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By James Rhodes, Esq.
ConstructionRisk Counsel, PLLC

A federal appeals court affirmed the limitation on a contractor’s compensation for change orders due to a Virginia public contracting statute that provides a cap on recovery.  The case was brought by a construction contractor that was performing site preparation work for a local housing authority.  The statute limits a contracting officer’s authority to modify a public fixed-price contract to exceed the aggregate of $50,000 or 25% of the contract value, without prior written approval of the governor’s designee or a political subdivision.  The court also strictly applied the procedural notice requirements for contractors’ claims pursuant to another provision of the public contracting statute.  Carnell Construction Corp. v. Danville Redevelopment & Housing Authority, 745 F.3d 703 (4th Cir. 2014)

Carnell Construction Corporation (Carnell) was awarded a contract of around $800,000 to provide site preparation work (including clearing, site grading, and installing drainage and erosion controls) for a public housing project in Danville, Virginia.  The client was the Danville Development and Housing Authority (Housing Authority), a public entity funded in part by federal grants.  Carnell began work in June 2008, but the relationship deteriorated after allegations of delayed and unacceptable by the Housing Authority.

Carnell claimed its work was proper and the delays were due to the Housing Authority’s mismanagement.  Carnell’s president also complained about alleged racial discrimination against the company – a minority-owned corporation.  The Housing Authority indicated in May 2009 that Carnell was to leave the site the following month, regardless of whether the work was complete.  Carnell subsequently left the site before completion and requested reimbursement for unpaid work.  The payment requests were rejected and the Housing Authority declared the company to be in default under its performance bond.

Carnell filed a lawsuit in federal district court (the Eastern District of Virginia) alleging racial discrimination and breach of contract against the Housing Authority and a related private investor in the project.  While raising interesting legal issues under federal civil rights law, the racial discrimination aspect of the case is outside the scope of this article.  After two mistrials, the jury in the third trial found for Carnell in the breach of contract claims, awarding around $900,000.  But the judge subsequently reduced the award to around $200,000 in large part due to a Virginia statutory cap for certain contract modifications on public contracts, which will be discussed in greater detail.  Both parties appealed to the United States Court of Appeals for the Fourth Circuit.

The Virginia Public Procurement Act (VPPA), the main statutory scheme applicable to public contracts in the state, includes a cap on a contractor’s entitlement to contract modifications that have not been agreed to in advance by the applicable political entity.  The provision reads as follows:

 A public contract may include provisions for modification of the contract during performance, but no fixed-price contract may be increased by more than twenty-five percent of the amount of the contract or $50,000, whichever is greater, without the advance written approval of the Governor or his designee, in the case of state agencies, or the governing body, in the case of political subdivisions. In no event may the amount of any contract, without adequate consideration, be increased for any purpose, including, but not limited to, relief of an offeror from the consequences of an error in its bid or offer.

 Virginia Code § 2.2-4309(a).

The appeals court found that the trial court had properly reduced the damages pursuant to this provision.  Accordingly, Carnell could only be compensated for changes up to 25% of the value of the firm fixed-price contract because of the lack of prior written approval by the requisite political authority.  The court rejected several arguments on the scope or applicability of the provision, strictly enforcing what it found to be the unambiguous meaning of the statute.

Lessons Learned:  This decision highlights the potentially harsh result of “statutory caps” on changes for contractors.  Despite formal or informal direction from the contracting officer to perform out of scope work, either written change orders or “constructive changes” will be deemed invalid in Virginia when the aggregate exceeds 25% of a fixed-price contract value.

Note that similar limitations exist in other states as well.  The statutory cap can put the contractor in a difficult position, as the contractors are ordinarily required to perform additional work pending the outcome of any related dispute.  Accordingly, contractors must remain wary of their client exceeding its statutory authority to direct change orders.

The case also addressed the importance notice requirement under the VPPA.  Unlike in the first two trials, the plaintiff failed to offer a key letter into evidence in the third trial that provided notice in November 2009 of the plaintiff’s intent to file claims related to numerous specific issues.  Instead, the plaintiff had only offered into evidence an earlier letter that provided notice for only a few of the claims.

Citing to Supreme Court of Virginia precedent, the court rejected the plaintiff’s argument that it was sufficient that the Housing Authority had “actual notice” of all the claims.  The case highlights that courts will construe the VPPA notice requirement strictly, as a “mandatory, procedural requirement,” before consideration of the merits.

 

 

This article is published in ConstructionRisk.com Report, Vol. 16, No. 10 (December 2014).

Copyright 2014, ConstructionRisk, LLC