Jonathan M. Preziosi and Stephanie L. Jonaitis | Pepper Hamilton LLP | July 6, 2016
Consider this scenario taken from an actual project dispute: The contractor has entered into an agreement with the owner for a project of any size. During the course of the project, the owner directs the contractor to perform additional work under a written “field change directive,” pending execution of a formal change order.1 The written field change directive sets forth the scope of the additional work to be performed by the contractor and states that payment will be calculated on a time and materials basis. The original contract documents contain a schedule assigning unit price values to particular categories of labor and materials. The contract also states, however, that the stipulated contract price shall not be amended until there is a fully executed change order.
Prior to the written field change directive being embodied into a final, formal change order, the owner becomes insolvent and does not have the funding to pay for work already completed. The contractor, now being owed some or all of the original contract price plus payment for work performed under the field change directive, wants to file a lien under the construction lien law of the state where the project is located (the Lien Law). Because construction lien laws in some states provide that a lien can only be filed for the unpaid portion of the stipulated contract price or amended contract price, however, a very legitimate question arises: Is the unpaid portion of the work performed under the written field change directive “lien-able” under the Lien Law?
Owners might answer this question in the negative. They would argue that, until the work performed under the field change directive is finalized and perfected into a final change order pursuant to the terms of the contract, there is no amended contract price and the work cannot form the basis for a lien. Contractors, on the other hand, would answer the question in the affirmative, arguing that the written field change directive constitutes a written amendment to the contract price and therefore will support a lien. To resolve the obvious disagreement and differing of interests of the owner, contractor and, in most cases, subcontractors, one needs to the turn to the express language of the applicable Lien Law and the policy behind it.
New Jersey’s Construction Lien Law, for example, is typical in limiting lien claims to the unpaid portion of the contract price or amended contract price. The law permits contractors or subcontractors to lien property for the value of the work or services performed “in accordance with [a] contract and based upon the contract price.” The law defines “contract” as “any agreement, or amendment thereto, in writing, signed by the party against whom the lien claim is asserted and evidencing the respective responsibilities of the contracting parties[.]” Therefore, in order to support a lien, a lien claimant must demonstrate that there is a contract or amendment thereto that (i) is in writing, (ii) sets forth the parties’ respective obligations and (iii) evidences a contract or adjusted contract price.
Thus, to the extent that the field change directive is in writing and sets forth (i) the parties’ obligations (e.g., scope of work to be performed) and (ii) the manner by which the extra work will be priced, the argument may be made that the additional work should be lien-able. Provided that these elements are present, the contractor would argue that it should be entitled to assert a lien related to the unpaid portion of the written field directive in accordance with the typical Lien Law.
The policies behind the typical Lien Law, it could be argued, also support the conclusion that written field directives are lien-able. The purpose of the “written contract” requirement of the New Jersey Construction Lien Law, for example, is to “provide ‘tangible evidence that will reduce the factual proof problems in litigated matters and provide a sound basis for third parties to evaluate the merits of the lien claim.’”2 That legislative purpose of the “written contract” requirement, the contractor could assert, is fully satisfied by field change directives that are in writing and set forth the respective responsibilities of the parties and the applicable pricing terms for the extra work.
Additionally, the contractor could argue that the “written contract” requirement should also be construed in a manner consistent with the broader underlying policies of the typical Lien Law. The New Jersey Lien Law, like many others, was primarily enacted to “guarantee effective security to those who furnish labor or materials to enhance the value of the property of others [.]”3 The statute is to be read “sensibly” and “with an understanding of the policies underlying the Lien Law.”4 Accordingly, so long as the written field change directive and the associated contract price change are readily quantifiable and verifiable, the field change directive is enforceable, the contractor would maintain, because it satisfies both the letter and the spirit of the common Lien Law’s “written contract” requirement.
There is another policy consideration to be explored. If field change directives are not lien-able until they are processed into “final” change orders, the ability of construction projects to continue without interruption and delay would be severely impeded. Field change directives are not only customary in the industry, but are also integral to the industry’s ability to ensure that projects do not come to a halt every time a change is encountered or extra work is assigned, until a final change order can be issued. Owners need the ability to direct the performance of extra work while the total cost of that work is still being quantified, and contractors who dutifully perform that work on a lump sum or time and materials basis pending issuance of a formal change order need to know that their work is protected by the Lien Law. The vital role of the field change directive or “construction change directive” is well-established in the construction industry and “common practice … to get the work rolling when the owner, contractor and architect are unable to agree on the price or time adjustments for the change.”5 Consequently, contractors engaging in the customary industry practices of performing additional work pursuant to a field change directive should most certainly be afforded a Lien Law’s protections. The use of field change directives would be severely chilled, and the progress of construction projects throughout the industry would be obstructed, if the courts were to adopt a rule that extra work performed on a time and materials basis pursuant to a field change directive cannot be liened, no matter how well documented, if the party who issued the field change directive goes defunct while that work is midstream and issuance of a final change order is still pending.
These arguments would weigh in favor of the contractor’s position that written field change directives are lien-able. Accordingly, and absent other countervailing circumstances, a contractor could credibly argue that it should not be considered a violation of a Lien Law for the contractor to file a construction lien that includes unpaid amounts billed pursuant to a written field change directive that sets forth a method for calculating the changed price.