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STA LEGAL LOG – JUNE 2019

When is a Cardinal Change “Cardinal”?

By Henry L. Goldberg, Legal Counsel, Subcontractors Trade Association
Partner, Moritt Hock & Hamroff LLP

A cardinal change is a rare event in construction. However, when it “probably” occurs, it can turn the relative rights of the parties to a construction dispute upside down. A recent New York case bears this out.

In this case, a general contractor on a New York City School Construction Authority project subcontracted to a masonry subcontractor. The subcontract called for the performance of a “complete masonry installation” at a purchase price of $5,320,000.

The subcontract also specifically excluded “out of sequence work operations, except for coordination with other trade installations, and premium/overtime/extended shifts unless required due to subcontractor’s fault.”

In addition, the subcontract provided that the GC, “at any time, in any quantity or amount… without invalidating or abandoning the contract, may add or delete, modify or alter, the work to be performed under this agreement, including, without limitation, ordering changes or extra work.” Finally, the mason was not allowed to perform any change in the work unless it received a duly signed change order or field order from the general contractor.

While the work on the project was ongoing, numerous disputes arose between the general contractor and masonry subcontractor about delays in the mason’s work and the causes of those delays. The mason eventually made claims for an additional $500,000 for “increased manpower, supervision, and additional summer shifts in order to complete the work as originally scheduled.”

The general contractor issued an “Addendum #3” to the subcontract that deleted a substantial portion of the masonry work.

At that time, the mason had completed approximately 30% of its original subcontract work. Addendum #3 deleted approximately 30% of the subcontract price, inclusive of claimed change orders. Accordingly, following Addendum #3, approximately only 35-40% of the masonry’s work remained.

The mason responded to Addendum #3 by notifying the general contractor that it would immediately stop working on the project. The general contractor replied that it was terminating the subcontract due to the mason’s material breaches and abandonment of the project.

The mason commenced a lawsuit. It alleged that the general contractor had interfered with its work and wrongfully deleted a substantial portion of the masonry work in material breach of the subcontract.

While clauses in a contract that permit the deletion of work are commonplace and clearly enforceable, courts have construed such clauses to permit deletions in contracts only so long as they do not alter the “essential identity or the main purpose” of a contract. The enforcement of a changes or omissions clause also requires a finding that such changes or omissions were not arbitrary and capricious.

The court observed that the stated purpose of the subcontract was “complete masonry installation.” Addendum #3 had the effect of altering the essential identity and main purpose of the subcontract. The court further stated that a contract provision could not be construed to allow the general contractor to take 35-40% of the work from the plaintiff-masonry company and then, at the same time, compel the plaintiff to complete the balance of the original scope. As such, the general contractor did not establish, as a matter of law, that the mason breached the subcontract by stopping work on the project after receiving Addendum #3.

MHH Commentary

Reasonability has its limits.

The integrity of a subcontract may not be “eviscerated” by general contractor change orders and deletions.

Seeking to compel a subcontractor to finish a mere minority portion of a subcontract is potentially problematic.

Work can be deleted, only as long as it does not alter the essential identity and purpose of a subcontract. Compelling the mason to complete only a minority of its work will alter the “benefit of the bargain” to the subcontractor.

Subcontractor overhead and profit margins would be directly and negatively impacted by compelling the subcontractor to complete only a relatively small portion of its work while its full-project overhead continues while inadequately absorbed.

As stated above, almost all contracts allow for changes and deletions. As always, “the devil is in the details.” Both a quantitative and qualitative analysis must be made regarding the nature of changes and deletions. The question does not depend upon a precise percentage of work or cost involved, but on the character of the work as well.

While examples of such overreaching, arbitrary behavior as found in this case are not common, neither is the finding of a cardinal change defending a subcontractor from declaring a breach by the general contractor and refusing to proceed further. The standards are imprecise and give courts wide discretion. What, in fact, is the “essential identify” and “main purpose” of your contract? Here, the court failed to find the subcontractor in breach for walking off the job. Is this a safe option? No. But, as this case demonstrates, under the right circumstances, you can defend your interests in the face of such abusive deletions and changes clearly inappropriate for your particular project.