additional services or work for an owner without first adhering to notice and approval requirements of the contract. Failure to obtain authorization for additional work from the owner’s designated representative can, and often does, bar entitlement to be paid for the extra work.
In the case of F. Garofalo Electric Co., Inc. v. New York University, et al., 705 N.Y.S. 2d 327 (March 14, 2000), the electrical contractor, Garofalo, alleged that it performed additional work and furnished additional materials in reliance upon oral representations by NYU and its construction manager, MDI, to pay for such extra work. Plaintiff’s complaint alleged breach of contract by both NYU and MDI. It also alleged that MDI was negligent. The defendants asked the court to grant motions of summary judgment against the complaint. The appellate court agreed that the plaintiff could not maintain a claim for negligence against MDI because New York did not recognize a cause of action for economic loss caused by allegedly negligent performance of contractual duties. Moreover, the court held that the plaintiff was not a third party beneficiary of the contract between NYU and MDI, and therefore had no rights under that contract to sue MDI.
NYU argued that it was entitled to summary judgement because plaintiff had failed to provide the contractually required contemporaneous written notice and documentation of its claims for extra work, and that they were therefore barred. In opposition to the motion, plaintiff didn’t argue that it complied with the contract’s notice requirements or obtained a signed contract modification. Instead, it argued that NYU, through MDI, its agent, had abandoned, waived or modified the requirements. Its basis for this argument was its assertion that MDI’s project manager orally instructed plaintiff to perform the extra work and keep track of hours and materials, and said, “it would be taken care of at the end of the job.” “Further, plaintiff pointed to the deposition testimony of MDI’s vice president, wherein he stated that MDI basically instructed plaintiff to ‘proceed with the work’ without the paperwork required by the contract. Lastly, plaintiff maintained that its foreman and sub-foreman prepared Foreman’s Daily Reports and submitted them to MDI on a daily or weekly basis and that these reports were sufficient to meet the contract requirements.”
In rejecting all of these arguments by the plaintiff, the court explained: “The contract’s notice and documentation requirements for extra work and delay damages are condition precedents to plaintiff’s recovery and the failure to strictly comply is deemed a waiver of such claims. Plaintiff conceded . . . it did not strictly comply with the contract’s mandates. Therefore, plaintiff clearly waived its claims.” Even if MDI had, as alleged by the plaintiff, orally instructed plaintiff to perform the extra work and modified the contractual requirements, the court said this would not relieve the contractor from meeting the requirements. According to the court, “The record reveals that MDI’s authority was clearly and unambiguously limited by the express terms of both the contract and the construction manager’s agreement and, as such, it lacked authority to waive or modify the notice or documentation requirements in plaintiff’s contract.”
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Risk management Note: It is vitally important that parties to contracts understand the principles explained in this case. When the contract states it can only be modified in writing, it means what it says. Courts enforce these provisions even in situations where the results might appear to be “unfair” and the owner might appear to receive a windfall by not having to pay for work. Although this case dealt with a construction subcontractor, the same principles and law apply equally to consulting contracts. If a consultant is asked by an owner to perform services that it deems are “additional services” beyond the scope of the “basic services” for which it was to compensated, it must adhere to the requirements of the contract to provide the owner with written notice that the services are “additional.” It will also have to meet any contractual requirements mandating that the notice be given to a specified representative of the owner for approval. Finally, it will have to adhere to contractual requirements concerning the documentation of costs associated with the additional services.
When consultants and contractors run afoul of the contract requirements, it is sometimes because the individuals running the job are not adequately familiar with the contract terms. In other instances it is because the parties have developed a comfortable relationship that has led to informality and apparent waiver of contract requirements. As explained by this court, however, the requirements are not actually waived in the absence of a written modification to the contract. From my experience, I don’t think that project owner’s intentionally lull consultants and contractors into performing services with the intent not to pay for them. But what sometimes happens is that when the contractor or consultant submit claims to the owner at the end of the project, the owner retains counsel who determines that the parties did not adhere to the notice and documentation requirements. In fulfilling their zealous representation to the owner, they advise the owner that because these requirements were not met, the claimants’ have legally waived their right to be paid for the additional work. There are even reported court cases in which the owner counter-claimed against the plaintiff and recovered progress payments it had made on work that had been performed with its knowledge but without written authorization of the designated owner’s representative. When it comes to construction contracts, the devil’s in the details.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 1, No. 6 (Jun 2000).
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