Problematic Construction Contract Clauses: Oral Modifications

This is the final blog post in a 12-part series that discusses clauses in construction contracts with the goal of providing awareness of contract terms that often cause difficulties and give rise to claims.

Previous blog posts have addressed problematic contract clauses involving differing site conditions, no damages for delay, changes, coordination, suspension of work, warranty and defects liability, variation in quantity, inspection, force majeure, flow down, and compensation and payment, weather, and escalation. This post discusses oral modifications clauses.

Generally, a written contract can be modified subsequent to its execution, and such modification can be either oral or written.¹ Construction contracts, however, typically contain provisions that require any modifications to be in writing.² A requirement that modifications must be in writing will generally be enforceable.³

Despite the general rule upholding the requirement of written modifications, certain exceptions are well recognized. Most importantly, the conduct of the parties can evidence an intent to “waive” the requirement of a writing.⁴ Whether or not a waiver will be found is a very fact specific question, hinging upon the apparent intent of the parties. For example, a statement by a prime contractor that an alleged item of extra work would be, “take[n] care of…down the line” was held insufficient to establish a waiver in Austin Elcon Corp. v. Arco Corp.⁵ However, that very same statement could give rise to a contrary result when put before a different judge, jury, or arbitration panel. Accordingly, much caution should be exercised when discussing potential extras because the outcome could ultimately hinge upon an arbitration panel, judge, or jury’s conclusion regarding the apparent intent of the parties.

In the Balli case, for example, the extra work was orally requested by the owners and the prime contractor, and the construction superintendent orally stated that the subcontractor would be paid extra. The court allowed the claim for extras, stating that “a reasonable man would believe he would be paid extra notwithstanding a writing requirement.”⁶ This would not appear to be much different than the statement that extra work “would be taken care of down the line,” yet the result was drastically different than in the Arco case.

Another situation where additional compensation may be recovered, even in the absence of a written agreement, is where the work is entirely outside the scope of the written contract.⁷ In the Husar Industries case, the work in question was expressly excepted from the written contract. In other cases, however, an assessment of whether the work in question is outside the scope of the original contract may be necessary to determine whether it is truly an extra.

In Board of Regents of the University of Texas v. U.S. & G. Construction Company,⁸ the contractor was forced to construct the project as it was being designed because the original design was not adequate. The contract required change orders to be in writing. The contractor received numerous oral directives by the owner to modify the work. Under these circumstances, the court determined that the written change order procedure for the project was inadequate. The owner had breached the agreement by failing to give adequate plans, and it could not hold the contractor to the written change order procedure.

Oral statements can also wind up as part of a contract even where the writing states that it contains the entire agreement of the parties. This may happen as the result of fraud or misrepresentation allegations, or by means of consumer legislation such as Texas’ Deceptive Trade Practices Act.⁹

While the examples above resulted in oral modification being upheld, contractors should not rely on these examples. It is always best practice to follow-up with a written change order request to the owner, or from the subcontractor to the general contractor, when an apparent oral modification occurs.

¹    Schwartz v. NMS Industries, Inc., 517 F.2d 925 (5th Cir. 1975) cert. denied, 423 U.S. 1054.

²    See, e.g., AIA Document A201, General Conditions of the Contract for Construction, Subparagraph 1.1.1.

³    Chambless v. J. J. Fritch, General Contractor, Inc., 336 S.W.2d 200 (Tex Civ. App.—Dallas 1960, writ ref’d n.r.e.).

⁴    Texas Construction Associates, Inc. v. Balli, 558 S.W.2d 513 (Tex Civ. App.—Corpus Christi 1977, no writ).

⁵    Austin Elcon Corp. v. Arco Corp., 590 F.Supp. 507 (N.D. Tex. 1984).

⁶    Balli, 558 S.W.2d at 522.

⁷    Husar Industries, Inc. v. A. L. Huber & Son, Inc., 674 S.W.2d 565 (Mo. App. 1984).

⁸    Board of Regents of the University of Texas v. U.S. & G. Construction Company, 529 S.W.2d 90 (Ct. App. Austin 1975, writ ref’d n.r.e.).

⁹    Weitzel v. Barnes, 691 S.W.2d 598 (Tex 1985).

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