Tuesday, October 2, 2018

IES Commercial v. Manhattan Torcon A Joint Venture (Maryland U.S.D.C.)

Filed: September 26, 2018

Opinion by: Judge Bennett

Holding:  Subcontractor’s breach of contract claim fails under the “cardinal change” theory because the parties amended the contract and therefore Subcontractor was not “ordered” to perform additional work outside the scope of the original contract.

Facts:  The U.S. Government hired General Contractor to build a biological research facility for the Army at Fort Detrick.  General Contractor hired Subcontractor for the electrical work.  A fire destroyed the building after Subcontractor had performed 92.5% of the work.
General Contractor and Subcontractor agreed to a Fire Rider that amended the original contract.  The rider set forth new, additional terms and conditions.  The Subcontractor then performed fire mediation work pursuant to the rider.  However, because the General Contractor was not required under the Fire Rider to pay the Subcontractor until the insurer paid the General Contractor, the General Contractor refused to pay the Subcontractor for a portion of the additional work.  The Subcontractor sued for breach of contract under a cardinal change/quantum meruit and other theories. 

Analysis:  A “cardinal change” occurs in the context of a government contract “when the government demands a contractual alteration ‘so drastic that it effectively requires the contractor to perform duties materially different from those originally bargained for.’”  Hancock Electronics Corp. v. WMATA (4th Cir. 1996).  This theory developed when the government began issuing unilateral contract modifications without seeking the consent from subcontractors and without being in breach of contract.  Crown Coat Front Co. v. US (USSC 1967).  If the unilateral modification exceeds the scope of the contract’s changes clause, then a cardinal change has occurred.  AT&T Comms. v. Wiltel (Fed. Cir. 1993).  Accordingly, a change is cardinal when it cannot be said to have been within the contemplation of the parties when they entered into the contract.  When the government orders a modification that constitutes a cardinal change, the result is a material breach of the contract, which “has the effect of freeing the contractor of its obligations under the contract, including its obligations under the disputes clause.” JJK Grp. v. VW Int’l (D. Md. March 27, 2015).

Here, the Subcontractor asserted that the fire “changed the nature of the Project from new construction to a disaster recovery, restoration, and reconstruction Project,” fundamentally altering the work Subcontractor had contracted to perform for General Contractor under the Subcontract.  However, the parties amended the contract via the Fire Rider, so the government never took unilateral action in altering the contract.  Similarly, the fire itself cannot be considered a cardinal change, nor can the altered work be either.

The full opinion is available PDF.

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