Construction Law Update: Iowa Court of Appeals Says Contractor's Failure to Obtain Written Change Orders Precludes Payment for Extra Work
In Ryan Cos. US, Inc. v. FDP WTC, LLC, 2022 WL 469336 (Iowa Ct. App. 2022), the Iowa Court of Appeals concluded that “Ryan failed to obtain some of the contractually required change orders to increase the GMP” so it reversed “that part of the judgment in Ryan's favor that was based on work not covered by signed change orders.” Ryan and the project owner, FDP WTC, entered into two written contracts, each with a guaranteed maximum price (“GMP”). Because of design changes, Ryan performed extra work. FDP did not sign many of the proposed change orders submitted by Ryan for the extra work, but “FDP [had] requested or otherwise orally approved such work.” At trial, the district court entered judgment for Ryan, including judgment for the extra work performed by Ryan that FDP had orally approved but for which it had not signed change orders.
Ryan’s payment claims for the extra work were based on express and implied contract claims. On the express contract claims, the Iowa Court of Appeals concluded that the written contracts required that “any changes in scope ‘shall be incorporated by Change Order,’” which “clearly guaranteed FDP would not have to pay more than the GMP without written and signed change orders to increase the GMP.” Because Ryan failed to obtain written change orders for the extra work, the Court concluded that it was not entitled to payment under the written contracts.
Ryan countered that even if it were barred from recovery under the written contracts, it was still entitled to payment for the extra work under implied contract claims because the extra work was outside the scope of the contract and the evidence was undisputed that FDP knew about the extra work, agreed that it was extra work, and had orally approved the extra work and directed that it be performed. The Iowa Court of Appeals rejected the argument and explained that “the work at issue was covered by the parties’ express contracts due to specific language in the contracts requiring valid change orders to add such work to the scope of the project.” As a result, the legal principle that an express contract and an implied contract cannot coexist with respect to the same subject matter applied thereby precluding recovery under the implied contract claims.
Finally, the Iowa Court of Appeals rejected Ryan’s argument that FDP had waived the written change order requirement because “the [district] court did not make specific findings on the issue of waiver of the change-order requirement” so Ryan had waived its waiver argument.
The Court of Appeals’ decision seems to create tension with established Iowa law that a “written change order requirement . . . is not of the essence of the contract, but is a detail in the performance,” and that it “can be waived by the owner's knowledge of, agreement to, or acquiescence in such extra work, a course of dealing which repeatedly disregards the requirement, and a promise to pay for extra work, orally requested by the owner and performed in reliance thereon.” Cent. Iowa Grading, Inc. v. UDE Corp., 392 N.W.2d 857, 860 (Iowa Ct. App. 1986); Berg v. Kucharo Constr. Co., 21 N.W.2d 561, 567 (Iowa 1946); Palmer v. Glasbrenner, 2004 WL 1159736, at *3 (Iowa Ct. App. 2004); Cent. Iowa Grading, 392 N.W.2d at 860 (stating that a party “waive[s] th[e written change order] requirement in the subcontract by entering into oral agreements . . . regarding the extra work”). Here, it was undisputed that, prior to performing the extra work, Ryan had submitted proposed written change orders to FDP, FDP knew of the extra work, orally agreed to it, and acquiesced in its performance, and Ryan relied upon FDP’s knowledge, agreement, and acquiescence in performing it. These facts fit squarely within prior Iowa appellate court cases’ requirements for the existence of a waiver. Although the district court did not use the magic words of “waiver” in its judgment, it explicitly found all of the facts necessary to establish that a waiver occurred.
The decision also transforms contractual written change order requirements into potential “super provisions” that preclude the parties from modifying them orally or by their course of dealing, which creates tension with other contract law principles.
The lesson from this case for contractors is this: if your contract requires signed written change orders for extra work, then be sure to obtain written change orders before performing extra work. Otherwise, a contractor could face the following declaration by the Iowa Court of Appeals in this case: “Contracts mean what they say. Here, a party that failed to follow what a contract says in terms of the procedure to change the scope of the contract seeks to avoid the consequences of that failure. We decline to allow such avoidance.”