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A homebuilder’s lawsuit against a city and its architectural firm for refusing to grant change orders for additional costs was rejected by a court because the contractor failed to comply with a contractual requirement that it give written notice to the architect of its breach of contract claims against the city before initiating litigation.

In the case of Cameo Homes v. Kraus-Andersen Construction Company and City of East Grant Forks, (No. 04-1200, U.S. 8th Circuit), the Court of Appeals affirmed a summary judgment granted in favor of the City and architect by the federal district court.  Federal District Court .   Cameo Homes (hereinafter, “Cameo” or “Contractor”) entered into four contracts with the city to do concrete work on four projects being managed by Kraus-Andersen, the city’s construction manager (CM).  The contracts incorporated the general conditions of the American Institute of Architects (AIS) contract provisions, including a provision stating that the contract could only be modified through written agreements such as “change orders.”

In the section addressing change orders, the contract provided that change orders requested by the contractor were then to be prepared by the construction manager stating the additional work to be performed, the deadline and the additional compensation, if any.  No change order would be effective unless singed by the CM, the architect, and the contractor.  No oral modification of contract terms was permissible.

In addition to the change order process, the contract addressed a separate category called “claims.”  The difference in a change order and a claim is that change orders modify the terms of a contract while claims seek relief owed “as a matter of right” under the existing terms of the contract.  Written notice of any claim was required to be submitted to the architect by the contractor within 21 days of an event or the discovery of an event giving rise to the demand.   As a condition precedent to any litigation, the contractor was required to first obtain an architect’s decision of a claim.

In this case, Cameo, the contractor, submitted several change orders which were denied.  Cameo performed the work demanded without obtaining change orders and subsequently submitted change orders for its extra costs.  These change orders too were denied.  Cameo then filed suit against both the city and the CM, alleging breach of contract by the city, negligence by both the city and the CM as well as defamation, fraud, RICO violations, intentional and negligent interference with prospective business advantage, intentional interference with contractual relations, extortion, civil conspiracy, and violations of the Davis-Bacon Act.

After the defendants had the case removed to the federal district court, they succeeded in having the court grant their motions for summary judgment and dismiss all the contractor’s claims.  On appeal, Cameo argued that the district court erred in determining that it had failed to give notice of its claims to the architect.  In particular, the contractor argued that the process for submitting a claim “is referred to as the ‘change order process.’”  In practice, the contractor claims that the parties amended the claims process by allowing change order requests to be submitted and approved after contested work had been performed. Cameo therefore argued that its submission of change order requests satisfied the requirement that written notice of claims be given to the architect before litigation.

The appellate court concluded that although the contractor submitted some evidence suggesting the parties developed an alternative practice for the approval of change orders, it had not proved that the parties understood change order requests to be equivalent to submitting formal claims to the architect as required by the contract.  The claims process was never modified in writing.  Since the contractor failed to adhere to the contract’s strict requirement to give written notice of claims to the architect, the court held the contractor was barred from filing suit in court.  This applied not only to breach of contract claims but also to the alleged negligence-based claims against the architect.  The court concluded that the contractor’s disagreement with the architect over verification of concrete placements was subject to the same contractual claims process rather than a negligence action because the architect acted within the scope of the contracts and incurred no corresponding obligation directly to the contractor.

For these reasons, the appellate court affirmed the summary judgment against the contractor.

Commentary: This case once again demonstrates the importance of knowing and following the contractual requirements concerning the change order process and claims process.  There a numerous reported court decisions in courts throughout the country upholding the contract terms to bar contractor claims that failed to meet the time requirements or notice requirements specified.  As explained by this court, when a contract states on its face that it can only be amended in writing, it means what it says. Even if the parties appear to informally waive the contractual requirements to permit consideration of changes or claims that do not adhere to the literal black-letter requirements of the contract, many contracts state that such an apparent waiver on one matter does not constitute a waiver of the provision going forward.

Even where no harm or apparent prejudice has been caused to the architect or project owner by a contractor’s failure to adhere to the strict claims process requirements, numerous court decisions have held that the failure to comply with the contractual claims process acts as an absolute bar to filing claims in court.  The basic idea is that where commercial entities have bargained for and entered into a contract, it is not proper for courts to undo or rewrite the bargain.

As part of the risk management training that I present to owners, design professionals and contracts, I emphasize the importance of knowing your contract.  Know what it says with regard to time limitations for filing change order requests and claims. Know what it says concerning where to file and with whom to address the change order requests and claims.  Be sure that the responsible field personnel and project managers know the requirements.  And be sure they all follow the requirements.

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 7, No. 3 (Jun 2005).

Copyright 2005, ConstructionRIsk.com, LLC