The following story is based on the facts of a project I was personally involved in.
Eight doctors decided they wanted to build their own office building, so they formed a partnership. They hired an architect to design a four-story structure where each doctor would have his or her own conference room, reception area and examining room on one of the floors. Because of each doctor’s specialty, the design became eight unique areas joined together in one building, with a large common operating room on the first floor.
After lengthy discussions, the doctors and the architect determined that an efficient way to run the job was through a construction manager (CM). The CM would contract directly with each trade contractor as the doctors’ agent. Brasov Electric was awarded the electrical portion.
The contract form used for this multiprime contract was fairly standard. There were clauses for insurance, dispute resolution, changes, time extensions and progress payments based on percent complete.
Substantial completion was set for one year following the notice to proceed, with a $1,000 per day liquidated damages assessment for delays. The completion date was important, as it coincided with the terms of the doctors’ existing leases on their offices, with about a month to spare.
The job was a challenge for Brasov Electric. The doctors kept coming up with new ideas for the layout of their offices and meeting rooms, lighting and the equipment to be used related to their specialties. All of these complexities affected the electrical layout.
There were also numerous change orders. Brasov Electric’s estimates for cost and time extension for these changes proved to be somewhat inaccurate. Then came the major problem.
Some of the equipment needed for the common operating room had a longer lead time for delivery than the architect had estimated and would delay project completion for 30 days. To adjust for the delay, the architect and doctors came up with their own remedy: the portion of the building for the doctors’ offices would have one completion date and the operating room would have its own separate one set for 30 days later. There would now be two liquidated damages dates, one for the eight offices (date No. 1) and one for the operating room (date No. 2).
Date 1 was met by every contractor except Brasov Electric. However, all of its work was completed by date No. 2. The doctors assessed liquidated damages of $30,000 against Brasov Electric ($1,000 per day for 30 days) for not meeting date 1.
Does Brasov have a case?
Rip Hunzel, president of Brasov Electric, was shocked when he saw that the large liquidated damages had been deducted from his final payment. It just seemed wrong. Rip never agreed to this date 1/date 2 directive. As far as he was concerned, there was only one completion date, and that was when the entire building was done. If the doctors can change the commercial terms of the contract as they wish, then the whole purpose of having a written contract is defeated. Is he right?
The answer is a qualified yes. There are many variations in the language used for a changes clause. Some refer to changes in the work, others to scope of work and some, more generally, to changes in terms and conditions. In all of these clauses, the remedy is always an adjustment to the contract price or time.
In federal government contracts, the issue of how far a changes clause can go in modifying the contract is clear. The changes clause may not be used, unilaterally, to change “commercial terms and conditions”—these are contract provisions not concerning the work itself. Translated, an owner cannot by itself modify payment terms, termination provisions, warranties or insurances, nor can the owner add, delete or modify dispute resolution clauses such as mediation and arbitration provisions or liquidated damages.
Here, the doctors’ decision to create two completion dates is an unacceptable misuse of the changes clause in two ways. The doctors unilaterally changed one completion date to two, and they unilaterally modified and added to the liquidated damages provision in the contract. (For a case that discusses these points, see CH2M-WG Idaho LLC, Civ. Bd of Contract App. No. 3876 [Sept. 7, 2017].)
If the court hearing Brasov Electric’s argument were to follow the federal standard, then the doctors’ unilateral changes to create two substantial completion dates and two liquidated damages provisions would be invalid. The late delivery of the operating room equipment, which delayed the entire project by 30 days, would entitle Brasov Electric to a 30-day time extension, so Brasov Electric completed on time and no liquidated damages could be assessed against them.
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