On March 10, 2014, Division I of the Washington Court of Appeals held that a contract’s written change order requirements had been mutually waived when a contractor and owner encountered issues that necessitated changes to plans and specifications, then usually (but not always) discussed the changes and associated costs, and then the contractor performed the extra work. The Court of Appeals further held that recovery for the extra work where the parties had not agreed on price would be based upon the equitable doctrine of quantum meruit, and that the amounts recovered for extra work were subject to a RCW Ch. 60.04 lien.
Top Line Builders, Inc. v. Bovenkamp involved the construction of a custom “prototype” residence by Top Line Builders, Inc. (“Top Line”) for the Bovenkamps in Blaine, Washington.[i] The residence was designed to meet gold-certification standard of Leadership, Energy, and Environmental Design (“LEED”). The construction began in February 2008. Top Line indicated it believed it agreed to construction on a “cost-plus” basis, but the executed contract was in fact a “fixed-price contract.”
The contract required written and signed change orders. The contract authorized the contractor to proceed with changed work at the owner’s verbal direction, but indicated that the contractor would follow-up with a written change order “within the current month.” In practice, when the need for changes in the scope of work arose, Top Line and the Bovenkamps often discussed the changes and “sometimes-but not always-agreed to the costs associated with those changes.” The parties never executed any written change orders or submitted any such change orders to the project lender, U.S. Bank.
By April 2009, Top Line had substantially completed the work. At that time, the Bovenkamps still owed Top Line approximately $25,000 for base scope work and $85,000 for extra work. For reasons that are not expressly clear in the opinion, the Bovenkamps did not pay Top Line or submit a final draw request to U.S. Bank for payment.
As a result, Top Line recorded a construction lien on the property and filed a lawsuit to foreclose the lien. U.S. Bank was named as a defendant. Top Line asserted that its construction lien had priority over U.S. Bank’s deed of trust. U.S. Bank acknowledged that Top Line’s lien had priority over U.S. Bank for the base scope work, but argued that the changed work should be subordinate to U.S. Bank’s interest. The basis for U.S. Bank’s argument was that Washington’s construction lien statute limits recovery on a construction lien to the unpaid “contract” balance. Accordingly, U.S. Bank argued that (a) the contract’s written change order requirements served as the sole means for increasing the contract price for purposes of the lien statute, and therefore no lien could be maintained for the extra work without change orders and (b) the amount awarded for the oral change orders exceeding the contract price in quantum meruit were not part of the contract price, and therefore could not be liened.
The trial court held that Top Line and the Bovenkamps mutually waived the change order requirement. Although U.S. Bank did not waive the change order requirement, its consent was immaterial because the amount of the extra work did not exceed the loan amount. Ultimately, the trial court found that Top Line’s claim for both the base scope work and extra work were secured by its construction lien.
The Court of Appeals affirmed the trial court’s ruling, holding that the parties’ conduct of discussing the changes-even if not agreeing on additional compensation-resulted in a mutual waiver of the contract’s change order requirements. Where the price was agreed upon, the Court noted that recovery on the change orders was properly in contract and where the contract price was not agreed upon, the appropriate basis for recovery was quantum meruit. The Court further held that both the judgment for the sums awarded in contract and the sums awarded on the change orders in quantum meruit were properly subject of the construction lien. The contract work and the extra work were both clearly “furnished for the improvement of real property,” at the “insistence of the owner,” and pursuant to an initial contract and later oral request for changes, which was sufficient for Top Line’s lien to attach. The Court noted that the ruling was consistent with prior Washington appellate decisions that allowed for recovery under RCW Ch. 60.04 in quantum meruit, but which did not fully analyze the construction lien statute.
Finally, the Court rejected U.S. Bank’s argument that the contractor and owner had materially breached the Bank’s Loan Procedures Assignment and Consent Agreement (“LPA”) by mutually waiving the change order provisions. The Court further noted that U.S. Bank was barred from seeking equitable relief with respect to the enforcement of the LPA and Contract because it was cherry picking only the select provisions it sought to enforce, while failing to comply with other provisions.
Comment: Anytime an appellate court in Washington finds a mutual waiver of construction contract provisions, it is noteworthy given the very strict approach Washington courts have taken with respect to enforcement of contractual provisions in the notice and claim context. Prior discussion of the enforcement of such provisions can be found here. With that said, the contract provision in this case, which allowed for oral direction to perform work to be followed up by written change orders, is friendly to a finding of waiver. Contractors should be aware that the provisions in their own contracts will almost always have a significant effect on their ability to argue to a court or arbitrator that recovery for inadequately documented extra work should be allowed.
[i] __ Wn. App. __, 320 P.3d 130 (Wash. Ct. App. 2014).