“The general contractor may at any time, without invalidating the contract, by written instructions, direct the subcontractor to make changes, additions or deletions to the work. Subcontractor shall promptly proceed with such instruction. An increase or decrease in the subcontract price resulting from such changes shall be agreed upon in writing by the parties.”
With some variations, this clause appears regularly in construction contracts. The subcontractor is expected to proceed with changed work while negotiations over price go forward. Of course, the subcontractor bears the cost of the change until price is agreed. On the other hand, the clause prevents the general contractor from being coerced into accepting an inflated price for the work in order to have it continue.
The problem is the clause is open-ended. There is no limit on the extent of unresolved changes that are allowable or for how long. One particularly egregious case outlines the potential perils for both sides when unsettled changes go out of control. That case is The Fru-Con/Fluor Daniel Joint Venture v. Corrigan Brothers, Inc., 154 S.W.3d 330 (Mo. 2005).
The nature of the beast
Proctor & Gamble contracted with the joint venture to build a $485 million paper products facility. The joint venture then issued two mechanical subcontracts to Corrigan, each with a changes clause similar to the one noted above. Both subcontracts were subjected to a great number of changes that remained uncompensated because of disputes over the pricing of them. Eventually, Corrigan said “Enough!” and left the project.
During the lawsuit, both parties presented their main factual arguments, legal theories and separate calculation of damages. The trial court’s decision was somewhat surprising, as the two contracts were treated very differently. In one, the court held that Corrigan breached the contract. In the other, the court held that both parties had abandoned the agreement. How could this be?
Contract No. 1
Here are Corrigan’s factual arguments:
1. The joint venture substantially delayed the work because of the changes
2. Of 3,600 drawings, 2,500 were revised
3. The quantity of changes showed an abuse of the changes clause
4. Agreement on pricing the changes was unreasonably delayed
5. All of these factors fundamentally changed the agreement.
What does this mean contractually?
On appeal, the Supreme Court of Missouri appeared to accept these positions of Corrigan as proven to be accurate. But where was the breach? Here is what the court said: “The contract provided that the Joint Venture could require Corrigan to begin change order work before the parties had agreed on the price for the work ... Despite the large number of changes, they were allowed by the contract ...”.
Accordingly, there was no breach, and Corrigan had no right to walk off the job. In addition, the quantity of changes did not mean that the joint venture had “abandoned” the original contract. In other words, the changes clause was part of the agreement and it governed the dispute.
But Corrigan did not lose
Now came the damages calculations. Corrigan wanted to be paid for all work it performed prior to its walking away from the project. The joint venture wanted the excess cost of completion by a follow-on contractor, including the cost of the uncompleted changes. This difficult accounting issue is always present in a termination/abandonment lawsuit. The court’s resolution was very much to the subcontractor’s benefit.
At the time of the breach (the abandonment by Corrigan), about 70 percent of base contract and changed work had been completed. The court then translated this percentage into labor hours and allowed a 43 percent “labor modifier” on top of Corrigan’s base rate to account for difficult job conditions. (How the court calculated labor for the disputed change work was not explained.)
On the other hand, the joint venture was awarded no damages at all: “[T]he Joint Venture failed to distinguish between work remaining to be performed under Corrigan’s base contract and unresolved [change order] work.” Apparently, Corrigan’s labor records were better than the joint venture’s.
Contract No. 2
Contract No. 2 was treated very differently for reasons that are not entirely clear, as the root cause of problems for both contracts was an excessive number of changes without an agreement on price.
The emphasis on the second contract, however, was not on disputed pricing of changes, but on the effects the changes had on the schedule. In particular, it was proven that Corrigan could not begin the work on contract No. 2 until the time of the original completion date. After that, the joint venture modified the progress schedule a number of times. The result was an overrun in labor hours and an abandonment of the four-day/10-hour shift plan.
Under these conditions, the court held that the parties “mutually abandoned” the agreement. Damages were calculated using the “reasonable value” of all of Corrigan’s work, deducting amounts paid and backcharges for defective work. The term of art for this calculation is a “modified total cost” approach, and the legal term is “quantum meruit,” a recovery basis only allowable where there is no contract.
Cardinal change again
The legal theory of “abandonment of contract” obviously had a mixed reception in Corrigan. The published decision indicates that neither nonagreement on changes nor an excessive number of changes, separately or together, supports the theory. On the other hand, a major revamp of the schedule, when combined with excessive changes, can amount to an abandonment.
“Cardinal change” arguments were rejected out of hand. The court declined to adopt the cardinal change doctrine, noting that it was a creature of federal government contracting, and that other states, including Ohio, Mississippi and Illinois, also would not accept this theory of breach.
I am not alone in finding the “unpublished” designation to be a questionable practice.
Exceptionally bad jobs seem to create a need for imaginative legal theories and less than rigorous analysis by the courts. A number of these alternatives have been discussed in prior columns (Nov. ’05 “Economic Duress,” Jan. ’05 “Total Cost,” Mar. ’01 “Cumulative Effects of Changes,” Nov. ’00 “Abandonment”). As Corrigan shows, none give predictable outcomes. Other nontraditional arguments will be analyzed in future articles. EC