Owner successfully denies contractor’s “extra” and quantum meruit claims for additional payment on sewer system work repair and retrofit work needed to satisfy local government requirements. The decision: Archon Construction Co. v. U.S. Shelter (PDF).
Backstory – Archon Construction Co. v. U.S. Shelter
Owner develops a subdivision for new homes. The subdivision needs a sewer system. So the owner contracts with a contractor to build the sewer system. (That contractor is the prime contractor. (And to keep things short and easy—because this case doesn’t involve controversy with subcontractors or anyone else further downstream—we’ll just refer to that prime contract as the “contractor”.)
Because the owner will later transfer the completed sewer system to the local city, the sewer system must satisfy city requirements and get city approval. The construction contract for building the sewer system—via a byzantine route of references to design plans, that include “notes,” that refer to and incorporate government specifications—adopts a completed sewer system that’s acceptable to the city as part of the work.
The contractor’s proposal specifies PVC—not iron—pipes for the system. But the city rejects the PVC pipes on a part of the system. That requires the contractor to retrofit the system, principally by excavating part of the system and replacing the PVC with iron pipe. The contractor requests additional money from the owner to pay the additional cost of that retrofit work. The owner denies that request. The contractor sues the owner, alleging claims for “extra work,” breach of contract, and quantum meruit. Continue Reading
Earlier this week I was with family in Chicago’s Millenium Park. Looking west across Michigan Avenue gave this view of the Legacy at Millenium Park. Had to snap a pic. Seeing the building complete reminded me: I represented the owner negotiating both the architects agreement for the design and the prime construction contract to erect the building. Remarkable–and humbling–to see something you worked on extend 72 stories into a crisp blue sky.
Owner fails to pay prime contractor. Prime denies payment to a subcontractor, citing subcontract language that the prime contends conditions payment to the subcontractor on prior owner payment to the prime. Result: the subcontract language isn’t clear enough to support the prime’s weight; the prime must pay the subcontractor regardless of whether the owner paid the prime.
The decision: Beal Bank Nevada v. Northshore Center THC (PDF)
Prime contractor subcontracts with a subcontractor to provide excavation, sewer line, and other work. The owner doesn’t pay the prime for that work, and so the prime doesn’t pay downstream to the sub for that work either.
The subcontractor sues the prime contractor for breach of contract (as well as to foreclose a mechanics lien). The prime contractor defends, contending that the subcontract requires the prime to pay the sub only if the owner first pays the prime for the sub’s work (and then only after a certain amount of time after the owner’s payment to the prime). According to the prime contractor, the subcontract imposes owner payment to the prime as a condition precedent on the prime’s duty to pay the sub. Continue Reading
The jurists who believe in natural law seem to me to be in that naive state of mind that accepts what has been familiar and accepted by them and their neighbors as something that must be accepted by all men everywhere.
U.S. Supreme Court Associate Justice Oliver Wendell Holmes, Jr., Natural Law, 32 Harvard Law Review 40, 41 (1918)
Prime contractor and owner exchange drafts of a proposed contract. They never sign. But they proceed with work and payment as if they did. Result: that proposed contract is their contract and binds them both.
Owner doesn’t want to be liable under that contract, claims they were acting merely as agent for someone else, though never announced their agency role to the contractor. Result: the erstwhile agent is the principal, and liable as the owner under the contract.
The decision: Trapani Construction v. The Elliott Group Continue Reading
Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loser — in fees, expenses, and waste of time. As a peacemaker the lawyer has a superior opportunity of being a good man. There will still be business enough.
— Abraham Lincoln
(And if you asked him today, I’d wager the late President wouldn’t limit the peacemaking’s lawyer’s superior opportunity to just being a good man.)
Statutes of limitation find their justification in necessity and convenience rather than logic. They represent expedients, rather than principles. They are practical and pragmatic devices to spare the courts from litigation of stale claims, and the citizen from being put to his defense after memories have faded, witnesses have died or disappeared, and evidence has been lost.
They are by definition arbitrary, and their operation does not discriminate between the just and the unjust claim, or the avoidable and unavoidable delay. They have come into the law not through the judicial process but through legislation. They represent a public policy about the privilege to litigate. Their shelter has never been regarded as what now is called a “fundamental” right.
Robert H. Jackson, Chase Securities Corp. v. Donaldson, 325 U.S. 304, 314 (1945)
Minor Change Background
Following construction change directives, “minor changes” are the final way to make changes. With the limits on how and when minor changes are allowed, “nominal” change is probably a better name. But they’ve been called minor changes for so long, we’ll continue the tradition here.
Like many of our other construction contract phrases and features, the minor change most likely originates in the AIA contracts. Currently, Section 7.4 of the AIA A201 “general conditions” identify minor changes, and how and when they may happen. Based on that model, other published forms and manuscript contracts usually adopt something similar.
Minor Change Features and Limits
Here’s the principal features and limits you need to know about minor changes to the work:
- The change must not affect (1) the price of the work or (2) the time to complete it
- The order mandating the change must be written
- Usually, only the architect (or comparable design professional) may order a minor change. That’s what you’ll find in in the AIA contract forms. But sometimes parties subvert architectural hegemony and change their contracts to allow the owner to order a minor change under a prime contract, a prime contractor to order one under a subcontract, etc.
The law, — a profession whose general principles enlighten and enlarge, but whose minutiae contract and distract the mind.
U.S. Supreme Court Associate Justice Joseph Story, Letter to Samuel P.P Fay, September 6, 1798, from the Life and Letters of Joseph Story 1:71 (William W. Story ed. 1851)
Construction Change Directive
Next on the list of top ten construction contract terms: “construction change directives.” Often in their contracts, the owner and the prime contractor agree that the owner may unilaterally order changes in the work and the prime contractor will change the work as the owner orders. Those orders must usually be written. And subcontracts often have similar terms, if for no other reason than to pass down orders that come from higher up the chain.
For generations, the AIA form contracts have referred to those orders as “construction change directives.” And because of that, so does everyone else.
How price and schedule change along with the changed work? That comes later. Ideally, the owner and prime contractor can later agree on price and schedule changes, then incorporate all changes into a comprehensive change order they each sign that supersedes the construction change directive.
If owner and prime contractor don’t agree, they will fall back on other tools. The original contract may have unit prices for particular materials or parts of the work. Then adjusting price is just addition and multiplication. Unfortunately, unit prices aren’t a common feature in contracts for many types of projects.
Cost-plus priced contracts also lend themselves to easy pricing changes. Though if the prime contractor has a fixed fee, the cost of additional or reduced work won’t automatically adjust the fee. Sometimes lump sum contracts will have a default cost-plus feature for additional work. So, if the owner and prime contractor don’t agree on a different way to adjust price, the cost of the additional work, plus a percentage fee, gets added to the lump sum. And while unit prices and cost-plus can set price changes, they still don’t adjust schedules and deadlines. Continue Reading