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As a property owner if you want to modify a construction contract, consult an experienced Midway Utah real estate lawyer.

A contract modification is any written alteration to the terms, conditions, or performance requirements of an existing contract, whether accomplished unilaterally or bilaterally.

The unilateral modification is signed only by the property owner. A unilateral modification may be used to make administrative changes in contract provisions, issue change orders when time or circumstances do not permit the negotiation of a full agreement as to the consequences of the change itself, make changes authorized by articles other than the Changes clause (i.e., Property clause, Suspension of Work clause, etc.), issue termination notices, or increase funding levels under the contract, in the form of a unilateral determination, when agreement cannot be reached as to a fair and reasonable price for the changed work.

The bilateral contract modification, frequently referred to as a supplemental agreement, is executed by both parties to the contract. It is essentially a wholly new agreement negotiated by the parties, which does not necessarily modify all parts of the original agreement. Bilateral agreements are used to make negotiated equitable adjustments resulting from the issuance of a change order, definitize letter contracts, and reflect other agreements of the parties modifying the terms of the contract. To be legally effective, however, the bilateral modification must demonstrate mutuality of consideration. Otherwise, it is a nullity.

The standard Changes clause permits the property owner to make changes only within the ‘general scope’ of the contract. Because of this phrase in particular, and the structure of the article in general, the courts have consistently ruled that such a change provision does not authorize a drastic modification beyond the scope of the contract. Rather, a fundamental alteration of this nature is a contract breach, or cardinal change as it is sometimes referred to, entitling the contractor to breach damages. Under established case law, a change outside the scope of the contract is a breach. It occurs when the property owner affects an alteration in the work so drastic that it effectively requires the contractor to perform duties materially different from those originally bargained for.

The issuance of change orders will, of course, have varying effects in different situations depending on the scope and location of the work required by the orders and the timing and manner of the issuance of such orders. The issuance of a large volume of change orders could adversely affect the contractor’s ability to efficiently perform the basic contract. Since such dislocation is a normal and natural consequence of the circumstances, a contractor would be entitled to recover a fair and reasonable amount for the additional costs it sustained.

Under certain circumstances a contractor could justifiably refuse to continue performance even though directed to do so by the property owner. This would be the case where such direction constituted a material breach of contract.

A contractor could properly refuse to perform upon a material breach by the property owner. As a result of a material breach, the contractor has a legal right of avoidance, thereby discharging his duty to perform and relieving him of a default termination and the consequences that flow there from. Whether the contractor has the right to refuse performance depends on the seriousness of the property owner’s breach and the impact on the contractor’s ability to perform. Short of commercial impossibility, a contractor is not entitled to refuse performance on the ground that performance would entail substantial expenses not taken into account in its bid price. Absent clear property owner direction to proceed with the manufacture of useless articles, the contractor is not obliged to do so. But the consequences of the property owner’s breach must be so severe as to provide the contractor with the right of avoidance.

Failure or unreasonable delay in making payment has also been held to constitute a material breach of contract, justifying abandonment by the contractor. In a contract that provides for periodic installment payments, a failure to make a payment at the time specified is a breach that justifies abandonment of work; whenever one party to a contract is guilty of such a breach, the other party may treat the contract as broken and may abandon it. A contractor has a right to assume from the inception of the contract that he would be paid according to the requirement of the contract, and the failure of the property owner to pay justified his refusing to proceed. Whatever might have been his faults up to the time payment was refused, the property owner, having permitted him to proceed, having accepted the performance of the contract, and having received the benefit of his labor, was not within its rights to withhold the pay in order that it might be secured against the consequences of a probable or possible failure.

Where the property owner’s failure to make progress payments impairs the contractor’s financial ability to continue performance, such failure excuses the contractor from continuing. The contractor does not have the burden of proving that he would have been able to perform but for the property owner’s breach.

EQUITABLE ADJUSTMENTS

The phrase “equitable adjustment” is a term of art used to describe the compensation to which a party may be entitled for a change within the general scope of the contract.

The making of an equitable adjustment cannot be reduced to the application of a mathematical formula. If the intended meaning was reasonable costs plus a fair profit, it would have been easy for the clause to have been so written. What constitutes an equitable adjustment depends in substantial part on the facts of the particular case. It cannot be said that as a matter of law an equitable adjustment must include a profit allowance in all cases. An equitable adjustment normally includes an allowance for overhead and profit, and this is true whether the equitable adjustment is upward or downward. The key is always to put the contractor in as good a position as he would have been in, but for the property owner’s action.
When the property owner makes a change, it should not alter the contractor’s position from making a profit to suffering a loss, but should merely compensate for the change made, leaving the contractor in the same relative position as before the change.

Repudiation

A repudiation will be found where it is evident that the contractor is totally unable to perform the contract. Repudiation will be found in those circumstances where a contractor makes an unequivocal statement that he will abandon the work. If the contractor fails to follow the instructions of the property owner to proceed with the work required by the contract, the courts, absent an adequate defense by the contractor, will view the property owner’s default termination favorably.

An improper omission of a cure notice and termination for default, based on acts that do not show that there has been an anticipatory repudiation of the contract, will not be upheld by the courts even though the contractor subsequently admits that he had abandoned all intention of performing the contract. The propriety of the default depends on what the property owner knew at the time of the termination. Although the property owner may reasonably infer that the contractor is not going to perform, inference s not enough. The issue of whether the contractor’s alleged repudiation was unequivocally manifested to the property owner is not determined by reasonable inferences or educated guesses even if the inferences or guesses prove to be correct. The issue of anticipatory repudiation is determined by what was actually manifested to and perceived by the property owner and whether such manifestation was capable of being understood in only one way. In this connection, the settled principle that the property owner has the burden of proving the propriety of its action in terminating a contract for default must not be overlooked. The property owner must shoulder the burden of proving that it perceived an unequivocal manifestation of the contractor’s alleged anticipatory repudiation. This burden, in the sense of the “risk of nonpersuasion,” is not satisfied merely by evidence of the reasonableness of inferences drawn by the property owner.

The term “abandonment” does not necessarily carry a pejorative connotation so as to equate it with “anticipatory repudiation” in all instances. A promisor may be justified in abandoning performance of its obligations when the other party has committed a material breach, such as by delaying performance or otherwise rendering performance commercially impossible. Similarly, failure or unreasonable delay in making payment has been held to constitute a material breach, justifying abandonment of performance by a contractor. Therefore, abandonment of performance does not in itself justify a default termination. Of course, an unjustified abandonment of performance, accompanied by manifestation to the promisee of the promisor’s unequivocal refusal to complete the contract, amounts to an anticipatory repudiation and gives rise to an immediate right of action.

FAILURE TO PERFORM OTHER PROVISIONS OF CONTRACT

The standard Default articles provide that the property owner may terminate a contract in whole or in part if the contractor fails to perform any other provision of the contract.

RIGHT TO SET OFF

The property owner has the right to set off any claim it has against a contractor by refusing payment of funds that are otherwise due the contractor. The right to set-off has been held to be inherent in the United States and to be grounded in the common law right of every creditor to apply the monies of his debtor in his hands to the extinguishment of the amounts due him from the debtor.

ACCORD AND SATISFACTION

Accord and satisfaction has been defined as the discharge of a contract, or of a disputed claim arising under or related to a contract, by the substitution and execution of a new agreement between the parties in satisfaction of such contract or disputed claim. Accord generally refers to the execution of a bilateral agreement requiring additional performance or payment, whereas satisfaction occurs when the additional performance or payment is accomplished.

As a general rule, the execution by a contractor of a release that is complete on its face reflects the contractor’s unqualified acceptance and agreement with its terms and is binding on both parties. It is well established that where a contractor has the right to reserve claims from the operation of a release, but fails to exercise that right, it is neither improper nor unfair, absent some vitiating or aggravated circumstance, to preclude the contractor from maintaining a suit based on events that occurred prior to the execution of the release.

Modifications to a contract after performance has been completed, which include general language releasing the property owner from further liability and which adjust the contract price, are generally held to be an accord and satisfaction. If the modification was executed as a bilateral agreement by the parties and, by its terms, increased the price of the contract to reimburse the contractor for additional costs incurred due to discrepancies and errors in drawings and changes in contract requirements, but contained no limitations, exceptions, qualifications, or reservations, it will be considered to be an unconditional settlement of the additional costs incurred in performing the contract. It has been consistently held that in the absence of any showing of fraud, collusion, or mutual mistake, an agreement is binding on both parties. Such an agreement should not thereafter be unilaterally disturbed.

The granting of a time extension, “with no increase in funds,’ to perform property owner-requested work does not preclude recovery of additional compensation for that work because the limiting clause does not constitute an accord and satisfaction releasing all claims or surrendering the contractor’s rights under the contract. In interpreting a change order as a release or an accord and satisfaction as to any claim not clearly included in the agreement, the intent of the parties as to the effect of the agreement and the matters included or excluded is a primary factor that must be resolved on the basis not only of the language of the agreement, but also of the circumstances surrounding the agreement, including negotiations between the parties and their actions and conduct with respect to the agreement.

Before making any modifications to an existing construction contract, speak to an experienced Midway Utah real estate lawyer. The modifications can affect your rights under the contract.

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When you need legal help with a real estate matter in Midway Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.