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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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