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Two design-build cases decided by the federal district courts in Virginia dismissed suits by subcontractors to recover for extra or changed work they performed, because even though there was no question that the work was performed and that the prime contractor and project owner benefitted from the extra or changed work, the subcontractors failed to follow the specific contractual procedures that required timely written request for change orders.   In Carolina Conduit Systems, Inc. v. Mastec North America, Inc., 2011 WL 5042082 (E.D.  VA Richmond Div. 2011),  Carolina Conduit was a conduit supplier and installer under subcontract to Mastec on a Dominion Virginia Power project.  Carolina determined shortly after beginning its work that the “project could not be built as designed” and that due to the field conditions encountered, there were numerous duct banks that would have to be installed in a horizontal configuration instead of vertically.

Instead of submitted a formal change order request, the subcontractor’s president met with the prime’s project manager and discussed the issue and was told “not to worry” about the extra costs “because plenty of funds were available.”  In apparent reliance upon that response, the subcontractor completed its work in the more expensive manner, but when it ultimately invoiced the extra costs, the prime contractor rejected the invoice.  In response to the subcontractor’s suit for breach of contract, the prime moved for summary judgment, arguing that the extra work claimed by the sub actually fell within the scope of the subcontractor’s services under its contract, but that if not, then the subcontractor was required by contract to submit a formal change order request, which it failed to do.

In reviewing whether the work was within the fixed price scope of services, the court stated that even if the work could not be performed as set forth in the design documents, the subcontractor was already aware of that before it signed the contract.  It admitted that it learned that some duct banks would have to be constructed horizontally instead of vertically over four months before signing the Subcontract.  It seems the court could have decided the case against the subcontractor based on that determination alone and stopped right there with its decision, but instead, the court went further to focus more on the subcontractor’s failure to follow the change order submittal process.

The court stated that “Virginia law provides that contractual provisions containing written change order requirements are binding upon the parties to the contract” and quoted case precedent that “where there is a method under the contract by which a party can insure the recovery of the cost of extra work, that party is not entitled to recovery where it fails to follow that method.”  In the instant case, said the court, the subcontractor failed to provide evidence that it submitted change orders for the extra work at issue and also failed to prove that the parties had agreed to waive the change order procedure.  In fact, the change order had been properly followed by the parties for other changed work on the project, and there was no evidence that the parties modified the subcontract through their course of dealing.  The subcontractor offered no examples or evidence of any other instances where the prime contractor disregarded the change order provision as to the project.  For these reasons, the subcontractor was not entitled to recover for its extra costs on the basis of breach of contract.

Quantum meruit was also argued by the subcontractor as an alternative basis for recovery, based on deserving to be paid the value of the services it provided, and because the prime contractor would otherwise be unjustly enriched.  This was rejected by the court because when there is a written contract that governs the relationship there can be no basis for an equitable claims for relief outside the terms of the contract based on the theory of quantum meruit.  As stated by the court, “Where a contract governs the relationship of the parties, the equitable remedy of restitution grounded in quasi-contract or unjust enrichment does not lie.”

Interestingly, another design-build decision addressed very similar issues and was decided the same month by another U.S. District Court in Virginia (SNC-Lavalin America, Inc. v. Alliant Techsystems, Inc., 2011 WL 4895217 (W.D. Va, Roanoke Div. 2011). In this case, certain work could not be performed as anticipated by the parties, and the project owner ultimately evaluated several alternatives suggested by the contractor and chose one of those.  Design and construction changes were approved by the Owner but the parties were unable to agree on the additional costs required to install an acid-resistant concrete.  The contractor nevertheless proceeded to perform the work requested by the owner.

Ultimately, the contractor sued for breach of contract and the owner moved for summary judgment, arguing that to the extent the contractor was seeking damages resulting from the owner’s delay in deciding to install acid-resistant concrete and the additional time required to install the floor covering, those damages would be barred by the contractor’s failure to comply with the contract’s written notice requirements.  The court agreed.  It cited the contract which stated “[f]ailure to provide written notice within the prescribed time period will serve as an absolute bar and complete waiver of Contractor’s right to recover for any increases in the Contract Price or Contract Time resulting from the change.” (Terms and Conditions Section 12.4.)

Moreover, even though the change was an “Owner-Directed Change” the court concluded that was of no consequence with regard to relieving the contractor of the obligation to submit a formal change order request for the change and the resultant compensation requested.  The court went through a detailed review of the changes provisions of the contract and concluded that Owner-Directed Changes are just one category of change in which contractors must follow the normal written change order procedures.   For these reasons, summary judgment was granted against the contractor on the extra costs claimed.

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. 14, No. 10 (Nov 2012).

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