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MARCO LAW, PLLC WINS TRIAL - PROVES CARDINAL CHANGE RESULTING IN DAMAGES FOR SUBCONTRACTOR CLIENT

In August 2022, Judge Joel M. Cohen of the Commercial Division in New York County Supreme Court ruled, after a two (2) week trial, that a general contractor’s issuance of a credit change order resulted in a cardinal change and abandonment of a subcontract. Graciano Corporation v. Lanmark Group, Inc., Federal Insurance Company, 2022 NY Slip Op 32736(U) (Sup. Ct., NY Cnty. 2022).


After hiring Graciano to furnish and install a “complete masonry installation” on a project for the New York City School Construction Authority (SCA), Lanmark deleted approximately half of Graciano’s masonry work under the change order clause. Since Graciano never consented to the deleted work, it stopped working and sued Lanmark and its surety alleging a cardinal change and abandonment of the subcontract.


While the change order clause was broad, stating that Lanmark could add or delete work in any amount and for any reason, the trial Court agreed with Graciano that under New York law Lanmark could not delete work that had the effect of “alter[ing] or destroy[ing] the essential identity” of the subcontract. At trial, Graciano proved that by eliminating entire elevations of masonry work, as opposed to just incidental items, Lanmark destroyed the purpose of providing a complete masonry installation.


Graciano also proved that Lanmark deleted the more profitable items of historical masonry restoration of the SCA’s building that was originally constructed in 1929 and left Graciano with just standard brick work. The trial Court also agreed with Graciano that Lanmark could not use the change order clause to effectively terminate any portion of Graciano’s work [as it did] by deleting it, but instead would have had to utilize either the termination for cause or for convenience clauses.


Upon finding that Lanmark abandoned the subcontract by deleting a portion of Graciano’s masonry work [which Lanmark thereafter self-performed], the Court granted Graciano the fair and reasonable value of work completed prior to issuance of the credit change order in addition to delay damages and extra work performed in the total sum of $925,732.83. The Court also dismissed Lanmark’s counterclaim for alleged completion costs in excess of 3 million dollars since it abandoned the agreement.


Comment:


It has long been the law in New York that there is a limit to the general power of effectuating changes in a contract. As stated by the Court of Appeals, while a change order clause can be used to make changes “as frequently occur in the process of construction building, in matters of taste, arrangements and details … it does not authorize a change in the general character of the building.” National Contracting Co. v. Hudson River Water Power Co.


In fact, New York courts have found an unauthorized use of a typical change order clause where (i) a scope of work, necessary for the project’s completion, is deleted from a contractand given to another to perform [Gallagher v. Hirsh]; (ii) omissions are made for a retaliatory purpose against the contractor [Langan Const. Corp. v. State]; or (iii) omissions of such magnitude are made that “the essential or main purpose of the contract” is altered [Peter Scalamandre & Sons, Inc. v. State].


As to point (iii), “[t]he test to be applied is whether the [change] ordered so varied from the original plan, was of such importance, or so altered the essential identity or main purpose of the contract that it constitutes a new undertaking.” Albert Elia Bldg. Co. v. New York State Urban Dev. Corp. When such a change of the scope of work occurs, it is deemed a “cardinal change” and breach of the contract by the contractor. National Contracting Co.


The inquiry is whether the deletion frustrates the main purpose of the Contract or is “merely incidental” to it. Del Balso Const. Corp. v. City of New York. Under this analysis the deletion of “underpinning” and demolition work was found to be merely incidental to construction of a subway and therefore not in violation of a change order clause. Id. The reduction in the amount of sheathing was found to be incidental to a contract’s main purpose of installing a septic system. Camarco Contractors, Inc. v. State. A change in the material used to backfill open trenches was found to be incidental to a contract’s main purpose of installing water mains. De Foe Corp. v. New York.


Conversely, the deletion of construction of one of three pedestrian bridges was found to be more than just incidental as it altered “the very nature of the contract”. North Star Contracting Corp. v. City of New York. “[W]hether an omission is incidental does not depend on the percentage of the work or the cost involved, but on the character of the work omitted”. Del Balso Const. Corp. v. City of New York. To illustrate, Del Balso cites to Litchfield Construction Co. v. City of New York, wherein deleting just 2.5 percent of a railroad spur changed the description of the contract where it required that it be installed.


At trial, Lanmark took the indefensible position that it had unlimited power to make changes to the Subcontract, for any reason whatsoever, including deleting entire elevations of the masonry work itself, not just items incidental to that work. In addition, Lanmark claimed that it had no choice but to delete the work because Graciano was not performing and the SCA was threatening to impose liquidated damages. Even though the trial Court found that Graciano was, in fact, performing prior to issuance of Lanmark’s credit change order, it also ruled that Lanmark’s appropriate remedy for alleged non-performance was the Termination Clause – not the change order clause – where Graciano was powerless to “cure” any purported default.


The bottom line is that while an owner or general contractor has every right to order changes under a typical change order clause, generally, it cannot add or delete work that defeats the main purpose of the contract. Similarly, it cannot use the change order clause to delete work in retaliatory fashion nor can it use the change order clause to terminate a portion of the contract, unless there is language specifically giving it that right.


About the author: George Marco is an attorney practicing in the field of construction law. He also holds a Bachelor of Science in Mechanical Engineering and was previously employed as a Project Manager for a public improvement contractor.


If you would like more information regarding this topic or any other related to construction law please contact George Marco at george@gmarcolaw.com or call (516) 464-2320.


Disclaimer: This article is for informational purposes only and not intended to serve as legal counsel.



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