Nothing I’ve seen causes contractors more legal headaches than change orders. If you’ve dipped into the pages of this blog over the last ten years, you’ve seen how changes in the work can spoil nearly any job. A New York case decided last month illustrates the point. Here’s what happened.
Lanmark Group, a New York prime contractor, won the bid to do nearly $15 million in improvements to the Vince Lombardi School in Brooklyn. Lanmark awarded the masonry part of the job to Graciano Corp. at a subcontract price of $5,320,000.
It didn’t go well.
Once work started, Lanmark and Graciano fell into bickering – mostly about delays. Graciano blamed Lanmark and demanded $500,000 more for extra shifts and supervision needed to stay on schedule. Lanmark didn’t agree. With the masonry about 30% done, Lanmark gave up on Graciano, issuing a change order that deleted most of the remaining work. Lanmark hired another masonry sub to finish what Graciano hadn’t. Graciano sued, claiming wrongful deletion from the contract. By way of defense, Lanmark cited clear language in the agreement with Graciano:
"[A]t any time, in any quantity or amount, without notice to the sureties and without invalidating or abandoning the contract, [Lanmark] may add or delete, modify or alter the Work to be performed under this Agreement.”
And that’s what Lanmark did, cutting Graciano out of most of the remaining masonry work.
What should the court do? A change order deleting 30% (or any percentage) of the job was Lanmark’s right under their agreement. And courts are loath to re-write contracts. When the words are clear, contracts get enforced as written. But consider this: If a prime contractor can throw any sub off the site by issuing a deletion change order, what’s the value of any subcontract?
I like the way the court decided Graciano Corp. v Lanmark Group. Deletion change orders are perfectly legitimate. But there are limits. In this case, Lanmark’s change order eliminated too much of the work. In the words of the court, Lanmark altered “the essential identity and main purpose of the subcontract.” Graciano’s bid was for a “complete masonry installation.” After deletion, Graciano was left with only crumbs. The court ruled that Graciano could proceed to prove their loss.
Notice that the Graciano case involved a deletion change order. Back in March of 2013, I wrote a blog post about change orders for additional work. In that case, a contractor working at a Colorado ski resort got stuck in a cost + 10% contract. The owner issued change orders for more and more work, many extra weeks, all to be billed at cost + 10%. The contractor wanted out of the deal. He was locked into working for wages at a time when good work was plentiful at better markups. The court in that Colorado case turned the contractor free, citing the “cardinal change” rule. Changes to a contract have to be within the general scope of the agreement and have to be relatively small. Large changes (or too many small changes) are considered a cardinal change and have to be the subject of a new contract.
I believe the cardinal change rule works well for both deductive and additive changes.
Now Watch This
A few minutes studying the contract could have saved Graciano a major headache. I hope you wouldn’t sign any contract that allowed the other side to make changes at will without negotiation. That’s elementary. And it’s just the beginning. There’s plenty more to know about staying out of trouble with change orders. It’s all at your fingertips with Construction Contract Writer. The trial version is free.