May a contractor stop work, or threaten to
stop work, if an owner fails to issue a change order to which
the contractor is entitled? Imagine a typical scenario on a
construction project. The architect issues “clarifications” to
project plans and specifications. The contractor concludes that
the clarifications are in fact “changes” that involve extra work. Therefore,
the contractor issues a change order request. The owner disagrees
or defers the decision and does not to approve the requested
change order.
What should the contractor do? If a contractor proceeds with
the work without an agreement (an executed change order) for
additional compensation, the contractor may never recover the
increased cost of the work. Rather, at the conclusion of the
job a settlement of the contractor’s claim may be negotiated
at a fraction of the actual value and/or cost of the work, in
part because of the high cost and uncertainty of litigation or
arbitration.
Often, under these circumstances, a contractor will threaten
to shut the job down unless the question of extra work and/or
change orders, and compensation for the same, is resolved. This
is somewhat akin to playing a game of chicken, and is extremely
risky. This is particularly true under the typical AIA dispute
clause, which provides that work shall proceed diligently, even
in the face of a dispute over whether extra work is involved,
pending resolution of the claim in the claims process.
The standard AIA A-201-1997 clause reads as follows:
4.3.3 Continuing Contract Performance.
Pending final resolution of a claim except as otherwise agreed
in writing . . ., the Contractor shall proceed diligently
with performance of the Contract and the Owner shall continue
to make payments in accordance with the Contract Documents.
That clause provides tremendous leverage to the owner. Will
the courts enforce such a clause? Generally, the answer appears
to be yes. A contractor who refuses to perform disputed work
may be guilty of anticipatory breach of the contract, even if
it ultimately is held by a court that the contractor was correct
(e.g., the work was extra and the contractor was entitled to
a change order). Under such circumstances, the owner may be
justified in terminating the contract for cause – failure of
the contractor to diligently perform.
For example, in applying similar Continuing Contract Performance
clauses under federal contracting law, boards of contract appeals
have repeatedly held that a contractor’s refusal to proceed with
the work, unless the owner meets the contractor’s request for
a change order, gives the owner the right to summarily terminate
the contract for cause. See, e.g., Swiss Products, Inc., ASBCA
No. 40,031, 93-3 BCA ¶ 26,163 (1993). This is
true even if the contractor’s interpretation of the contract
requirements, and its entitlement to a change order for additional
compensation, is correct. Brenner Metal Products Corp., ASBCA
No. 25,294, 82-1 BCA ¶ 15,462 (1981).
On the other hand, in Meinhardt v. Investment Builders
Properties Co., 518 P.2d 1376 (Colo. App. 1973),
the court held that a contractor did not breach the contract
when it attempted to renegotiate the total contract price because
of changes and additions by the owner that went substantially
beyond the scope of the original contract. The court held
that a “repudiation of the contract must consist of a present,
positive, unequivocal refusal to perform the contract, and
a mere threat alone to abandon is not a ‘repudiation.’” Significantly,
despite its effort to renegotiate the contract, the contractor
continued work until the owner locked him out. Moreover, because
an oral contract was involved, there was no clause requiring
that the disputed work be performed pending resolution of a
claim.
There is a fine line between being firm in insisting on appropriate
change orders and improperly threatening to stop work. Of course,
where the owner makes substantial changes to the original scope
of work, a contractor is justified in seeking to negotiate a
change order.
Simply requesting such new terms, or asserting that a change
order should be executed, without making threats, should not
constitute breach of contract. On the other hand, if in the
process of negotiation the contractor threatens to stop work
or implements a meaningful slowdown on the job, he may be found
to have breached the contract, thus giving the owner grounds
to terminate for cause.
The distinction is somewhat subjective, but given the possible
consequences, contractors are advised to exercise caution when
attempting to obtain additional payments for disputed extra work. The
consequences of a termination for cause, of course, include lost
revenue to the contractor and quite possibly damages owed to
the owner.
The key to successfully navigating the situation is to comply
with the terms of the contract while recognizing the common law
rights of termination that an owner may have.
Practical Points
The situation discussed above creates a bit of a Catch-22 for
contractors. Contractors do not want to perform work without
adequate assurance of payment. At the same time, the standard
contracts do not have a good mechanism to force owners to approve
change orders, or even make a timely decision on change order
requests. There are a few things that may help:
Negotiate a claims dispute clause that permits work
stoppage if disputed change orders aggregate over a certain dollar
threshold. As an example, such a clause might permit work stoppage
until resolution of claims when the combined value of unapproved
change order proposals exceeds $500,000 (or whatever threshold
the parties agree upon).
Make clear when seeking a change order or contract modification
that the work on the job will continue.
Carefully segregate and document all extra costs incurred
on any work that might be characterized as extra.
Don’t wait until the end of the job to initiate the claims
procedure (e.g., mediation or arbitration).
While none of the above suggestions will absolutely protect
any contractor, they will make life somewhat easier if a change
order dispute arises.
Kevin Bridston is
a partner in Holland & Hart LLP's Construction and Real
Estate Litigation Group. |
