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By:  Philip R. White, Esq.

Where a public owner issued a deductive change order, it was required to equitably adjust a contract despite the absence of an equitable adjustment clause in the contract, despite the absence of specifications or applicable public contracts law, and despite the fact that the contractor’s bid was unbalanced .  In M.J. Paquet, Inc. v. NJ Dept of Transportation, 171 N.J. 378, 794 A.2d 141 (2002),  the NJDOT awarded a contract to Paquet for the rehabilitation of several highways and bridges.  A year later, OSHA revised regulations that affected Paquet’s bridge painting work.  When the NJDOT and Paquet could not agree on a increased price for the painting that resulted from the revision of the OSHA regulations, the NJDOT deleted bridge painting from Paquet’s work scope.

Paquet’s bid was unbalanced due to a last minute change in painting subcontracts that reduced the cost of bridge painting.  Paquet argued that due to time constraints it could not practicably adjust all of the pay items affected by the change in subcontractors in time to submit its bid to NJDOT.  Instead, Paquet reduced the price of several other items, like mobilization and layout costs, to offset the overstated bridge painting pay items.

After finding that NJDOT correctly deleted the painting work from the contract pursuant to the principle of impracticability, the Court held that Paquet was entitled to an equitable adjustment to compensate it for the non-painting work included in bridge painting pay items that NJDOT had deleted from the contract.  The court found that neither the contract nor the specifications contained a provision addressing equitable relief.  The court expressly rejected the argument that Paquet’s claims was barred by a specification prohibiting claims for additional compensation arising from pay items that inaccurately stated the cost or profit associated with that item.

The court noted that there was an established policy against unbalanced bids and front-end loading in public contracts.  But in examining the facts relating to Paquet’s bid, the court found Paquet had not violated that policy.

Although the court commented that its ruling was limited to the facts of the case, it changed two basic aspects of public contracting law in New Jersey and provided a basis for contractors to argue for the same changes elsewhere.  First, after canvassing federal law and the law of several states that recognize a contractor’s right to equitable adjustment by statute or contract, the court determined that New Jersey would permit such relief.  Thus, because there was no statutory or contractual basis for equitable relief in the Paquet contract, the court effectively created a common law right to equitable adjustment.

This common law right to equitable adjustment creates a potentially potent tool for contractors to use against public and private owners.  Second, rather than simply barring Paquet’s claim because of the policy against unbalanced bids, the court undertook an analysis of the reasons why the bid was unbalanced.  This gives aggrieved contractors a valuable tool for pressing their claims.

The court’s decision seemed driven by its finding that, absent an equitable adjustment, the NJDOT would be unjustly enriched at Paquet’s expense.  If the court denied relief to Paquet, the contractor would not have been compensated for substantial work that it performed.  Viewed expansively, the decision recognized the equitable principle that pricing for changes caused by the owner should be adjusted to make the contractor whole.
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About the Author:  Philip White is an attorney with Sills, Cummis, Radin, Tischman, Epstein & Cross, located at One Riverfront Plaza , Newark , NJ 07102 (973) 643-7000.  E-mail: pwhite@sillscummis.com.  This article was originally written by Mr. White for publication in the URS Claims Resource newsletter, Spring 2003 edition, published by URS Dispute Resolution Group, 100 California Street, Suite 500 , San Francisco , CA 94111-4529 . For more information on URS, contact Adam Winegard at 213-996-2579 or by e-mail at dispute_resolution@urscorp.com.

ConstructionRisk.com Report, Vol. 5, No. 5 (Jun 2003)