By: Thomas S. Tripodianos Published: February 2015

Subcontractor's Recovery for Change Order Work is Contractually Limited to Amounts Recovered by General Contractor from Owner

Question.        Subcontractor alleged General Contractor's breach by failing to pay for additional change order work at two school renovation sites done under Notices of Direction from the Owner. The Article 9-Change Orders section in the parties' contracts specified that the Subcontract Price and time adjustments hereunder shall be limited to the amount and extent of the adjustments actually allowed by the Owner.  Is the Subcontractor’s recovery limited to the significantly lesser amounts approved by the Owner?

Answer. Yes. Rather than the combined $373,976 Subcontractor claimed entitlement to, the General Contractor's liability for change order work at the two projects was limited to $27,622 and $17,886, the respective amounts approved by the Owner.

Background

Subcontractor alleges that General Contractor breached contracts between the parties by failing to pay Subcontractor for certain asbestos abatement work it performed at two public school renovation sites for the Owner. Subcontractor alleged that in addition to the base contract work it performed for General Contractor, Subcontractor also performed additional, change order work, for which Subcontractor has not been paid by General Contractor.

The parties reached an agreement to settle the base contract claims.  The only unresolved issue is General Contractor's liability, if any, with respect to additional or change order work performed by Subcontractor.

Subcontractor contends that (i) based upon the parties' written contract for the Elementary School Project, it should be allowed the full amount of its claim arising from the additional work it performed on the Elementary School Project, and thus be awarded $79,101.09; and (ii) as there is no written contract governing the parties' rights and obligations relating to Subcontractor's work on the Middle School Project, Subcontractor is entitled to $294,874.86 for the additional work it performed at Middle School under a theory of quantum meruit.

General Contractor contends that (i) pursuant to the (written) contracts between the parties for the Elementary School Project, General Contractor is not liable to the Subcontractor for any amounts claimed by the Subcontractor for additional work which exceed the amounts recovered by General Contractor from the Owner; and (ii) with respect to Middle School, Subcontractor cannot bring a quantum meruit claim because there exists a contract governing how payment for extra work will be determined.

There are three relevant construction subcontract agreements, two for the Elementary School Project, and one for the Middle School Project.

Elementary School Project

During the course of its base contract work on the Elementary School Project, Subcontractor was instructed by General Contractor to do additional asbestos abatement work pursuant to a Notice of Direction (NOD) issued by the Owner.

The established practice in performing change order work for the Owner is for the contractor or subcontractor to proceed immediately with the work as described in the NOD.  The Owner regularly issues change orders for its projects and often determines that the value of work performed pursuant to change orders is less than the amount requested by subcontractors.

Subcontractor attended meetings with the General Contractor and the Owner at which General Contractor negotiated in good faith with the Owner for the Subcontractor's claims of additional work at the Project. In the end, the Owner determined that the fair and reasonable value of such additional work by the Subcontractor was $27,622.37, and issued a change order authorizing payment to Subcontractor in that amount.

The Elementary School Contracts between General Contractor and Subcontractor, contain a section entitled Article 9-Change Orders, which specifically provides that the Subcontract Price and time adjustments hereunder shall be limited to the amount and extent of the adjustments actually allowed Contractor under the Contract Documents, i.e., by the Owner.

Each of the three written contracts between Subcontractor and General Contractor referred to above defines Contract Documents as (a) this Subcontract and the exhibits, schedules and other supporting materials to which the Subcontract refers, some of which are attached hereto, and (b) the prime contract between the Owner the Owner, whether directly or through an agent such as the Contract Manager, and the General Contractor or Contractor, as the case may be, and the documents to which the Prime Contract refers.

In this case, Subcontractor, as subcontractor, actually attended and participated in such settlement negotiations. Pursuant to the provisions of Article 27-Disputes of the Elementary School Contracts, General Contractor is not liable to the Subcontractor for any amounts claimed by the Subcontractor which exceed the amounts recovered (or agreed to) by General Contractor from the Owner for that work: In no event shall Contractor be liable to the Subcontractor for Subcontract Work performed or for any cause whatsoever, except to the extent that Contractor may recover therefore, from the Owner.  That amount was $27,622.37 for the Elementary School Project.

Middle School Project

While neither party signed the Middle School Contract on the signature page Subcontractor did sign the Middle School Contract on three separate pages, specifically the Equipment Use Release, Project Labor Agreement, and Safety Rider.

Subcontractor states that it performed its services on the Middle School Project in good faith and that those services were accepted by General Contractor and Owner. Subcontractor concedes that it performed what was intended to be the base contract work for the Middle School Project, and has been paid for such.

The Middle School Contract contains the same provisions regarding Change Orders and Disputes, respectively, as are contained in the Elementary School Contracts.

During the course of its base contract work on the Middle School project, Subcontractor was instructed by General Contractor to perform additional work pursuant to an NOD issued by the Owner. Subcontractor furnished, provided and supplied the work, labor and services required on its part to be supplied and performed pursuant to the Change Order Work for the Middle School Project.

Subcontractor attended meetings with General Contractor and representatives of the Owner to negotiate Subcontractor's claims for additional work on the Middle School Project. During the meeting, the Owner and General Contractor came to an agreement that the additional compensation due to the Subcontractor for additional work associated with NOD was $17,886.89. The Owner subsequently issued a change order authorizing payment to Subcontractor in that amount.

The Elementary School Contracts are valid and enforceable and the parties are bound by their terms. When interpreting a contract under New York law, the intention of the parties should control, and the best evidence of intent is the contract itself. If an agreement is complete, clear and unambiguous on its face, it must be enforced according to the plain meaning of its terms.

The Elementary School Contracts limit Subcontractor's payment for its change order work to the amount that General Contractor recovered from the Owner for such work. As noted, the contracts contain a section entitled Change Orders, which provides that the Subcontract Price shall be limited to the amount and extent of the adjustments actually allowed Contractor and/or GC under the Contract Documents. Pursuant to the provisions of 'Article 9-Change Orders' of the Agreement, General Contractor is entitled to settle subcontractor claims with the Owner, the results of which settlement are binding on the Subcontractor.

Article 27 of the Elementary School Contracts provides that in no event shall Contractor be liable to the Subcontractor for Subcontract Work performed or for any cause whatsoever, except to the extent that Contractor may recover therefore, from the Owner the Owner.

Accordingly, based upon the unambiguous language of Articles 9 and 27 of the Elementary School Contracts Subcontractor's recovery against General Contractor for the change order work it performed at the Elementary School is limited to $27,622.37, i.e., the amount that General Contractor was able to recover from the Owner.

General Contractor's liability to Subcontractor for change order work performed for the Middle School Project is limited to $17,886.89 (the amount approved by the Owner)

Subcontractor's contention that there is no binding agreement fails. Clearly the parties intended to be bound by the Middle School Contract. Subcontractor concedes that it performed its services on the Middle School Project in good faith and that those services were accepted by General Contractor and Owner. The parties conducted themselves as though there was a signed contract between them regarding Subcontractor's work on the Middle School Project.

There was a binding, written agreement between Subcontractor and General Contractor for the Middle School Project. Subcontractor cannot recover under a theory of quantum meruit, which only applies in the absence of an express agreement.

Based upon the parties' clear intention to be bound by the Middle School Contract, and the unambiguous language of Articles 9 and 27 of the Middle School Contract Subcontractor's recovery against General Contractor for the change order work it performed at Middle School is limited to what General Contractor was able to recover from the Owner, i.e., $17,886.89.

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