Changes are a fact of life in design and construction. Written contracts typically require that the changes are not valid unless formalized in writing and signed by an authorized agent of the owner. Frequently, though, to advance progress, contractors or design professionals proceed on oral authorizations or letters signed by an owner’s employee.
For private contracts, the courts have recognized that parties can waive the contract’s formalities regarding the need for written change orders by their course of conduct. See, e.g., Tados v. Kuzmark, 660 N.E.2d 162, 170 (Ill. App. Ct. 1995). A recent case reminds us that public contracts are different: on public contracts, statutes or ordinances apply.
As a designer-installer of a computer system learned too late, a municipality’s project manager did not have authority to bind a municipality to pay for changes in U.S. Neurosurgical, Inc. v. City of Chicago, 2009 U.S. App. LEXIS 15106 (7th Cir., July 9, 2009). While U.S. Neurosurgical is not a construction case, its principles generally apply to many public design and construction contracts.
U.S. Neurosurgical involved a contract to design and install a computer information system for the city of Chicago’s Department of Health. Data entry was possible by key, but the city also wanted to enter data by scanning. The installer considered the programming necessary to introduce a scanning function to be extra work.
The contract contemplated and set forth procedures for changes. The installer had to submit a written work plan and cost estimate. If agreement was reached, the installer then had to submit a detailed work order. That work order had to be approved by various levels at the city. If so approved, the city would issue a written amendment to the contract corresponding to the work order.
The installer contended the city’s project manager had waived those procedures and even had paid for extra work when the procedures had not been followed. But the city refused to pay for the alleged extras for the programming of the scanning function.
The installer sued. The city argued that the scanning program was not extra work and, even if it were extra, installer had not followed the contract’s changes process and the city’s project manager lacked authority to waive those procedures. (The city’s project manager denied he had told the installer that it would be paid for the scanning programming as an extra.)
The district court agreed with the city that the city was not obligated to pay the installer for the alleged “extra work.” The installer appealed.
On appeal, the Seventh Circuit began by announcing that “a modified contract could only be valid if it was entered into with proper authority.” Thus, the first question to decide was: Did the city’s project manager have authority to order changes that would bind the city?
Under Illinois law, a municipality’s power to contract is limited by statute. CFM v. City of Chicago, 516 N.E.3d 880, 884 (Ill. App. Ct. 1987). Under the Illinois’ Municipal Purchasing Act (65 ILCS 5/8-10-016), the city created a department of purchases, contracts and supplies headed by a procurement officer, who acts as the sole agent of the municipality in contracting. “Unless the power to bind the city in a contract is expressly delegated to someone other than the statutory authority, only corporate authorities may execute contracts.” McMahon v. City of Chicago, 789 N.E.2d 347, 352 (Ill. App. Ct. 2003). Consequently, “even if [the City’s Project Manager] reached agreement with [the contractor] that the scanning implementation was additional work requiring additional compensation, the agreement did not comply with the provisions of the Municipal Purchasing Act or the Municipal Code of Chicago. [The project manager] was not the city’s procurement officer and had no statutory authority to bind the city in contract.”
U.S. Neurosurgical, 2009 U.S. App. LEXIS 15106, * 11.
A contractor might assume that the city’s project manager had the authority but the Seventh Circuit emphasized that “[The contractor] is charged with knowing the level of authority [the project manager] actually possessed.” D.S.A. Finance Corp. v. County of Cook, 801 N.E. 2d 1075, 1081-82 (Ill. App. Ct. 2003). Simplystated, “Business transactions involving municipal corporations are not governed by the same rules that govern nongovernmental entities.”
Public contractors must remember two things: (1) The contractor “cannot enforce a contract unless the applicable statutory method of executing the contract has been followed; and (2) statutes and ordinances limit an official’s authority to bind a government entity to a contract.”
The installer argued that “the contract stated that [project manager’s] duties included the ‘approval of all changes to project plans.’” From that, the installer reasoned that the city had delegated change approval authority to the city’s project manager. Disagreeing, the appellate court said: “authority vested in [project manager] to oversee changes to a project plan does not equate to a delegation of authority to bind the city contractually. A satisfactory project plan was but one of a number of procedures required before a new contract could be established. … Although [project manager’s] approval of changes was necessary to create a modified contract, it alone was not sufficient.” U.S. Neurosurgical, 2009 U.S. App. LEXIS 15106, * 14 – 15.
The appellate court continued that, even if the city’s project manager actually had been delegated the proper authority, installer still would lose. The contract required amendments to be in writing. In private contracts, oral modifications might be possible despite a contract’s requirement for a written amendment. But, with this public contract “oral modifications were not only prohibited by the contract, but by statute. The city’s municipal code requires that all agreements with the city be in writing.” See Municipal Code of Chicago, Ill. 2-92-050.
But if the city had paid for some “extra work” without a writing, would the city then be “equitably estopped” to deny other compensation based on the lack of a writing? No, said the Seventh Circuit: “A contract that is entered into by a municipality which is expressly prohibited by law is void and cannot thereafter be rendered valid by estoppel or ratification on the part of the municipality.” Ad-Ex, Inc. v. City of Chicago, 565 N.E.2d 669, 675 (Ill. App. Ct. 1990). Even if the contractor and the city’s project manager “had a meeting of the minds which they believed yielded a modified contract calling for [the contractor] to receive additional compensation, that purported contract was immediately and permanently void.” U.S. Neurosurgical, 2009 U.S. App. LEXIS 15106, * 16.
Not all public contracts require a procurement officer’s signature to authorize a contract amendment. But, the U.S. Neurosurgical decision is a sobering reminder of the danger of ignoring contractual formalities regarding changes on public contracts.