RULING DEALING WITH CONSTRUCTIVE CHANGES, CONSTRUCTIVE SUSPENSION, AND THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING

Posted on January 14, 2024January 14, 2024 by David Adelstein

A dispute pending in the Armed Services Board of Contract Appeals (ASBCA) dealt with interesting legal issues on a motion to dismiss. See Appeals of McCarthy Hitt-Next NGA West JV, ASBCA No. 63571, 2023 WL 9179193 (ASBCA 2023). The dispute involves a contractor passing through subcontractor claims due to impacts caused by the COVID-19 pandemic and the government’s response to the pandemic. More particularly, the claim centers on the premise that the government “failed to work with [the contractor] in good faith to develop a collaborative and cooperative approach to manage and mitigate the impacts and delays arising from the COVID-19 pandemic.” See Appeals of McCarthy Hitt.

The contractor (again, submitting pass through claims from subcontractors) claimed: (a) constructive changes to the contract entitling it to an equitable adjustment under the Changes clause of Federal Acquisition Regulation (F.A.R.) 52.243-4; (b) construction suspensions of the contractor’s work entitling it to an equitable adjustment under the Suspensions of Work clause of F.A.R. 52-242-14; and (c) the government breached the implied covenant of good faith and fair dealing. Each of these legal issues and theories will be discussed below because they are need-to-know legal issues. Keep these legal issues in mind, and the ASBCA’s ruling on the motion to dismiss as its analysis may demonstrate fruitful in other applications.

(a) Constructive Changes

“To prevail upon a constructive change theory, a contractor must show (1) that it performed work beyond the contract requirements, and (2) that the added work was ordered, expressly or impliedly, by the government.” See Appeals of McCarthy Hit.

The government moved to dismiss this claim arguing the complaint did not allege sufficient facts to support a constructive change theory. The ASBCA disagreed and found sufficient facts were pled to allege the government required the contractor (and subcontractors) to perform beyond the contract requirements.

For example, [the contractor] alleges that the [government] required it to comply with government guidance on COVID-19 and implement COVID-19 exposure control procedures; perform additional job safety analyses and task-specific analyses; create new health and safety signage; provide additional training; develop contact tracing, testing, and quarantine programs; impose quarantines and enforce return-to-work protocols; impose tool and shared surface disinfection and cleaning requirements; comply with social distancing requirements; provide and utilize additional personal protection equipment; add air filtration systems; require temperature checks and daily health checks; permit additional breaks; provide for additional break areas; change office, break, and trailer spaces and configurations; change site logistics; and change crew compositions and work plans.

See Appeals of McCarthy Hit.

(b) Suspension of Work

To recover under the Suspension of Work clause, the contractor must show (1) that the contracting officer suspended the work; and (2) that the resulting delay was unreasonable. A constructive suspension occurs when, absent an express order by the contracting officer, the work is stopped for an unreasonable amount of time and the government is found to be responsible for the work stoppage. “A constructive suspension has the same effect and consequences as an actual suspension, and relief should be granted as if an actual suspension order had been issued.

See Appeals of McCarthy Hit (internal citation omitted).

The government moved to dismiss this claim arguing the complaint did not allege sufficient facts to support a constructive suspension theory. The ASBCA disagreed and found sufficient facts were pled to support a constructive suspension. For example, the contractor alleges:

[The government’s] actions and inactions in administering the Contract once the pandemic struck had the effect of unreasonably disrupting, delaying or hindering the work on the Project. For example, the complaint alleges that the government refused to work with [the contractor] to develop a collaborative and cooperative approach to manage the impacts caused by the pandemic, instead simply insisting that the work proceed on schedule, which had the effect of hindering and delaying the work unreasonably. The complaint also alleges that [the contractor] informed [the government] of the impacts of its action and inactions, but that [the government] refused to acknowledge that the work was being delayed.

See Appeals of McCarthy Hit.

(c) Implied Covenant of Good Faith and Fair Dealing

Like every contract, the Contract here contained an implied duty on each party to perform with good faith and fair dealing. The implied duty “prevents a party’s acts or omissions that, though not proscribed by the contract expressly, are inconsistent with the contract’s purpose and deprivethe other party of the contemplated value.” A breach occurs when a party violates its obligation “‘not to interfere with the other party’s performanceand not to act so as to destroy the reasonable expectations of the other party regarding the fruits of the contract.”’ The implied duty “‘cannot expanda party’s contractual duties beyond those in the express contract or create duties inconsistent with the contract’s provisions.”’

See Appeals of McCarthy Hit (internal citations omitted).

The government moved to dismiss this claim arguing the complaint did not allege sufficient facts to support a breach of an implied covenant and good faith and fair dealing claim. The ASBCA disagreed and found sufficient facts were pled to support this claim. For example, the complaint alleges:

“[A]fter the pandemic struck, the government declined to cooperate with it in managing or addressing the impacts, which were severe andunexpected. Rather, it is alleged, the government insisted that [the contractor] and the Subcontractors continue to perform as though nothing ofconsequence was occurring, used the DO-C2 rating as a means of exerting pressure to maintain the schedule at all costs, and was non-responsiveto requests for help in complying with all the new and changing requirements placed upon [the contractor] and the Subcontractors. Theseallegations suggest that the government essentially left [the contractor] “twisting in the wind” by insisting on uninterrupted performance in the faceof extraordinary circumstances and are sufficient to make out a plausible claim for a breach of the duty of good faith and fair dealing.

See Appeals of McCarthy Hit (internal citations omitted).

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

THE RISK OF A FIXED PRICE CONTRACT IS THE MARKET

Posted on July 10, 2022July 10, 2022 by Edward Garber

When performing work on a fixed price or unit, there is risk that is being assumed on your end. One risk is the market. You are ultimately banking on the fact that the market is not going to make your fixed prices unprofitable. That’s not an unforeseeable occurrence because the market shifts and that shift can have a negative ripple effect.

In a recent case out of the Federal Circuit, U.S. Aeroteam, Inc. v. U.S., 2022 WL 243176 (Fed.Cir. 2022), this market risk played a role in a fixed price contract. Here, a contractor was hired by the federal government to produce ground support trailers. A key component of these trailers was a running gear. The contractor relied on a vendor for these running gears. Due to financial difficulties, the vendor had to raise its unit price for the running gears. Based on the increased price, the contractor elected to manufacture the running gears itself. The contractor asked the government if this was ok and the government approved the request. Once the contractor started manufacturing these running gears, it had an “awe” moment – the manufacturing costs were higher than anticipated. The contractor submitted a request for equitable adjustment which the government denied. The Contractor than sued the government raising three arguments to support its entitlement to additional costs: (1) constructive change; (2) cardinal change; and (3) commercial impracticability. The contractor lost on all arguments. It probably should have lost on all arguments.

Constructive Change

“To demonstrate a constructive change, a contractor must show (1) that it performed work beyond the contract requirements, and (2) that the additional work was ordered, expressly or impliedly, by the government.” Aeroteam, supra, at *2 (internal citations and quotation omitted).

The problem with this argument was that the government did NOT order the contractor to manufacture the running gears. It merely approved the contractor’s request. The contractor made the decision since it thought it could manufacture the running gears when its vendor increased the unit price. An approval of a request, is NOT an order. Aeroteam, supra, at *3.

Cardinal Change

A cardinal change, discussed in prior postings, “is so profound that it is not redressable under the contract, and thus renders the government in breach.” Aeroteam, supra, at *3.

The problem with this argument was there was no alteration in the contractor’s contract. The contractor chose to manufacture the running gears and it was not forced to do this by the government.

Commercial Impracticability

“To prove commercial impracticability, a contractor must show that because of unforeseen events, [the contract] can be performed only at an excessive and unreasonable cost or all means of performance are commercially senseless.” Aeroteam, supra, at *4 (internal citations and quotation omitted).

The problem with this argument was that the contractor could have used its vendor to manufacture the running gears at a higher unit cost. The contractor did not want to pay the higher unit cost. Moreover, there was no evidence that the higher unit price was even excessive. In this regard, the Court expressed that an increase in market price of the running gears is the risk the contractor assumed in a fixed price contract.

DOES YOUR JURISDICTION RECOGNIZE THE CARDINAL CHANGE DOCTRINE?

Posted on June 26, 2022June 26, 2022 by Edward Garber

The contract was cardinally changed. Have you heard that before? It is a “sexy” doctrine, but, in actuality, cardinal change is hard to demonstrate. Under certain factual scenarios, it could have traction, but whether it will be recognized in the jurisdiction is typically a question of law.

An unreported 2002 case out of Northern District of Ohio, Ebenisterie Beaubois Ltee v. Marous Brothers Construction, Inc., 2002 WL 32818011 (N.D. Ohio 2022), contains a short discussion on cardinal change. I know what you are thinking – 2002 that was 20+ years ago. True. But the short discussion is interesting because the issue was whether Ohio would recognize the cardinal change doctrine.

A cardinal change breach of contract occurs when one party “effects an alteration in the work so drastic” that the contractor is forced to perform duties materially different in scope from those originally contemplated by the parties. “The doctrine is couched in terms which apply generally to modifications which are so fundamental that they cannot be redressed within the contract by an equitable adjustment to the contract price….” Thus, the doctrine of cardinal change provides an extracontractual remedy to a contractor where changes ordered by the owner are so significant that they cannot be said to fall within the “changes clause” contained in the contract.

Ebenisterie Beaubois Ltee, supra, at *3 (internal citations omitted).

Ultimately, by arguing cardinal change, the party is seeking damages OUTSIDE of the contract, essentially arguing that the contract itself should not apply to govern recourse and damages. I’ve argued this doctrine before and I’ll argue this doctrine again. However, this cardinal change doctrine cannot be the only doctrine alleged meaning you can’t solely assert this doctrine while ignoring any breach of contract action.

As the Court’s discussion began in this 2002 case, it recognized the doctrine of cardinal change started under federal contract law in a dispute between a government contractor and the government. Contracts with the federal government contain a changes clause that allows the government to modify the contractor’s scope of work. Such contracts also contain equitable adjustment provisions to address a contractor’s rights in the event of such changes. These provisions are not limited to government contracts but are also included in private construction contracts. The question, as this Court delved into, was whether this doctrine that began in the federal contract arena could be extended as a matter of law to private construction contracts in Ohio.

At this time, the Court held Ohio would not recognize the cardinal change doctrine:

This Court finds that the Ohio Supreme Court would decline to adopt the cardinal change doctrine as a rule of law in Ohio. The cardinal change doctrine is based on the notion that even though an express contractual provision exists governing changes to the contract, as well as the contractor’s compensation for the changes made, some changes are nonetheless “so severe” that extracontractual relief is appropriate. Ohio courts, however, consistently refuse to allow recovery in quasi-contract where an express contract governs the subject matter of the dispute.

Ebenisterie Beaubois Ltee, supra, at *4

The Court’s rationale is why cardinal change is challenging to prove. The circumvention of a contract is NOT an easy feat and certain jurisdictions are going to put their foot down regarding such arguments. Other jurisdictions will let facts play out in determining whether the facts fit the doctrine. But this Court (in the 2002 unreported decision) maintained that as a matter of law this doctrine would not exist under the current state of Ohio’s law.

ARGUING CARDINAL CHANGE IS DIFFERENT THAN PROVING CARDINAL CHANGE

Posted on March 6, 2021March 6, 2021 by Edward Garber

The cardinal change doctrine has become a popular doctrine for a contractor to argue under but remains an extremely difficult doctrine to support and prove. Arguing cardinal change is one thing. Proving cardinal change is entirely different. As shown below, this is a doctrine with its origins under federal government contract law with arguments extending outside of the federal government contract arena. For this reason, the cases referenced below are not federal government contract law cases, but are cases where the cardinal change doctrine has been argued (even though these cases cite to federal government contract law cases).

A party argues cardinal change to demonstrate that the other party (generally, the owner) materially breached the contract based on the cardinal change. In reality, a party argues cardinal change because they have cost overruns they are looking to recover and this doctrine may give them an argument to do so. But it is important to recognize the distinction between raising it as an argument and the expectation that this (difficult doctrine to prove) will carry the day.

The cardinal change doctrine is a doctrine that originated under federal governments contracts law–the doctrine developed based on drastic unilateral modifications of the contract from the federal government that were not contemplated by the contract’s changes clause. IES Commercial, Inc. v. Manhattan Torcon A Joint Venture, 2018 WL 4616029, *5 (D. Maryland, 2018). See also U.S. v. Peter R. Brown Construction, Inc., 674 Fed.Appx. 901, 909 (11^th Cir. 2017) (explaining cardinal change doctrine has applied when a contractor is directed by the government to perform a scope “that fundamentally alters the contractual undertaking” such that it is “not comprehended by the normal Changes clause.”) (citation omitted).

The cardinal change doctrine applies “when the government effects an alteration in the work so drastic that it effectively requires the contractor to perform duties materially different from those originally bargained for.” Durr Mechanical Construction, Inc. v. PSEG Fossil, LLC, 2021 WL 303030, *2 (D.New Jersey 2021) (quotation and citations omitted). These are changes that “fundamentally alter the nature of a contract” and constitute a “drastic modification beyond the scope of the contract that altered the nature of the thing to be constructed.” Latex Construction Company v. Nexus Gas Transmission, LLC, 2020 WL 7386358, *8 (S.D.Texas 2020) (internal quotations and citations omitted). See also Amex Construction, Inc. v. Clark County, 2020 WL 3488736, *6 (D.Nevada 2020) (“A cardinal change must drastically alter the work agreed to such an extent that the contractor effectively performs duties that are materially different from those for which the contractor originally bargained.”) (internal quotation and citation omitted).

Noteworthy, out of sequence work, delays, and even increased costs do not amount to a cardinal change. Ames Construction, supra.

Just because the cardinal change doctrine applies to federal government contract law does not mean it universally applies to state law. For instance, in Durr Mechanical, the court refused to apply the cardinal change doctrine because it had not been adopted by New Jersey law. Durr Mechanical, supra, at *5 (“I find no compelling reason to recognize a cardinal change doctrine claim under New Jersey law, and decline to do so.”). On the other hand, in Latex Construction Company, the court found that while the plaintiff faces significant hurdles in proving a cardinal change, the doctrine applied to private construction contracts. Latex Construction Company, supra, at *8.

When arguing cardinal change, outside of the federal government contract arena, please remember that there may be an argument that the doctrine does not apply to the state law claims. And, even if there is an argument that the cardinal change doctrine does apply, keep in mind that the origin of the doctrine and its historical context will apply. The change should apply to a drastic change/modification (unilateral modification) that fundamentally alters the contract because it is so materially different than what was bargained for–this is difficult to prove!

GENERAL CONTRACTOR SUPPORTING A SUBCONTRACTOR’S CHANGE ORDER ONLY FOR OWNER TO REJECT THE CHANGE

Posted on September 8, 2019September 8, 2019 by Edward Garber

The opinion in Westchester Fire Ins. Co, LLC v. Kesoki Painting, LLC, 260 So.3d 546 (Fla. 3d DCA 2018) leads to a worthy discussion because it involves a common scope of work occurrence on construction projects involving a general contractor and subcontractor. The contractor submits a subcontractor’s change order request to the owner and the owner rejects the change order. What happens next is a scope of work payment dispute between the general contractor and subcontractor. Yep, a common occurrence.

In this case, a general contractor hired a subcontractor to perform waterproofing and painting. A scope of work issue arose because the specifications did not address how the window gaskets should be cut and then sealed. The owner wanted the window gaskets cut at a 45-degree angle and the subcontractor claimed this resulted in increased extra work. The general contractor agreed and submitted a change order to the owner to cover these costs. The owner rejected the change order claiming it was part of the general contractor’s scope of work even though the cutting of window gaskets at a 45-degree angle was not detailed in the specifications.

After the subcontractor filed a suit against the general contractor’s payment bond surety, the project architect further rejected the change order because gasket cutting was part of the specification requirements. (Duh! What else was the architect going to say? It was not going to concede there was an omission that resulted in a change order to the owner, right?)

Importantly, the subcontract agreement stated that, “If a dispute arises between the Contractor and the Subcontractor regarding the Scope of Work, or in the interpretation of the Contract Documents, and the parties hereto do not resolve that dispute, the decision of the [Architect] shall be final.” As it pertains to this provision, while the appellate court noted the enforceability of the provision, it found that it did not apply because there was not a scope of work dispute between the general contractor and its subcontractor. The general contractor agreed that this resulted in a change order condition, i.e., that there was a change to the subcontractor’s scope of work, and submitted a change order to the owner for the scope of work change. Ouch! The payment bond surety was on the hook to pay for this change order.

A few things that I find noteworthy.

First, the opinion does not include a lot of discussion on language in the subcontract. This tells me that there may not have been great language in the subcontract dealing with the subcontractor’s scope of work. It is not uncommon to hear that a specification does not include every single detail so if the subcontractor was always required to cut gaskets in performing its scope of waterproofing work then there may be an argument there is not a scope of work change. Either way, detailing the scope of work in the subcontract is important to account for the inevitable scope of work dispute.

Second, I understand the logic from the general contractor’s perspective of having the architect decide scope of work disputes between a general contractor and subcontractor because the architect is going to naturally disfavor scope of work changes or changes of work associated with its plans and specifications. This will benefit the general contractor as a rejection of a scope of work change will support the denial of a change order. With that said, I am generally not in favor of the finality of such a decision from an architect, particularly when addressing the scope of work dispute may warrant a detailed analysis of the governing subcontract. Also, the court in this case seemed to dismiss such language because the general contractor supported the subcontractor’s change.

Third, just because a general contractor supports a subcontractor’s change order request does not mean that it and its surety should automatically be bound by the change and finance the change. Again, there was little discussion as to language in the subcontract and it does not appear the surety tried to make an argument under the pay-when-paid clause. While such defense is generally not applicable to payment bond sureties, the (creative) argument could be different when dealing with a change order to preclude the effect of a surety and general contractor being on the hook for every change order submitted to the owner that the owner rejects.

And, fourth, this opinion does not address how the general contractor handled or pursued this with the owner. That is important because if the general contractor agreed and supported the change, there should have been an effort to collect this amount from the owner. This leads to another important consideration. In this scenario, the subcontract could include language that any claim the subcontractor initiates stemming from a dispute involving the owner should be stayed pending the resolution of the dispute with the owner. On the other hand, if the general contractor elects not to pursue the dispute with the owner but recognized the change, then it having to pay for the change makes sense based on the business decision it made.

What are your thoughts?

CONSTRUCTIVE CHANGE DIRECTIVES / DIRECTED CHANGES

Posted on May 28, 2018May 28, 2018 by Edward Garber

Prime contracts typically contain a constructive change directive clause. A constructive change directive also goes by the acronym CCD (and for purposes of this article, such changes will be referred to as a CCD), however it can also be known as a Work Change Directive, Interim Directed Change, or Directed Change, depending on the type of contract beign utilized. An owner can order a CCD, versus issuing the contractor a formalized change order, as a mechanism to direct the prime contractor to perform work if there is a dispute as to contract amount, time, or scope. Just because an owner issues a CCD does not mean the owner is conceding that it owes the contractor a change order. Rather, the owner is ordering the CCD as a mechanism to keep the project moving forward notwithstanding a disagreement with the contractor as to the price or time impact. Standard form construction agreements such as the AIA, EJCDC, or ConsensusDocs, will have a standard provision dealing with change directives where the owner can order the contractor to proceed with work in the absence of a change order. In the federal government context, most construction contracts will contain a changes clause that authorizes the government to formally direct changes; and, there is authority for contractors to equitably pursue a constructive change based on certain directives or instructions issued by the government. Naturally, from the contractor’s perspective, this CCD provision is an important consideration as it could likely require the contractor to finance a change to the owner’s project, particularly if there is a scope dispute where the owner does not believe the contractor is entitled to any change order.

An example in the federal government context can be found in the Armed Services Board of Contract Appeal’s decision in Appeal Of – Buck Town Contractors & Co., ASBCA No. 60939, 2018 WL 679564 (2018), dealing with the reconstruction of a hurricane protection levee. The prime contract required the contractor to place a layer of geotextile material at the base of the levee. The specifications required the material placed such that all seams and overlaps were installed perpendicular to the centerline of the levee. The contractor’s subcontractor, however, placed the geotextile material such that overlaps ran parallel (not perpendicular) to the centerline of the levee. The government objected to the method of the contractor’s placement of the geotextile material and directed the contractor to remedy the incorrect method (i.e., redo the incorrect work). The contractor interpreted this instruction or directive as a constructive change directive and submitted a Request for Equitable Adjustment (REA) associated with the directive claiming that it installed the geotextile material based on the interpretation of other provisions in the specifications. The government denied the REA and the contractor followed-up with a formal claim, which was also denied.

The Armed Services Board of Contract Appeals ultimately held that the prime contractor was not being directed to perform additional work, or work contrary to the contract. The Board found that the contract required the contractor to place the geotextile material so that all seams and overlaps were perpendicular to the centerline of the levee, which necessarily prohibits the contractor from placing seams and overlaps parallel to the centerline. As a result, the directive for the contractor to redo work was not a constructive change that authorized the contractor to additional compensation.

As mentioned above, the CCD provision is a valuable provision for owners in prime contracts to keep the project moving forward. Contractors need to consider this clause in conjunction with instructions and directives received from the owner during the course of construction that authorizes the contractor to perform claimed additional work as such work can have both a cost and time impact. If the requirements of the contract are changed and the contractor is directed to proceed with additional work, it is important that the contractor consider the directive in accordance with the provisions of its contract and preserve its rights and notify the owner accordingly.

DON’T DRAFT AN AMBIGUOUS SCOPE OF WORK IN YOUR CONSTRUCTION CONTRACT

Posted on November 26, 2014November 8, 2024 by Edward Garber

Contractors should spend time carefully drafting and agreeing to a detailed scope of work. Otherwise, a dispute may arise relating to that scope of work. This dispute can take the form of a change order dispute where the contractor argues that the subcontractor’s change order request was base contract work and, thus, does not entitle the subcontractor to additional compensation. Or, the dispute can take the form of a defect claim where the subcontractor argues that the defect being asserted against it was never within its scope of work to begin with.

If there is a scope of work dispute, a court will look to the contract and any applicable change orders in order to see what the contract requires. If an ambiguity exists relating to the scope of work, the court will determine whether the ambiguity is a patent ambiguity or a latent ambiguity. A patent ambiguity clearly exists on the face of the contract based on defective, insensible, or obscure language used in the contract whereas a latent ambiguity is not apparent from the face of the contract, but becomes apparent when extrinsic / parol evidence is introduced that leads to the contract being interpreted in two reasonably plausible manners. See Barrington v. Gryphon Investments, Inc., 32 So.3d 668 (Fla. 2d DCA 2010). With a patent ambiguity, parol evidence (extrinsic evidence used to clarify the intent of the parties relating to a contractual provision) is NOT allowed to clear up the ambiguity; rather, it is up to the trier of fact (judge or jury) to interpret the patent ambiguity without extrinsic evidence explaining the intent of the parties. See, e.g., Barclays American Mortg. Corp. v. Bank of Central Florida, 629 So.2d 978 (Fla. 5^th DCA 1993) (it was up to trier of fact to interpret letter of credit containing 2 different expiration dates). On the other hand, with a latent ambiguity, parol evidence is allowed to be introduced relating to the parties’ intent to assist the trier of fact in clearing up the ambiguity.

The opinion in Macky Bluffs Development Corp. v. Advance Construction Services, Inc., 2008 WL 109390 (N.D.Fla. 2008) illustrates what can happen if there is an ambiguous scope of work. Here, a developer entered into a change order with a contractor to fix the collapsed wall of a retention pond. The change order required the contractor to haul off collapsed material from the bottom of the pond. To fix the wall, the contractor hauled collapsed material and stockpiled the material on lot #8 (owned by the developer). The contractor reused suitable material in reconstructing the wall in addition to material it excavated from lot #8. The unsuitable material the contractor did not use in reconstructing the wall was spread out and compacted on lot #8 versus being hauled offsite to a dumping site.

Years later, the developer discovered the unsuitable materials had been buried on lot #8 that required it to excavate and remove this material and refill with suitable material. The developer then sued the contractor for the costs it incurred in remediating this issue. The contractor moved for summary judgment arguing that lot #8 was never part of its scope of work and it reconstructed the wall of the retention pond pursuant to the change order. Unfortunately, the change order did not specify whether the contractor was required to haul off unsuitable material to an offsite dumping facility or it was required to leave that material on lot #8. In fact, it does not appear the change order even mentioned that the contractor was going to stockpile collapsed material on lot #8 and reuse suitable material in reconstructing the wall. The owner’s position was that while the contractor could use lot #8 as a temporary storage area, the contractor was always required to haul off unsuitable material to an offsite dumping facility. The contractor disagreed stating it was always going to leave unsuitable material on lot #8 that it could not reuse to reduce the costs associated with fixing the wall. Yet, the change order did not address this issue and was ambiguous as to what the contractor’s scope of work consisted of relative to reconstructing the wall with stockpiled suitable material and what it was required to do with unsuitable material it did not reuse.

The Northern District maintained that the scope of work in the change order contained a latent ambiguity because the change order did not identify where the contractor was required to haul off the collapsed material and both the contractor and owner’s interpretation of this scope of work was plausible and reasonable. The court’s opinion includes a good discussion about the difference between a patent ambiguity and a latent ambiguity:

“Under Florida law, the interpretation of a contract is a matter of law for the court’s determination so long as the terms of the contract are unambiguous. The existence of an ambiguity in a contract is also a matter of law. There are two types of ambiguities that can exist in a contract: patent and latent. A patent ambiguity is one that appears on the face of the contract. A latent ambiguity, on the other hand, exists where the language employed is clear and intelligible and suggests but a single meaning, but some extrinsic / parol evidence creates a necessity for interpretation or a choice among two or more possible meanings. If the ambiguity is patent, then parol evidence cannot be used to clarify the parties’ intent. If the court finds, however, that there is a latent ambiguity in the contract, then parol evidence must be heard in order to explain the meaning of the ambiguous term. After receiving parol evidence clarifying the latent ambiguity, if there is no genuine issue of material fact remaining, the court can resolve the ambiguity as a matter of law. Where, however, the terms of the written instrument are disputed and reasonably susceptible to more than one construction, an issue of fact is presented as to the parties’ intent which cannot properly be resolved by summary judgment.”

Macky Bluffs Development Corp., supra, at *2 (internal citations and quotations omitted).

Had the parties clearly clarified the scope of work relating to how collapsed material was going to be stockpiled on lot #8 and reused and whether unsuitable material was going to be (a) hauled offsite or (b) left on lot #8, there probably would be no scope of work dispute. But, because this issue was not truly defined, it presented an ambiguity that naturally resulted in a dispute when the developer needed to remove the unsuitable material on lot #8. The key is to spend the effort to clearly articulate the scope of work, whether it is base contract work or change order work, to best support your argument when a scope of work dispute subsequently arises.

REQUESTS FOR EQUITABLE ADJUSTMENT AND CONSTRUCTIVE CHANGES IN FEDERAL CONSTRUCTION PROJECTS

Posted on October 29, 2014November 8, 2024 by Edward Garber

Federal government construction contracts contain a changes clause. The changes clause in fixed-price federal construction contracts is contained in F.A.R. 52.243-4 (set forth at the bottom of this posting). This changes clause allows the government, through the contracting officer, to direct changes to the construction contract. It also allows the prime contractor to request an equitable adjustment to its contract price associated with either a directed / formal change or a constructive change.

Formal / directed changes issued to the prime contractor by the government are easy to comprehend. These typically are less likely to lead to a dispute because the government acknowledges increased costs are owed to the prime contractor through its issuance of a formal change order / directive.

A constructive change, on the other hand, oftentimes is what leads to a dispute if the government does not agree that it caused the contractor to incur increased costs to perform the contract. The United States Court of Federal Claims in CEMS, Inc. v. U.S., 59 Fed.Cl. 168 (Fed.Cl. 2003) contains a good discussion as to what constitutes a constructive change:

“A constructive change generally arises where the Government, without more, expressly or impliedly orders the contractor to perform work that is not specified in the contract documents. The constructive change doctrine provides recovery for contractors as the rationale for constructive changes involves the objective of persuading a contractor to continue to work pending resolution of any dispute involving the work at issue.

***

There are two basic components to the constructive change doctrine-the change component and the order/fault component. The change component describes work outside of the scope of the contract, while the order/fault component describes the reason that the contractor performed the work.

***

A constructive change issue arises for work if the Government either expressly or impliedly ordered the work outside the scope of the contract, or if the Government otherwise caused the contractor to incur additional work….In any event, the Government must have directed the contractor to perform the additional work. The work must not have been volunteered.”

CEMS, supra, at 203 (internal quotations and citations omitted).

It is the constructive change that typically leads to what is referred to as a request for equitable adjustment or REA. An equitable adjustment compensates a prime contractor for the increased costs it incurs in performing the contract, whether due to additional work or delays caused by the government. Morrison Knudsen Corp. v. Fireman’s Fund Ins. Co., 175 F.3d 1221, 1243-44 (10^th Cir. 1999). “Some equitable adjustments are for work added by formal change orders….Other equitable adjustments result from ‘constructive changes,’ which occur when the government does something to increase the contractor’s costs without issuing a formal change order.” Id at 1244.

For a prime contractor to receive an equitable adjustment under the changes clause, it bears the burden of proving liability, causation, and injury. P.R. Burke Corp. v. U.S., 58 Fed.Cl. 549, 556 (Fed.Cl. 2003). The prime contractor must “prove that the government somehow delayed, accelerated, augmented, or complicated the work, and thereby caused the contractor to incur specific additional costs.” Morrison Knudsen Corp., 175 F.3d at 1244. Stated differently, “[b]efore an equitable adjustment will be granted, plaintiffs [prime contractor] are required to demonstrate that: (1) increased costs arose from conditions materially different from what the contract documents indicated and that such conditions were reasonably unforeseeable based on all information available to the contractor; and (2) the changes in the requirements caused the increased costs.” Sipco Services & Marine, Inc. v. U.S., 41 Fed.Cl. 196, 224 (Fed.Cl. 1998).

As a prime contractor, if you experience a constructive change (increased costs to perform your work), notify the government and request an equitable adjustment to the contract. If you volunteer to do additional work than you may be impacting your ability to request an equitable adjustment for a constructive change. It is all about knowing and understanding your rights under the contract so that, among other things, you can preserve your right to seek additional compensation / an equitable adjustment to your contract price.

52.243-4 Changes (JUN 2007)

(a) The Contracting Officer may, at any time, without notice to the sureties, if any, by written order designated or indicated to be a change order, make changes in the work within the general scope of the contract, including changes-

(1) In the specifications (including drawings and designs);

(2) In the method or manner of performance of the work;

(3) In the Government-furnished property or services; or

(4) Directing acceleration in the performance of the work.

(b) Any other written or oral order (which, as used in this paragraph (b), includes direction, instruction, interpretation, or determination) from the Contracting Officer that causes a change shall be treated as a change order under this clause; provided, that the Contractor gives the Contracting Officer written notice stating (1) the date, circumstances, and source of the order and (2) that the Contractor regards the order as a change order.

(c) Except as provided in this clause, no order, statement, or conduct of the Contracting Officer shall be treated as a change under this clause or entitle the Contractor to an equitable adjustment.

(d) If any change under this clause causes an increase or decrease in the Contractor’s cost of, or the time required for, the performance of any part of the work under this contract, whether or not changed by any such order, the Contracting Officer shall make an equitable adjustment and modify the contract in writing. However, except for an adjustment based on defective specifications, no adjustment for any change under paragraph (b) of this clause shall be made for any costs incurred more than 20 days before the Contractor gives written notice as required. In the case of defective specifications for which the Government is responsible, the equitable adjustment shall include any increased cost reasonably incurred by the Contractor in attempting to comply with the defective specifications.

(e) The Contractor must assert its right to an adjustment under this clause within 30 days after (1) receipt of a written change order under paragraph (a) of this clause or (2) the furnishing of a written notice under paragraph (b) of this clause, by submitting to the Contracting Officer a written statement describing the general nature and amount of proposal, unless this period is extended by the Government. The statement of proposal for adjustment may be included in the notice under paragraph (b) above.

(f) No proposal by the Contractor for an equitable adjustment shall be allowed if asserted after final payment under this contract.

PAY-WHEN-PAID AND THE PREVENTION OF PERFORMANCE DOCTRINE

Posted on February 23, 2014June 26, 2024 by Edward Garber

The pay-when-paid doctrine is a standard provision in subcontracts to shift the risk of the owner’s nonpayment to the subcontractor. The owner’s payment to the contractor is a condition precedent to the contractor’s payment to the subcontractor. However, if there is a payment bond in place, a surety in Florida cannot rely on this contractual defense to defeat a subcontractor’s claim. (Notably, in other jurisdictions, a surety can rely on this defense.) The pay-when-paid doctrine has been discussed numerous times in the following articles: https://floridaconstru.wpengine.com/pay-when-paid-provisions-and-payment-bonds/ and https://floridaconstru.wpengine.com/subcontractors-and-unjust-enrichment-claims/ and https://floridaconstru.wpengine.com/careful-drafting-of-pay-when-paid-provisions/.

Sometimes, there is not a payment bond in place and the subcontractor is forced to assert a direct claim against the contractor. Or, perhaps, the subcontractor may not have properly preserved its lien / bond rights and its best recourse is to assert a claim against the contractor. In this situation, the contractor will be able to rely on the pay-when-paid provision in its subcontract assuming it can prove that it was not paid for the subcontractor’s work that is the subject of the dispute. This defense, however, may not be absolute. There is a legal doctrine known as the “prevention of performance” doctrine.

Florida law provides:

“Under the doctrine of prevention of performance, one who prevents the happening of a condition precedent upon which his liability is made to depend, cannot avail himself of his own wrong and thereby be relieved of his responsibility to perform under the contract.” Florida Ins. Guar. Ass’n v. Somerset Homeowners Ass’n, Inc., 83 So.3d 850, 852, n.1 (Fla. 4th DCA 2011) (internal quotation omitted).

This doctrine really has not been analyzed in the context of a pay-when-paid defense under Florida case law. Yet, now and again, a case outside of Florida addresses interesting points that are worthy of discussion.

In Moore Brothers Co. v. Brown & Root, Inc., 207 F.3d 717 (4th Cir. 2000), the Fourth Circuit (interpreting Virginia law) analyzed the prevention of performance doctrine in the context of a contractor raising the pay-when-paid defense. In this case, the contractor entered into a contract to build a private toll road in Virginia. (The contractor was also an equity partner in the ownership group.) During the drafting of the prime contract, several design issues were referenced that would result in additional payment to the contractor. One of those issues was changing the thickness of the pavement subbase material. There was strong uncertainly over the initial pavement design and it was anticipated that the thickness of the pavement subbase material would change. The construction lenders wanted to contain construction costs and insisted on certainty in determining the costs. The lenders did not want to authorize a prime contract that did not provide this certainty and the draft prime contract with examples of additional costs the lenders may have to fund did not sit well with them. To appease the lenders, the owner and the contractor agreed to remove examples of design changes or issues that would result in increased construction costs. The owner and contractor further assured the lenders that they did not anticipate substantial changes in the work (such as a change in the pavement subbase thickness). Of course, what the contractor and owner assured the lenders was not really what they believed because they anticipated a design change regarding the thickness of the pavement subbase material. Thus, the owner and contractor entered into a side agreement that was not shared with the lenders concerning the design changes / issues that would result in increased costs to the contractor.

The contractor then hired subcontractors to perform scopes of work relative to the road construction. The subcontracts contained pay-when-paid provisions. The contractor did not advise the subcontractors that design changes such as a potential change in the thickness of the pavement subbase material were hidden from the lenders and that such a change would likely not be funded by the lenders. The contractor did not seem as concerned with this because it had pay-when-paid language shifting the risk of nonpayment to the subcontractors (although the contractor did have a payment bond in place). Naturally, there was a design change that changed the thickness of the pavement subbase material and this work was performed by the subcontractors. A payment dispute originated in arbitration involving the owner, contractor, and subcontractors regarding this additional work. The arbitrator ruled that the owner must pay the contractor for this additional work and the contractor, after receiving payment, must pay the subcontractors. The owner did not pay so the contractor never paid the subcontractors contending that the pay-when-paid language does not contractually require it to pay.

Since the arbitration award was never paid, the subcontractors filed suit in federal district court which was appealed to the Fourth Circuit. Among other issues discussed in the case, the Fourth Circuit analyzed whether the contractor was required to pay the subcontractors for the additional work associated with the pavement subbase thickness in light of the pay-when-paid provision. The Fourth Circuit found that the trial court correctly applied the prevention of performance doctrine to hold the contractor responsible for the payment of the additional work. The Fourth Circuit agreed that the contractor could not rely on the pay-when-paid language in the subcontract because it was responsible for the non-payment or non-occurrence of the condition precedent (i.e., owner’s payment). Specifically, the contractor knew that the additional work would most likely need to be performed which is why this design change was called out in the draft prime agreement. However, because of lender issues, it removed this language from the final prime contract and assured the lenders that additional work was not anticipated. It then contemporaneously entered into a side agreement with the owner that was not shared with the lenders regarding the same anticipated additional work (that it assured the lenders it was not anticipating). The Fourth Circuit held:

“The prevention [of performance] doctrine does not require proof that the condition would have occurred ‘but for’ the wrongful conduct of the promisor; instead it only requires that the conduct have ‘contributed materially’ to the non-occurrence of the condition.” Moore Brothers, 207 F.3d at 725.

It is easy to see how the facts in this case as presented by the Fourth Circuit warrant the application of the “prevent of performance” doctrine. It is uncertain from this case what the lenders would have done if construction costs were increased to specifically cover the highly anticipated design change to the pavement subbase thickness or why this change was not funded through any contingency funds / line item in the loan (perhaps there was none because the lenders insisted on certainty with the costs). It is also uncertain what the lenders would have done (or what they did) regarding the submission of these additional work costs since the parties could not dispute that the work was additional contractual work. And, it is uncertain why the contractor did not obtain bids for the additional work from the subcontractors before hiring them and try to negotiate perhaps a more palatable cost knowing this additional work was likely going to occur. Even though the contractor appeared to try to appease the lenders so this project could move forward, it knew funding for the additional work would be a huge concern and it was not up front with its subcontractors regarding this potential lack of funding. Had it been up front with the subcontractors, perhaps this risk could have been specifically accounted for in the subcontract through specific language or better pricing that could have been presented to the lenders.

Notwithstanding, in the event a contractor raises a pay-when-paid defense, a subcontractor may be able to rebut this defense by arguing the “prevention of performance” doctrine, that being that the contractor caused the very non-occurrence of the payment and, therefore, should not be entitled to rely on this defense. Although this argument seems like a tough hurdle for the subcontractor since not all facts will be as egregious as the facts in this case, the contractor should still take steps to eliminate this argument by showing that it took steps to obtain payment from the owner. Subcontractors, on the other hand, that may not have bond / lien rights or want to pursue substantial claims for additional work against the contractor, may want to rely on this argument in furtherance of trying to get around the expected pay-when-paid defense.

THE CARDINAL CHANGE DOCTRINE

Posted on May 15, 2012November 8, 2024 by Edward Garber

The cardinal change doctrine is a doctrine that originated from government contract work in the United States Court of Federal Claims and, until recently, was not really discussed or applied in a Florida case. This changed when the Southern District of Florida in Hartford Casualty Insurance Co. v. City of Marathon, 825 F.Supp.2d 1276 (S.D. Fla. 2011), applying Florida law, discussed the cardinal change doctrine and used it to relieve a performance bond surety of obligations under a performance bond. While the specific facts of this case will not be discussed in detail, the Court’s discussion of the cardinal change doctrine will be because it is a doctrine that contractors on very difficult projects (i.e., completed project is substantially different than original plans, there were never-ending or wholesale, material changes, and the completed project cost substantially more than original contract amount) may want to argue under.

In this case, the Court held:

“To determine whether a change order is outside the general scope of the underlying construction contract so as to qualify as a cardinal change, courts look to the following factors:

(i) whether there is a significant change in the magnitude of work to be performed; (ii) whether the change is designed to procure a totally different item or drastically alter the quality, character, nature or type of work contemplated by the original contract; and (iii) whether the cost of the work ordered greatly exceeds the original contract cost.”

City of Marathon, 825 F.Supp.2d at 1286 citing Becho, Inc. v. United States, 47 Fed.Cl. 595, 601 (Fed.Cl.2000).

The Court expressed that these factors are all fact-intensive analyzed on a case-by-case basis and the party utilizing this doctrine must prove the factors with particularity. Id. citing PCL Const. Serv., Inc. v. United States, 47 Fed.Cl. 745, 804 (Fed.Cl. 2000).

Regarding the first factor—whether there is a significant change in the magnitude of work to be performed—the Court will look to see whether the completed project is substantially different than the project called for in the original plans and specifications. Id. citing Wunderlich Contracting Co. v. United States, 173 Ct.Cl. 180 (1965). For instance, in City of Marathon, the Court found this factor applied because the government gave the contractor a change order that added a new water treatment plant to the contract that was to be built on a separate location with different plans and specifications. Additionally, the cost of the new water treatment plant was more than 100% of the contract amount.

Regarding the second factor—whether the change is designed to procure a totally different item or drastically alter the quality, character, nature or type of work contemplated by the original contract—the Court will look to see whether the change is contemplated by the contract. City of Marathon, supra, citing Becho, 47, Fed.Cl. at 601. In City of Marathon, the Court found that while the contract contemplated changes (as most construction contracts do), the magnitude of the change from both a scope and cost standpoint was not contemplated.

And, regarding the third and last factor—whether the cost of the work ordered greatly exceeds the original contract cost—the Court will look to see the total increase of the original contract amount due to the change or changes. In this regard, the Court noted that increases of the original contract amount of 100% or more tend to suggest a cardinal change whereas increases less than this percentage tend not to. In City of Marathon, as previously stated, the change increased the original contact amount by more than 100%, thus satisfying this factor.

Although the application of this doctrine carries a heavy burden, there are certain projects where it may apply. Contractors that end up constructing a project substantially different then the plans and specifications their contract is based on which results in extensive change orders / wholesale, material changes and massive cost increases may, depending on the circumstance, want to argue under this doctrine in order to circumvent harsh contractual provisions to recoup their costs, etc. for performing additional work.