Your Contract Might Not Be Ironclad: A Primer on Waiver-by-Conduct

Presumably before the commencement of work on a construction project the parties will expend significant resources drafting and negotiating their contract documents. After spending so much energy and effort to reach final terms and conditions, the parties expect certain results from their contracts regarding how risks and responsibilities are allocated and what outcomes to anticipate in the event of claims and disputes. Although the actual contract terms usually carry great weight in any contract dispute, the parties’ actions and course of dealing during construction could carry even greater significance than the contract terms.

Consider the plight of the unwitting owner on a construction job that has become riddled with numerous change order claims for additional compensation or contract time. In this example, assume the prime contract contains language favorable to the owner that (a) requires written change orders executed by the owner before the commencement of the changed or additional work and (b) waives claims for additional compensation or time arising from the work based on the contractor’s noncompliance with the procedure. Also assume the owner orally approved the contractor’s changed or additional work on the project during or even after prosecution of the work on repeated occasions. Relying on the owner’s pattern of behavior, the general contractor continued to submit claims for additional costs and time after completion of the work. The owner often paid the contractor for such work as part of the monthly progress payments. But, when the change order claims grew too large (towards the end of the project), disputes ensued.

When confronted with disputed change order claims, where the owner seriously questions the propriety of the change order claim or the amount requested by the contractor for performing the disputed work, the owner naturally retreats to the express language of the governing contract documents to provide protection against claims that deviate from the parties’ contractually agreed process or procedure. After all, it is the all-encompassing contract, a heavily negotiated and carefully drafted document, that should control in these situations, even if the parties may have established a course of dealing as to how change order claims are processed, right? Not necessarily. In this instance, the owner would be unwise to rely exclusively on the contract terms without acknowledging the significance of the parties’ (or namely, the owner’s) behavior relative to contract administration and change order claims.

The foregoing hypothetical underscores the importance of vigilant and unwavering adherence to the contract terms and adopting behaviors during construction that remain consistent with, and do not materially deviate from, the contract processes or procedures. Appellate cases from various jurisdictions recognize and uphold the concept of “waiver-by-conduct.” See Mike M. Johnson, Inc. v. Cty. of Spokane, 150 Wash. 2d 375, 386, 78 P.3d 161, 166 (2003) (“A party to a contract may waive a contract provision, which is meant for its benefit, and may imply waiver through its conduct.”).

Courts have even held that a party’s conduct can serve as a waiver of contract provisions even if the governing contract contains a “nonwaiver clause.” These clauses provide, for example, that no action or failure to act by the parties shall constitute a waiver of a right or duty afforded them under the contract, except as may be specifically agreed upon in writing.

But even these provisions, offering seemingly greater protection against waiver-by-conduct, may be unavailing in the context of an established course of dealing between the parties. See Moore v. Mut. of Enumclaw Ins. Co., 317 Or. 235, 241, 855 P.2d 626, 630 (1993) (“Under general contract law, a party to a written contract can waive a provision of that contract by conduct or by oral representation, despite the existence of a nonwaiver clause.” (citing, e.g., Fisher v. Tiffin, 275 Or. 437, 441, 551 P.2d 1061, 1063 (1976) (vendor’s long-standing practice of accepting late payments constituted waiver of time provisions despite nonwaiver clause)).

While waiver-by-conduct usually “requires unequivocal acts of conduct evidencing an intent to waive” express contract provisions (see Mike M. Johnson, 150 Wash. 2d at 386, 78 P.3d at 166 (citation omitted)), courts may scrutinize the parties’ conduct and construe a pattern of behavior as determinative when assessing how to enforce contract terms. Therefore, when assessing the viability of disputed contract claims and defenses, the parties’ conduct and course of dealing should be carefully considered. And the contract terms, while critically important, should be regularly reviewed and consistently followed at all times during the construction contract.

Originally published as “OP-ED: That contract might not be ironclad: a primer on waiver by conduct” by the Daily Journal of Commerce, Oct. 17, 2019.