By: Alexander A. Miuccio Gregory J. Spaun Published: August 2018

Contractor's Failure to Comply with Contractual Conditions Precedent Not Fatal

Disputes over construction “change orders” on public works projects are a frequent source of litigation. The contractor submits change order proposals seeking payment for “extra work”—construction work beyond that which is explicitly set forth in the initial contract. Provisions in the contract governing change orders and extra work are normally contained in the project’s “General Conditions”, a document incorporated by reference in the parties’ contract.

In the recent case of Danco Electrical Contractors, Inc. v Dormitory Authority of the State of New York, the appellate court addressed the issue of whether the contractor’s claim for extra work should be dismissed due to its failure to comply with the contractual condition precedents of verification, timeliness, and the requirement of a “notice to proceed” set forth in the contract.

Background

 

Danco Electrical Contractors was the prime electrical contractor on a project on which the Dormitory Authority (“DASNY”) undertook to construct for the City University of New York at Brooklyn College.  The contract between Danco and DASNY provided, in relevant part, that: “no claims for Extra Work shall be allowed unless such Extra Work is ordered by [DASNY] via a written Notice to Proceed”; if Danco disputed any matter relating to the Extra Work it had to provide a written notice of the dispute within 15 days after commencing the work, or 15 days after DASNY’s act or omission giving rise to the dispute; and if DASNY ordered Danco to undertake change order work that was not agreed to by Danco, then Danco had to submit a verified (sworn) statement of objections to DASNY’s forced pricing or outright change order rejections.  

During the course of the project there were numerous disputes between Danco and DASNY relating to change orders, and their pricing. On several occasions, DASNY directed Danco to perform extra work at DASNY’s price because the parties could not reach any mutually acceptable agreement. Danco ultimately sued DASNY to recover payment for several rejected change orders, and the price difference between Danco’s change order proposals and DASNY’s forced prices. DASNY moved for summary judgment dismissing the change order claims, citing the above conditions precedent contained in the contract, and arguing that Danco waived its right to seek payment on these change orders by not adhering to the required conditions precedent for change order approvals set forth in the contract.

Decision

The trial court granted DASNY’s motion to dismiss the extra work claims, finding that Danco’s failure to follow the contractual conditions precedent constituted a waiver of its change order claims. Danco appealed. On appeal, Danco argued that it would suffer a disproportionate forfeiture if these conditions precedent were strictly applied. The appellate court agreed with Danco’s argument, and distinguished prior settled case law by finding that Danco’s non-compliance was minimal, and that it did not result in any prejudice to DASNY.

In doing so, the court noted that DASNY does not argue that the contractor failed to document the costs of the extra work, provide timely notice of its claims for extra work, or provide timely notice of its objections to DASNY’s rejections and forced price reductions on the claimed extra work. The court also pointed out that DASNY does not argue that the contractor’s failure to submit verified written statements was prejudicial to DASNY.

Comment

It has been a long standing rule of law that where a contract set forth conditions precedent, such conditions had to be strictly complied with or else the claims would be dismissed. While the results of such a rule have often been harsh, the courts have been consistent in requiring strict performance of conditions precedent. Now, it appears that at least one appellate court has adopted a more flexible approach to the rigid requirements of conditions precedent by entertaining arguments of whether non-compliance with the conditions precedent was minimal or material, and whether there was any resulting prejudice to the party claiming the protection of the conditions. We will have to await further development of case law through further litigation to determine whether courts will follow the reasoning of this case on the issue of enforceability of a condition precedent.

In the meantime, contractors and subcontractors would be well advised to simply comply with the contractual conditions precedent rather than take the risk that a court may find that their non-compliance with conditions precedent, unlike Danco’s, was material or prejudicial to the other party. 

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