Is The Failure To Comply With A Change Order Notice Provision A Material Breach?

Division I of the Washington Court of Appeals recently sought to answer this question. It held that the failure of an owner and builders to comply with a written change order requirement did not materially violate a loan agreement. In Top Line Builders v. Bovenkamp, 179 Wn. App. 794, 320 P.3d 130 (2014) the property owner entered into a fixed-price contract with a builder to construct a custom residence. The owner secured a loan from his bank in an amount sufficient to cover the contract price with an allowance for potential cost overruns. The owner, builder and bank subsequently entered into a tri-party Loan Procedures Assignment and Consent Agreement (“LPA”) which mandated that any change orders resulting in cost overruns would be in writing and would be submitted to the Bank.

Over the course of construction the owner and builder agreed on a number of modifications to the construction plans—modifications which caused overruns. As you can guess, the owner and builder failed to execute the required change orders in violation of the LPA. Following completion of the home the builder moved to foreclose its lien for the balance of the unpaid contract price and overruns. The amount sought, however, did not exceed the total loan amount. The bank, a named defendant, sought to limit the builder’s recovery to the unpaid balance of the fixed price contract by arguing that the bank had no obligation to pay overruns because the change orders were never submitted.

The Court of Appeals ruled that the builder was entitled to the entire unpaid balance, including the amount owed under the change orders. The court held that the failure of the owner and builder to submit written change orders was a technical and immaterial breach of the LPA because “even if change orders were presented to [the bank], it had no right to object or require [the owner] to deposit additional funds.” In short, no harm no foul.

Although the court held that no material violation of the LPA occurred, this ruling should not be construed as an invitation to disregard the terms of your construction contracts. Had the change orders created overruns in excess of the total loan amount, the court likely would have found a material violation of the LPA.

School District Cannot Withhold Retention When the Only Dispute Is Whether Contractor Is Entitled to More Money for Change Orders

In a decision that should be self-evident to most readers, the California Second District Court of Appeals held that a school district could not avoid prompt payment act penalties when the “dispute” it relied upon to hold retention longer than 60 days after project completion was a dispute over the contract price owed to the contractor for change orders and delay and disruption. In East West Bank v Rio School District (April 1, 2015) 2015 DJDAR 3677, the District at the end of the project withheld $676,436 in retention after project completion and after all stop notices were released. It was still holding the retention 10 years after project completion when the trial court issued its decision.

The only dispute after project completion was whether the contractor was entitled to more money for 150 proposed change orders. Pointing out that the purpose of the statute was to prevent public entities from wrongfully delaying the payment of retention, the Court noted that once the withholding was no longer necessary to provide security against mechanic liens and deficiencies in the contractor’s performance the funds should be released.  The District had no business holding the retention hostage as leverage to resolve the other disputed issues. The Court upheld the trial court assessment of the statutory 2% per month penalty.