Who has authority? The issue arises in the context of project changes, directions on site about how the work is to be performed, and delays and acceleration to the project schedule.
But we haven't focused on the question of who has authority to act on behalf of the owner or the contractor. It is an important subject for contractors to understand — in the office and on the job site.
Authority is a relatively simple issue in federal construction contracting — the contracting officer has authority. He or she can delegate authority but must do so in writing.
Likewise, on a Texas Department of Transportation project, the standard specifications are clear that authority rests with the engineer of the department or its authorized representative. Item 5 of the standard specifications discusses the authority of the engineer in detail.
But authority issues can be less certain on state or local municipal projects and downright perplexing on private projects. We were reminded about this by a recent Texas appellate court case where a project ended prematurely and the parties were disputing the value of unperformed work. The contractor proposed a credit, and the owner’s project manager appeared to agree that the amount was acceptable. But later, that owner's principal indicated disagreement with the credit amount and disputed the project manager's authority to bind the owner. The appellate court ruled that the title, project manager, does not necessarily signify authorization to act on behalf of his or her employer.
So, our topic this month is how to appreciate the limits of project authority in real time in order to allow appellate courts to deal with other cases.
The law of authority is relatively simple. It involves essentially three different entities. We start with the principal, who is the owner in our hypothetical. The second party is the contractor, and the third party is the agent, who purports to act on the principal’s (i.e., owner’s) behalf. The agent could be an employee, a design professional, or a program manager.
The question begins when the contractor receives a directive from the agent. The question the contractor should be asking is whether that agent has authority to act on behalf of the principal. Does the agent’s communication bind the principal?
The law of authority says that the agent's communication binds the principal if the agent is authorized by the principal to act on the principal’s behalf. In other words, the delegation of authority must come from the principal.
This can create issues on the job site when an owner’s representative of some sort gives the superintendent a directive. It could be a directive for changed work, an approval of a materials submission or substitution, or advice from an inspector that a task should be performed differently or to a higher standard. But does that representative have authority from the owner?
If the superintendent understands the law of authority, the directive puts the superintendent in an uncomfortable position. Compliance may satisfy the owner's representative, but if there is cost or time involved, will the contractor be compensated?
In a perfect world, the superintendent could ask the owner’s representative whether he or she had authority to issue the directive and whether the directive would be binding on the principal — the owner. But that’s part of the discomfort. The superintendent risks alienating the owner's representative by questioning authority. And even if the representative declares that they have authority, the question hasn’t been answered. Remember that you need to hear about the authority from the principal, or someone who clearly does have authority.
If the question isn't resolved in real time, you run the risk that the authority issue may jeopardize compensation for additional costs or time. In such a dispute, lawyers will argue about implied authority or apparent authority. Did certain past conduct suggest that the principal had confidence in the agent’s actions and decisions? Perhaps there were occasions where the owner appeared to authorize the representative’s discretion or ratified a decision by the representative. In some cases, the contractor can argue that a pattern of conduct shows the delegation — as where the representative has previously directed changes that were later memorialized in change orders. This suggests a “course of conduct,” indicating that the representative does have the authority to bind the owner — or that the parties have revised the contract by their conduct.
So, all is not lost if the issue isn’t resolved in real time. But our purpose here is to help you avoid arguments about authority. How can the contractor diplomatically resolve the question of whether the representative’s directive is authorized by the owner and binds the owner?
There are a couple of approaches that can help with this discomfort or even avoid it altogether.
One is the written confirmation. The contractor might confirm the directive in writing to a senior owner’s representative, point out that the directive represents a change under the appropriate contractual provision, and confirm that the contractor is proceeding with the directive. That writing should indicate the contractor’s reliance on the directive and the representative’s authority to bind the owner. The written confirmation can also offer a polite exit ramp to the owner, for example: “If we have misunderstood the directive in any way, or if following this directive is not what the owner wishes, please let us know immediately so that we can sort out how you would like us to proceed and avoid any misunderstandings.”
A second approach is more proactive. During preconstruction, bring up authority issues. Who has authority to act on behalf of the owner? Is that authority limited in any way by subject or a dollar amount? Be prepared to respond with similar information about the contractor’s personnel and their authority. Then confirm those details in writing that is cosigned by authorized representatives of both the owner and the contractor. This might seem a little stilted, but you have the best interests of the project at heart. We're sure that you can offer a story or two about an experience that exemplifies the misunderstanding you want to avoid. And if that doesn't assure your counterpart of your good intentions, you can always just blame it on the lawyers.
| Your local Astec dealer |
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| Closner Equipment Co Inc |
| Closner Equipment Co Inc |
| Closner Equipment Co Inc |
| Closner Equipment Co Inc |
A third approach is to tell your lawyer that you want this issue resolved in the contract itself. You’ll indicate which of your team has authority to act on behalf of your firm, and there will be a similar identification of the owner’s authorized representative(s).
We should note that the issue is particularly thorny if one of the entities is a joint venture (JV). We have seen many appellate decisions stating that in the absence of any warning, a party contracting with a joint venture may assume that either venturer has the authority to bind the JV. As a result, both the parties to the JV and the party contracting with the JV have an interest in identifying — and thus limiting — who has the authority to act on the JV’s behalf.
There’s one more dynamic to delegated authority that we should mention. We sometimes see contracts that suggest that disputes on the project that aren’t resolved by the parties will be referred to a third party — often the architect, engineer, or another owner’s representative — for a final decision. Sometimes these clauses say that the decision will be final and binding unless one party takes some sort of appeal. And sometimes they just say that the decision is final and binding. There is no appeal.
Texas law can make such delegations enforceable. A couple of Texas appellate decisions find that such a delegation of authority to resolve a dispute is like an agreement to refer a dispute to arbitration. Certainly, the parties have the right to agree to have a dispute, or all disputes, resolved by final and binding arbitration. The decisions we mention provide that the parties similarly have the right to jointly authorize a design professional to resolve a dispute with a final and binding decision.
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| CLM Equipment Co |
| CLM Equipment Co |
| CLM Equipment Co |
| CLM Equipment Co |
Authority issues rarely announce themselves in advance. They tend to show up later, usually when someone says, “Wait. ... Who told you to do that?” By then, the work is done, the cost is real, and suddenly everyone is very interested in job titles and fine print.
The good news is you don’t have to learn this lesson the hard way. A little upfront effort — identifying who actually has authority, confirming directives in writing, and clarifying roles early — can save a lot of time, money, and awkward conversations later.
Because at the end of the day, “But the project manager told us to do it” is not nearly as convincing as it sounds — especially when the project manager’s boss disagrees. So, take the time to sort out authority early, confirm it often, and spare yourself from explaining to your accounting department why you built something on someone else’s say-so.
