August 03, 2020 Construction Law 101

Application of the Cardinal-Change Doctrines

Alex Costa

Change orders are a typical feature of construction projects. Contractors and owners are constantly agreeing on changes to the general scope of the work. Each change, respectively, may not harm the project as a whole. However, what happens when those changes start to pile up? Damaging results may occur once a party feels the number or scope of changes on a project exceeds expectations. Contractors’ productivity may decrease significantly, which could also lead to risky financial situations: Does a cash-strapped business continue with the change orders, losing profit and potentially more, or withdraw from the project and face breach-of-contract damages? On the other hand, owners may not have the ability to finance additional costs or time to bring in another contractor.

Once the amount or severity of changes start to accumulate, the doctrine of cardinal change may apply. The term cardinal change, originating from federal contracting law, was created as a way to prevent the government from taking advantage of contractors with numerous and drastic change orders after the bid solicitation period. Today, many states express this concept as “abandonment of contract.” Under either terminology, there has been a “substantial deviation that changes the nature of the bargain, and an alteration so profound that results in a material breach of contract.” This article explores two cases arising from the same project that illustrate how the cardinal-change doctrine is applied by the courts.

What is the Scope?

To determine whether a cardinal change exists, courts must analyze whether the changes to the original contract fall within the scope, the general scope, or beyond the general scope. The “scope” of the contract covers the work, responsibilities, and risks assumed by the contractor in consideration for the contract price. Any changes to this scope are changes that both parties acknowledge will occur to some degree, which is why the costs of these expected changes are often built into the contract price. Changes that occur outside of the ”scope” but within the “general scope” of the contract are also changes that are somewhat expected; however, neither party can exactly quantify or predict the change. Once a change falls beyond the “general scope” of the contract, this change constitutes a material breach of the contract.

The test for whether a change within or outside the “general scope” of the contract requires consideration of both the magnitude and the quality of the changes.  If the changes “unreasonably alter the character of the work or unduly increase its cost, or effect such material change as to constitute radical departure from the original contract,” the situation may be labeled a cardinal change, an abandonment of the contract, or a breach of the implied duty of good faith and fair dealing.

Factors of a Cardinal Change

Since the general scope of construction contracts is broad, most changes viewed individually are not considered “cardinal.”  However, viewing the cumulative impact of multiple changes, otherwise known as “death by a thousand cuts,” may provide a basis in showing both parties were performing beyond the general scope of the contract. Even so, it is not solely the amount of changes that determines whether a cardinal change has occurred. Courts look to the magnitude, quality, character, and impact of the changes on the project. These factors include, but are not limited to, “individual and cumulative impact of changes, degree of added complexity and difficulty of the work, disruption caused to the contractor’s performance, overall impact upon the contract cost and time of performance, and effect of change on compensation or risk allocation.” Also considered by courts in government contracts is the result from material additions or deletions to the contract.

Courts’ Interpretation of Cardinal Change/Abandonment Evidence

The quality of evidence required to prove cardinal change or an abandonment of the contract has been determined on a subjective basis by some courts, as shown by the conflicting decisions in O’Brien & Gere Technical Services, Inc. v. Fru-Con/Fluor Daniel Joint Venture and Fru-Con/Fluor Denial Joint Venture v. Corrigan Brothers, Inc.  These cases arose from the same project with very similar facts. The project consisted of a $485-million paper-manufacturing facility. The Joint Venture awarded one subcontract for the design and construction of three buildings to O’Brien for over $22 million and another two subcontracts (Papermaking and Balance of Plant) to Corrigan totaling over $4 million for pipe fabrication and mechanical work. After a hefty amount of design changes and performance problems, the Joint Venture terminated O’Brien within a year of entering the subcontract and Corrigan walked off the job five months later.

O’Brien commenced suit in the U.S. District for the Eastern District of Missouri against the Joint Venture and the Joint Venture filed suit against Corrigan in Missouri Circuit Court for Cape Girardeau County, with both subcontractors seeking to recover damages for abandonment of contract. Both subcontractors obtained a quantum meruit award; however, Corrigan was also found to have materially breached the Papermaking subcontract when it abandoned the work.

The final damages awards  resulted from each court interpreting similar facts with the same change-order clause differently. Both subcontracts contained the same change-order language requiring the subcontractor to “promptly proceed in compliance with such [changes, additions, deletions, etc.]” with an increase or decrease in price to be issued once agreed upon in writing.

Both cases also exhibited an array of changes. In O’Brien, the Joint Venture made frequent changes to the location and quantity of equipment components that would support the building. These changes were followed by design flaws by O’Brien, another 80 changes to the buildings’ design elements by the Joint Venture, delays caused by O’Brien’s steel-erection subcontractor, and unanticipated delays with poor subsoil and pre-existing firelines that were not designated in the drawings by the Joint Venture.

In Corrigan, the Balance of Plant subcontract could not be started until approximately the date the work was originally scheduled to be completed. The Joint Venture also issued 258 revised ISOs amounting to 132% of the initial drawings, which included a significant increase in hours from those previously contracted for. As for the Balance of Plant subcontract, Corrigan presented evidence of the Joint Venture changing or revising roughly 2,500 of the 3,600 drawings.

The court in O’Brien took a more practical approach, finding the breakdown and flaws of the change process to be “clear and substantial evidence that both parties intended to abandon their rights under the subcontract.” By forcing O’Brien to continue work while the parties could not agree over pricing for the substantial amount of changed work, O’Brien’s cashflow problems increased which affected O’Brien’s ability to perform. The court also highlighted each party’s inability to keep up with the tight schedule and the changes in scope, quantity, and frequency as factors indicating an abandonment of the contract.

 As for the court in Corrigan, both parties were found to have abandoned the Balance of Plant subcontract, but only Corrigan was found to have abandoned the Papermaking subcontract. Despite the high volume of changes to the drawings in the Papermaking subcontract similar to the Balance of Plant subcontract, the court in Corrigan “viewed the ‘breakdown in negotiations as to the price and payment of these changes’ to be authorized under the (Papermaking) subcontract and thus could not justify Corrigan’s abandonment.”

Even so, wouldn’t this reasoning apply to the Balance of Plant subcontract as well? The different approaches in the Corrigan court’s evaluation of the Papermaking and Balance of Plant subcontracts result “from a subjective evaluation of differences in numbers and magnitude of design changes and schedule delays under the two subcontracts.” Although abandonment of the Papermaking and Balance of Plant subcontracts arose out of similar facts, the court in Corrigan needed more evidence than changes or revisions to 2,500 of the 3,600 drawings for the Joint Venture to have abandoned the Papermaking subcontract.

Conclusion

Overall, the doctrines of cardinal change and abandonment seek to provide a remedy for parties that have been subject to change-order abuse. The biggest problem most parties face is not being able to seek judgement until it is too late. If a party feels like a cardinal change or abandonment issue has arisen, they can’t afford to stop work. Most if not all construction contracts include language requiring the contractor to continue working in the event a party feels as if the change order(s) fall outside the general scope of the contract. As shown in the cases above, courts may interpret the same change-order clause differently and require more evidence than another court. Even if a party believes they have the facts and law on their side, waiting for court proceedings could put the company under. Using the doctrine of cardinal change or abandonment may be applicable, but can you afford it?

Entity:
Topic:

Alex Costa

JD, Portsmouth, RI