Cardinal Change Doctrine – A Further Exploration
March 14, 2023
In this Surety Today blog post we once again discuss the Cardinal Change doctrine. In the first blog post we focused on the doctrine generally. In this post, we will look at some specific examples of its application and specific issues regarding the doctrine.
One of the best methods of understanding the cardinal change doctrine is to consider some examples of the doctrine being applied. The first case we will discuss is more of the classic cardinal change scenario where you have the government ordering a change to construct an entirely different additional facility. In Hartford Cas. Ins. Co. v. City of Marathon, 825 F. Supp. 2d 1276, 1285–88 (S.D. Fla. 2011), rev’d in part, vacated in part sub nom., Hartford Cas. Ins. Co. v. Intrastate Const. Corp., 501 F. App’x 929 (11th Cir. 2012), the City of Marathon was undertaking significant construction to implement a new water treatment plan for the city and surrounding area. The new plan required the construction of seven water treatment plants around the city. Marathon awarded a contract to the contractor to build a treatment plant designated as Plant No. 3. Subsequently, the City issued a change order to the contractor requiring that treatment Plant No. 7 also be constructed as part of the contract. Plant No. 7 was based on separate plans and specifications and was to be constructed 5.5 miles away on a completely different site. As the Court observed, “this was not a change order that merely extended or altered the specifications, timeline, or cost of the original treatment plant—this was a change order that ordered the building of a second treatment plant.” Id. Marathon argued that despite the difference in location, the Plant 7 Change Order was not authorizing a separate project under the contract because the plain language of the underlying construction contract contemplated changes and the Plant 3 Project and Plant 7 Project were interrelated because they were both part of Marathon’s larger water treatment plan. The Court rejected Marathon’s argument and stated that taken to its logical extreme, the argument would permit Marathon to issue change orders to include the entirety of the seven treatment plants under the Plant 3 contract and, in turn, obligate Hartford to bond additional millions of dollars without conducting an assessment of risk.
The Court noted that the original contract price was for $2,061,000.00 to construct Plant No. 3. The Plant No. 7 Change Order came at an additional cost of $2,984,487.00 – an increase of over 144 percent of the original contract sum. After reviewing all of the factors, the Court held that the Plant No. 7 Change Order was a cardinal change to the underlying construction contract. The Court also held that the facts demonstrated a significant, and potentially unbounded, increase in risk so as to prejudice and injure Hartford as the surety. As a result, the Court concluded that pursuant to the cardinal change doctrine Hartford was not obligated to bond the Plant No. 7 change order. Another argument to consider raising in a fact scenario like this is that the change is cardinal because the change would violate the public procurement laws by allowing construction of a new project without the bidding process. That a change that would not and indeed could not be contemplated by the parties and one which the government would not have the authority to undertake.
In this next case, we see the application of the cardinal change in a private project where the same project was built, but the manner of performance was dramatically altered. This case represents the more modern application of the doctrine. The case is J.A. Jones Const. Co. v. Lehrer McGovern Bovis, Inc., 120 Nev. 277, 295, 89 P.3d 1009, 1021 (2004). In the JA Jones case, the overall physical characteristics of the work changed very little, so the central issue was whether the entirety of the changes and impacts on the contractor’s work was so extensive as to force the contractor to perform work beyond the confines of the contract’s changes clause.
JA Jones was awarded a contract to install structural concrete at the Sands Exposition Center expansion in Las Vegas, Nevada. Jones’ original bid amount was $8.4 million. In order to reduce the bid amount, the owner agreed to perform various site preparation tasks and to streamline other tasks to shorten, by about half, the time needed for Jones to complete its concrete construction, thus reducing Jones’s labor, materials, equipment and overhead costs. Both parties made concessions and ultimately agreed that Jones would perform the structural concrete work for $7.4 million. Because of the agreed upon site preparation and streamlined activities, Jones agreed to shortened milestones. However, those milestones were eventually exceeded by 8 months because of changes made by the owner to the work, and obstructions, hindrances, and inefficiencies that rendered Jones’ work more difficult, time consuming and costly to perform. Once construction started, the owner essentially failed to provide any of the site conditions that it said it would provide and upon which Jones agreed to lower its bid. Jones asserted that out of its $7.4 million bid, it expected to capture $1.9 million in overhead and profit, leaving $5.5 million in anticipated costs. The actual costs, according to Jones, totaled over $8.8 million. Additionally, Jones’s expert testified that about $4 million, or 62 percent of the Phase I work value, was incurred because of changes. Jones was paid $1,078,303 for some of the changed-work expenses incurred during the delay by the owner and at trial Jones was awarded another $1.1 million for its damages, however, its cardinal change claim was dismissed. Jones was seeking $5 million in damages.
On appeal, the Nevada Supreme Court ruled that a cause of action based on the cardinal change doctrine was permissible under Nevada law and that Jones was entitled to assert its cardinal change claim. The Court reversed the dismissal and the case was remanded for a new trial.
In this next case, a cardinal change resulted from a failure to provide adequate construction drawings. In Westinghouse Electric Corp., v. Garrett Corp., 437 F. Supp. 1301 (D. Md. 1977) aff’d 601 F.2d 155 (4th Cir. 1979), the plaintiff subcontracted with Westinghouse to assemble cooling pods for military electronic countermeasure devices. Westinghouse delayed several months in supplying plaintiff with the source control drawings (“SCD’s”), which are similar to construction drawings in the construction industry. Source Control Drawings would have specified dimensions and tolerances and, like issued-for-construction drawings, would greatly facilitate the subcontractor’s efficient performance. Due to the lack of SCD’s plaintiff was required to make constant design revisions, and it incurred substantial additional costs trying to overcome these deficiencies and maintain the tight completion schedule. The court examined the effect of Westinghouse’s delay in supplying SCD’s and held that Westinghouse imposed a cardinal change upon plaintiff. According to the court, failure to provide SCD’s fundamentally altered the nature of plaintiff’s undertaking. Having SCD’s to work from was the basis of plaintiff’s bargain. Plaintiff was entitled to the ease of working from a single source of information and to the facilitation of incorporating otherwise disruptive changes that come from having such a source or “base line.” On a contract with a tight delivery schedule, the source control drawings became critical and fundamental, going to the heart of the vendor’s undertaking. Id. at 1333.
In this last case, we see the cardinal change doctrine being used in an affirmative claim and being applied in spite of the fact that the change work was performed (see discussion below). In Edward R. Marden Corporation v. United States, 194 Ct. Cl. 799, 808–09, 442 F.2d 364 (1971), the plaintiff was working on the construction of an aircraft maintenance hangar when the structure collapsed, causing substantial damage to equipment and work already completed. Following the collapse, the plaintiff, under protest, cleaned up the debris and reconstructed the hangar as directed by the Government. The plaintiff then brought a claim for breach of contract, asserting that the Government’s specifications had been defective, the structure collapsed due to the defect, and the plaintiff was ordered to reconstruct the hangar which resulted in increased costs of $3.7 million. The court found that considering the sheer magnitude of reconstruction work caused by the alleged defective specifications, a cardinal change had occurred. Therefore, because the reconstruction work had not been bargained for when the contract was awarded, the plaintiff’s breach of contract claim was not redressable under the contract’s changes clause.
POTENTIAL IMPEDIMENTS TO CARDINAL CHANGE
A. Entering Into Change Orders
- Change Orders May Bar Defense
In some cases, the courts have denied a cardinal change claim because the contractor entered into change orders and continued performing. In Colonna’s Shipyard, Inc. v. United States, No. 2:14-cv-331, 2015 WL 9008222 (E.D. Va. Dec. 14, 2015), the court found that a cardinal change did not occur under a contract for ship repair work when new “growth” work was added to a specification package and the parties entered into forty-six contract modifications. Although the court noted that the growth work exceeded the plaintiff’s expectations, the court explained:
… Plaintiff has not satisfactorily established that the work performed was materially different from that specified in the Contract. Despite the difficulties encountered, a contract to repair a ship remained a contract to repair a ship, and the modifications indicate that these changes were clearly redressable under the Contract. Had the changes been so profound that they were not redressable, it is unlikely that the parties would have been able to negotiate forty-six (46) bilateral contract modifications.
Id. at *19 (citing Amertex, 1997 WL 73789, at *1).
In Watt Plumbing, Air Conditioning & Elec., Inc. v. Tulsa Rig, Reel & Mfg. Co., 533 P.2d 980 (Okla. 1975), the plaintiff was the electrical subcontractor in a project to construct a new hospital wing. Although the parties adhered to the contractually required written change order process, at the completion of the project the plaintiff-subcontractor sued for quantum meruit recovery based upon a theory of breach by excessive changes. Rejecting the plaintiff’s claim, the Oklahoma Supreme Court held:
It is axiomatic that by mutual assent parties to an existing contract may subsequently enter into a valid contract to modify the former contract provided there is consideration for the new agreement. An alteration of a contract cannot constitute a breach of contract because it becomes a part of the contract. The contract as altered is the agreement between the parties. Id. at 983.
- Change Orders May Not Bar Defense
On the other hand, a number of decisions have recognized that a cardinal change claim is not barred by the fact that some or all of the changed work at issue is covered by executed change orders. The fact that a party may have sought, released, or otherwise compromised a claim under a contract’s equitable adjustment clause or other remedial clauses will not necessarily, at least in some courts, operate as a bar to claims for relief outside the contract. See Marden, supra. In Saddler v. United States, 287 F.2d 411 (Ct. Cl. 1961), a contractor recovered under a cardinal change theory even though the contractor executed a change order concerning the changed work. Near the completion date of the project, the government imposed a change which more than doubled the amount of earth and other material that the contractor was required to place in a levee. The contractor performed the changed work, but initially refused to execute the change order the government issued. Rather, it proceeded with the work under protest. After losing a claim of breach for additional compensation before the Corps of Engineers Claims and Appeals Board, the contractor executed the change order. He received compensation for the additional work, and accepted final payment. However, on appeal, the court of appeals held that a cardinal change occurred because the work covered by the executed change order altered the fundamental nature of the work performed. There are numerous cases where the cardinal change doctrine was applied even though change orders were entered into. The JA Jones, Marden and Marathon cases discussed above are examples.
B. Releases and Waivers
The cardinal change claim may be waived in a release or settlement. In re Boston Shipyard Corp., 886 F.2d 451 (1st Cir. 1989) the plaintiff contracted for the overhaul of a naval vessel for approximately $5 million. There were hundreds of change orders. The Plaintiff and the government eventually negotiated a settlement of claimed costs due to delay and disruption in the amount of $500,000, which was executed as a modification to the contract. The modification bore the language that it “definitizes a settlement of all contractor’s claims on the above job order” as of a certain date. Id. at 454. The court found that the modification barred the plaintiff’s claim under the cardinal change doctrine.
On the other hand, in Atlantic Dry Dock Corp. v. United States, 773 F. Supp. 335 (M.D. Fla. 1991) the court refused to bar a cardinal change claim as matter of law on grounds of accord and satisfaction despite the fact that the contractor entered into 130 change orders each of which provided that the change was “in full and final settlement of all claims arising out of this modification including all claims for delays or disruptions resulting from, caused by, or incident to such modifications or change orders.”
Another potential issue faced by sureties is the presence of waivers/consents in the terms of the bonds. It can be effectively argued that such waivers/consents are invalid and unenforceable as a result of the cardinal change doctrine. See e.g. J. Lewin & C.E. Schaub, Jr., Construction Law § 9:85 (2009); Duncan L. Clore et. al., Bond Default Manual, 3rd ed. at 19 (2005); Success Constr. Co. v. Superintendent of Ins., 220 A.D.2d 339, 340 (N.Y.A.D. 1995); Atlantic Dry Dock Corp., 773 F. Supp. at 339–40; L.K. Comstock & Co. v. Becon Const. Co., 932 F. Supp. 906, 937–38 (E.D. Ky. 1993) (“If a cardinal change exists, contractual waivers are ineffective to bar a cardinal change claim); Hartford Cas. Ins. Co. v. City of Marathon, 825 F. Supp. 2d 1276, 1284 (S.D. Fla. 2011), rev’d in part, vacated in part sub nom., Hartford Cas. Ins. Co. v. Intrastate Const. Corp., 501 F. App’x 929 (11th Cir. 2012). In addition, in order to provide a valid consent or waiver, such action must be knowing and voluntary. When none of the relevant facts or information are known or even in existence there cannot be a knowing waiver or consent.
The cardinal change doctrine can be a very handy tool in the right circumstances and it can be wielded in a variety of circumstances – as a defense, as the basis of a claim or as justification for refusing to perform work. The surety will need to ensure that the doctrine applies in the relevant jurisdiction and review the case law to determine if the doctrine will apply in a specific factual scenario. For reference, several courts have acknowledged specifically a surety’s prerogative to raise the cardinal change doctrine as a defense. See, e.g., United States ex rel. Sun Const. Co., Inc. v. Torix Gen. Contractors, LLC, Case No. 07–cv–01355–LTB–MJW, 2009 WL 3348287, at *3 (D. Colo. Oct. 15, 2009); In re Tech. for Energy Corp., 140 B.R. 214, 217 (Bankr. E.D. Tenn. 1992); United States v. Seaboard Sur. Co., 622 F. Supp. 882, 887 (E.D.N.Y.1985); Hartford Cas. Ins. Co. v. City of Marathon, 825 F. Supp. 2d 1276, 1285–88 (S.D. Fla. 2011), rev’d in part, vacated in part sub nom., Hartford Cas. Ins. Co. v. Intrastate Const. Corp., 501 F. App’x 929 (11th Cir. 2012); Philadelphia Indem. Ins. Co. v. Ohana Control Sys., Inc., 450 F. Supp. 3d 1043, 1056–57 (D. Haw. 2020).
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.