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ConstructionRisk.com Report
http://www.ConstructionRisk.com
Vol. 6, No. 7, November 04
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Inside
This Issue:
• Waiver and Release Language in Change
Order Bars Further Recovery
• Arbitration Consolidation was
Inappropriate
• Failure to Request Change Order Bars
Contractor Recovery for Excess Units
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ARTICLE
#1
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Waiver and Release Language in Change
Order Bars Further Recovery
J. Kent Holland
Contractor that entered into a number of change orders for additional
payments from the project owner (U.S. Navy) was barred from claiming
entitlement to additional compensation when the Government subsequently
terminated since each of the change orders contained language releasing
the Navy as to the matters covered by the change orders.
In J.C. Equipment Corp. v. Gordon England, 360 F.3d 1311 (2004),
the contractor (“J. C. Equipment”) had a fixed-price contract to repair
a water system for a Navy base. Work didn’t proceed smoothly due to a
large number of underground obstructions and pipelines being
encountered. Forty-two change order modifications were executed during
performance and pursuant to the construction contract, each of these
“bilaterally executed modifications … released the Government from
further payment to J.C.” for the matters covered.”
The Navy eventually ordered the contractor to stop work, and the
Government terminated the contract based on the contractor’s alleged
failure to diligently prosecute the work. The contractor filed a formal
claim seeking an equitable adjustment of over $2 million. When the
Government contracting officer rejected most of the claim, the
contractor appealed to the Armed Services Board of Contract Appeals,
where the written record included 15 thousand pages, and there was a
hearing resulting in a 1,000 page transcript. The contractor lost on
all but a few minimal claims and appealed the matter to court.
In reviewing the facts of the matter and the Board’s decision, the court
concluded that language of waiver of release contained in the change
orders was clear and unambiguous, barring contractor recovery. The
waiver and release clause was as follows: “Whenever the Contractor
submits a claim for equitable adjustment under any clause of the
contract …, such claim shall include al types of adjustments in the
total amounts to which the clause entitles the Contractor, including but
not limited to adjustments arising out of delays or disruptions or both
caused by such change. Except as the parties may otherwise expressly
agree, the Contractor shall be deemed to have waived (i) any adjustments
to which it otherwise might be entitled under the clause where such
claim fails to request such adjustments, and (ii) any increase in the
amount of equitable adjustments additional to those requested in the
claims.”
The court explained that this clause meant that in seeking an equitable
adjustment, the contractor must include all items for which such an
adjustment could be sought, and that failure to do so would constitute a
waiver of claims that were not asserted and that the contractor would
execute a release of such claims as part of the receipt for equitable
adjustment for any change order. The contractor’s failure at the time
of the change order modifications to explicitly except the additional
items that it is now claiming from the waiver and release bars the
contractor from asserting them subsequently, concludes the court.
Practice
Note: This decision, similar to the one discussed in the September
issue of the ConstructionRisk.com Report further demonstrates the
importance of waiver and release language. Such language when contained
in an executed change order can be used effectively to manage the change
order process so as to avoid subsequent disputes over entitlement to
additional equitable adjustment for matters covered by the change
orders. Further entitlement to either (or both) time and money can be
waived and released. The language doing so should be clear,
unambiguous, concise, and as comprehensive as possible if the project
owner desires to eliminate subsequent claims litigation. Where clear
language concerning the release is both in the contract and in the
change order (as it was in this case) the goal of the project owner will
be to seek summary judgment against the contractor and thereby avoid the
type of expensive litigation that must have occurred here that produced
a 1,000 page transcript and up to 15,000 pages of written record.
Contractors desiring to preserve their rights to further recovery must
exercise due care to negotiate out of change orders language that would
release the owner from further time or money that the contractor may be
intending to seek later in the project that arguable arise out of or are
related to these same change orders. For example, if the contractor
wants to preserve the right to seek delay and impact costs that are not
yet known at the time of the change order but which could result if the
number of change orders keeps growing, this should be specifically
stated as an exception to the waiver and release language.
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ARTICLE #2
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Arbitration Consolidation was
Inappropriate
Where a subcontractor submitted a claim against the general contractor
for payment, it submitted the matter to arbitration and the general
contractor replied with a counterclaim in that arbitration and also
initiated a third-party arbitration claim against a related
subcontractor. When the arbitrator ordered consolidation and permitted
an indemnity claim between subcontractors the impleaded subcontractor
sought a court order to separate the arbitrations and to exclude the
indemnity claim from the arbitration. The court denied that request and
the subcontractor appealed and obtained a reversal, holding that the
matters should not have been joined since the individual subcontracts,
although each mandating arbitration, did not dictate that matters
involving separate subcontractors would be joined in a single
arbitration proceeding.
In Seretta Construction, Inc. v. Great American Insurance Co, 869
So. 676 (2004), Pertree Constructors was the general contractor. It
subcontracted with Seretta to erect concrete tilt-up walls, and it
subcontracted with Five Arrows to prepare and paint the wall surfaces.
The subcontracts included identical arbitration provisions stating:
“Any claim, dispute or other matter in question between the Contractor
and the Subcontractor relating to this Agreement shall be subject to
arbitration upon the written demand of either party. Such arbitration
shall be in accordance with the construction industry arbitration rules
of the American Arbitration Association then obtaining. This Agreement
so to arbitrate shall be specifically enforceable under the prevailing
arbitration law, and the award rendered by the arbitrator shall be
final, and judgment may be entered upon it in any court having
jurisdiction thereof.”
At issue in this case was whether it was appropriate for disputes under
separate subcontracts that each had their own arbitration provision to
be joined into a single arbitration proceeding contrary to the will of
one of the subcontractors involved. In reviewing this issue, the court
considered decisions of courts outside the state of Florida and found
that some courts adopt the view that they have the power to direct that
related arbitration matters be joined into a single arbitration
proceeding. That line of cases relies upon doctrines of convenience and
economy to resolve in one proceeding disputes which arise out of common
facts and circumstances. In contrast to that line of cases, however,
federal courts and several state courts hold that they have no power to
compel consolidation where the contracts do not expressly provide for
the same. They reason that for the court to “rewrite” the contracts or
subcontracts to allow consolidation procedurally may conflict with the
rights of one or more of the parties under their contracts.
The Florida court concluded even though a consolidated arbitration in
this case would be more expeditious and economical, the court would
follow the approach of the federal courts and states that do not permit
courts to order consolidation in the absence of an agreement by the
parties to allow such consolidation.
Practice Note: As stated by the court in this case, it would
have been more economical and efficient to combine the issues and
disputes that arose out of common facts and circumstances into a single
arbitration proceeding. By having a single arbitration, responsibility
for the various claims, counterclaims, damages, and indemnification
between parties could be resolved in a prompt and logical manner.
Although courts in some states may impose consolidation despite the fact
that the contracts do not call for such consolidation, this is certainly
not always the case – as seen by the decision here. If you are signing
an agreement containing arbitration provisions and you desire that all
issues and matters related to common facts be resolved in a single
consolidated arbitration, instead of piece-meal in different
arbitrations, you should include express language in the contract to
provide for such consolidation.
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ARTICLE #3
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Failure to Request Change Order Bars
Contractor Recovery for Excess Units
J. Kent Holland
Contractor that performed significantly greater unit quantities of
paving work than anticipated was barred from an equitable adjustment
because although it adequately documented the increased quantities and
costs, and the project owner was aware of the same, the contractor
failed to submit a change order for approval by the owner in advance of
incurring the costs.
In Seneca Valley, Inc. v. Village of Caldwell, 808 N.E.2d 422
(Ohio, 2004), a contractor, (Seneca Valley) on a waterline project
brought suit against a village seeking an equitable adjustment for
increased costs associated with excess materials and costs it incurred
for increased unit quantities of pavement. The contractor argued that
the village was in breach of its contract by failing to pay for the
work, or that in the alternative, the contractor was entitled to recover
its extra costs under the theory of “quantum meruit” because the village
would otherwise be unjustly enriched by all the extra work performed by
the contractor.
The contract had been awarded to Seneca as the lowest bid on a lump-sum,
fixed-price contract. The specifications included in the invitation for
bid showed a small unit quantity of pavement replacement. Seneca
asserted in the litigation that the contract was not lump-sum contract
but a unit price contract. The contractor placed approximately 1,380
cubic yards of granular aggregate and replaced 1,422 square yards of
pavement at the project site. (Only ten square yards of asphalt
restoration was included in the unit price estimates contained in the
bid and contract). No written change order was issued for the placement
of these materials. It was not until the contractor’s pay estimate was
submitted to the village seeking payment for these quantities of
aggregate and pavement that the dispute became apparent. The project
manager for the village responded to the pay request by advising that “A
quantiy increase over the bid quantity of this magnitude needed a
request for a change order.” In addition, the project manager noted
that the material used for the pavement restoration was not the same as
the bid item and that this also required a written change order to
approve this change.
In considering the matter, the court stated that it was undisputed that
the contractor performed work beyond the specific base units set forth
in the bid. The court stated that the question to be determined was
whether the contract was a unit base contract (fixed price per unit but
no set number of units) or a fixed bid based contract (one set price for
completion of the job as a whole). The contractor argued that the
contract was a fixed bid contract and that setting unit prices within
the contract was “merely a convenience for calculation of the final bid
and, in the event that the specific number of units listed in the
contract was exceeded, was to be used in order to more easily facilitate
a written change order.”
The village’s Notice of Award to the contractor stated “You are hereby
notified that your bid has been accepted for items in the amount of
$103,040.” This amount, said the court, was the total amount of all bid
items and the notice of award didn’t anywhere mention unit prices. The
General Conditions section of the contract, says the court, support the
villages argument that the unit prices that were identified in the
contract were “pre-negotiated unit prices for dealing with
post-contractual increases.” The court quoted at length from various
contract provisions concerning “Contract Price,” “Field Orders,” “Change
Orders,” “Measurements and Quantities,” and “Changes in the Work.” It’s
conclusion was that in accepting the contractor’s bid, the bid was
accepted based on a finite amount of money and did not refer to unit
prices. The court finds: “Further, the fact that the base bid quantities
may have been estimates does not eliminate the change-order requirement
for work quantities in excess of the estimates. This contract
unambiguously requires a written change order in advance of any
additional pay items.” Based on this, the court found that the village
did not breach its contract by refusing to pay the extra costs demanded
by the contractor.
Contractor’s alternative theory for recovery (i.e., unjust enrichment
for the village) was also rejected by the court. As stated by the
court, “While the outcome herein may render unfortunate results for the
[contractor], it is not the function of this court, or any court, to
construe an otherwise unambiguous contract in order to achieve equitable
results. Finally, the court rejected the contractor’s argument that the
village had waived its rights under the contract by virtue of the fact
that its project representatives had approved daily work in excess of
the initial bid item quantities. As explained by the court, “The
contract documents in the instant case do not provide that the Village
water department employee, acting as an “Observer,” had authority to
authorize contract quantities orally or even writing. There is no
evidence of or any claims of an express waiver by the Village. In fact,
the bid contract documents themselves negate such a claim.” For these
reasons, the appellate court affirmed summary judgment in favor of the
village against the contractor.
Practice
Note: The importance of complying with contract requirements is
emphasized by this decision. As explained by the court, a number of
factors favored the Village against the contractor in this case. There
is a significant body of case law standing for the proposition that
where procedures for written change orders are provided for within the
contract, those procedures must be followed, and will not be deemed to
be waived by knowledge or actions of the owner’s project representatives
who lack authority to approve change orders, or even if they had
authority, were not timely asked to approve a change order in advance of
the contractor performing the work to which it asserts entitlement to
equitable adjustment. Contractors should take steps to educate their
field and office personnel on provisions of the contract concerning time
limitations and authority for approval of change orders. These are not
matters to be known only by the contract negotiators and legal counsel,
or to be ignored or forgotten by throwing the contract in a file cabinet
and never referring to it for managing the project and documentation.
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ABOUT
THIS NEWSLETTER & A DISCLAIMER
This
newsletter Report is published and edited by J. Kent Holland, Jr.,
J.D., a construction lawyer and risk management consultant for
environmental and design professional liability. The Report
is independent of any insurance company, law firm, or other entity, and
is distributed with the understanding that ConstructionRisk.com, LLC,
and the editor and writers, are not hereby engaged in rendering legal
services or the practice of law. Further, the content and comments in
this newsletter are provided for educational purposes and for general
distribution only, and cannot apply to any single set of specific
circumstances. If you have a legal issue to which you believe this
newsletter relates, we urge you to consult your own legal counsel.
ConstructionRisk.com, LLC, and its writers and editors, expressly
disclaim any responsibility for damages arising from the use,
application, or reliance upon the information contained herein.
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Copyright 2004, ConstructionRisk.com, LLC
Publisher & Editor: J. Kent Holland, Jr., Esq.
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