Cardinal Change Doctrine
March 7, 2023
In this Surety Today blog post we will explore the Cardinal Change doctrine. This will be the first of two blog posts on the subject. In this post, we will focus on the doctrine generally, how it is defined, its history, where it applies and how it can be used. In the second post, we will look at some specific examples of its application and specific issues regarding the doctrine.
Virtually every construction contract has a clause that allows the owner or upstream contractor to make changes to the scope of work (the “Changes Clause”). These Changes Clauses give the owner/contractor broad unilateral power to order changes to the work and generally require the contractor to perform the work, even if the contractor disputes or objects to the change. As the Supreme Court has observed, “[a] changes clause allows the Government to make unilateral contract modifications without seeking consent from the subcontractor and without being in breach of the contract.” Crown Coat Front Co. v. United States, 386 U.S. 503, 511 87 S. Ct. 1177 (1967). But, what if the changes ordered are unreasonable and outside of the contemplation of the parties when the contract was entered into?
For example, what if the change(s) double or triple the original contract work and price or extend the work double or triple the original contract time? Is the contractor or surety still bound by the Changes Clause to perform? The cardinal change doctrine says no! This doctrine can apply to a surety in a number of ways. First, if a surety takes over a project, it may directly face an overly broad change that it may not wish to perform. Second, it can be raised by the principal, or by the surety through its right to assert its principal’s defenses, as a defense to an obligee’s change demand or claims for costs to perform overly broad change work. The principal’s/surety’s position would be that they are not responsible for such costs, because they were outside the permissible scope of the contract. Third, the doctrine can form the basis for claims for extra compensation in quantum meruit beyond the contract terms, if the principal was forced to perform the overly broad change work.
So, what is a cardinal change? A cardinal change is one which, because it fundamentally alters the contractual undertaking of the contractor, is not comprehended by the normal changes clause. Am. Line Builders, Inc. v. United States, 26 Cl. Ct. 1155, 1177–78 (1992). The Court of Federal Claims in Edward R. Marden Corporation v. United States, 194 Ct. Cl. 799, 808–09, 442 F.2d 364 (1971) stated that the purpose of the cardinal change doctrine “is to provide a breach remedy for contractors who are directed by the Government to perform work which is not within the general scope of the contract.” The Federal Circuit Court of Appeals put it this way: “A cardinal change occurs when …an alteration in the work [is] so drastic that it effectively requires the contractor to perform duties materially different from those originally bargained for.” Rumsfeld v. Freedom NY, Inc., 329 F.3d 1320, 1332 (Fed. Cir.), adhered to on denial of reh’g en banc, 346 F.3d 1359 (Fed. Cir. 2003).
In other words, a change is “cardinal” when it cannot be said to have been within the contemplation of the parties when they entered the contract. Universal Contracting & Brick Pointing Co. v. United States, 19 Cl. Ct. 785, 792 (1990). Thus, by definition, a cardinal change is a change so profound that it is not redressable under the Changes Clause of the contract and renders the party directing the change in breach. Appeals of Gassman Corp., ASBCA No. 44975, 00-1 B.C.A. (CCH) ¶ 30720 (Dec. 29, 1999). Stated differently, a cardinal change is such an unreasonable, unanticipated change that it actually “constitutes a material breach of the contract.” Alliant Techsystems, Inc. v. United States, 178 F.3d 1260, 1276 (Fed. Cir. 1999). Because a cardinal change is a material breach it has “the effect of freeing the contractor of its obligations under the contract, including its obligations under the disputes clause to continue performance during the pendency of the dispute.” JJK Grp., Inc. v. VW Int’l, Inc., No. TDC-13-3933, 2015 WL 1459841, at *10 (D. Md. Mar. 27, 2015) (quoting Alliant Techsystems, Inc. v. United States, 178 F.3d 1260, 1276 (Fed. Cir. 1999)). Indeed, there is case law holding that where a cardinal change was found, the contractor was excused from contract provisions such as no damage for delay clauses, waivers and claim notification provisions. Thus, when a cardinal change occurs, the performing party is legally justified in refusing to perform the change.
However, one of the difficulties in the application of this doctrine is that “[t]here is no automatic or easy formula which can be used to determine whether a change (or changes) is beyond the scope of the contract.” Appeals of Gassman Corp., supra (quoting Edward R. Marden Corp., 442 F.2d at 369); see also Wunderlich Contracting Co. v. United States, 351 F.2d 956, 966 (Ct. Cl. 1965). Initially, in deciding whether a single change or series of changes is a “cardinal change,” many courts observed that “one must examine the work done in compliance with the changes and ascertain whether it is essentially the same work that the parties bargained for when the contract was awarded.” Id. (citing Aragona Constr. Co. v. United States, 165 Ct. Cl. 382, 390-91 (1964)). Essentially taking a literal approach to the doctrine. So, you will have some cases where the court will say – yes there were a lot of changes, delays and impacts, but you were contracted to build a tunnel and you built a tunnel. For example, in United States ex rel. Sun Const. Co., Inc. v. Torix Gen. Contractors, LLC, Case No. 07–cv–01355–LTB–MJW, 2009 WL 3348287, at *4 (D. Colo. Oct. 15, 2009) the federal district court in Colorado denied summary judgment in light of unresolved issues of fact concerning whether a two-year delay and $1,000,000 in increased costs qualified as “significant changes” where the contractor “built the same tunnel they originally were hired to build, and in essentially the same manner and location.” But the more modern interpretation of the doctrine is that “[a] cardinal change can occur even when there is no change in the final product because it is the ‘entire undertaking’ of the contractor, rather than the product, to which [courts] look.” Rumsfeld, supra. Unfortunately for contractors and sureties facing a possible cardinal change, there is no reliable method to make a contemporaneous determination of cardinality.
In Becho, Inc. v. U.S., 47 Fed. Cl. 595 (2000) the Court of Federal Claims gave the following guidance concerning the cardinal change doctrine:
[W]hile there is no precise calculus for determining whether a cardinal change has occurred, the courts have considered, inter alia, the following factors: (i) whether there is a significant change in the magnitude of work to be performed; (ii) whether the change is designed to provide a totally different item or drastically alter the quality, character, nature or type of work contemplated by the original contract; and (iii) whether the cost of the work ordered greatly exceeds the original contract cost.
Becho, Inc., 47 Fed. Cl. at 601.
The Court of Federal Claims in Wunderlich Contracting, 351 F.2d at 966, similarly observed that “[t]here is no exact formula for determining the point at which a single change or a series of changes must be considered to be beyond the scope of the contract and necessarily in breach of it. Each case must be analyzed on its own facts and in light of its own circumstances, giving just consideration to the magnitude and quality of the changes ordered and their cumulative effect on the project as a whole.” While these more modern cases addressing cardinal change broaden its application, the lack of a clear standard or bright-line rule can make it difficult to look at a given situation and definitively determine if the cardinal change doctrine will be upheld by the ultimate trier of fact.
The doctrine began in the federal courts, but it has since been adopted in many state courts around the country. Further, while the doctrine originated in government procurement matters, it has been recognized in private projects as well. In one case for example, the opposing party argued that the doctrine was limited to government contracts. However, the court stated “[t]his position, however, ignores the essential similarity of public and private construction contracts about the mechanism for unilateral ordering of changes by the party for whom the work is being performed, and concerns about misuse or overuse of that unilateral authority. These features of any contract for construction are the central focus of the cardinal change doctrine.” L.K. Comstock & Co. v. Becon Const. Co., 932 F. Supp. 906, 938–39 (E.D. Ky. 1993). Thus, the Court concluded, “this broad principle has been recognized by state courts as well as federal tribunals, and in private as well as public contract settings.” Id.
While the cardinal change doctrine has received wide acceptance, it is not universally accepted in all circumstances. For example, the Court in Ebenisterie Beaubois Ltee v. Marous Bros. Const., No. 02 CV 985, 2002 WL 32818011, at *3–6 (N.D. Ohio Oct. 17, 2002) sitting in diversity and interpreting Ohio law, held that the Ohio Supreme Court would not recognize the cardinal change doctrine. The Court reasoned that Ohio courts consistently refuse to allow recovery in quasi-contract where an express contract governs the subject matter of the dispute. The Ebenisterie Court cited to two other courts that rejected the cardinal change doctrine as well for similar reasons. Specifically, the Court referred to Mellon Stuart Construction, Inc. v. Metropolitan Water Reclamation District of Chicago, 1995 WL 124133 (N.D. Ill. 1995), in which the court found that the Illinois Supreme Court would decline to recognize a claim for “cardinal change” breach of contract. The court based its decision, in large part, on the deference Illinois provides to parties in defining their obligations under a contract. Similarly, in Litton Systems, Inc. v. Frigitemp Corp., 613 F. Supp. 1377, 1382 (S.D. Miss. 1985), the district court refused to recognize a claim based on cardinal change breach of contract because “Mississippi law clearly and unequivocally denies extra-contractual relief where the parties have expressly contracted upon a subject.” See also Durr Mech. Constr., Inc. v. PSEG Fossil, LLC, 516 F. Supp. 3d 407 (D.N.J. 2021)(holding that New Jersey would not recognize the cardinal change doctrine because quasi contract recoveries cannot apply with an express contract). Many of the cases rejecting the doctrine do so where the doctrine is being used to seek an affirmative recovery, rather than being used as a defense. As with so many issues, you will need to check the applicable jurisdiction to determine if the cardinal change doctrine is recognized and under what circumstances.
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.