By Joshua E. Holt of Smith, Currie & Hancock LLP
Originally published June 30, 2023
A fundamental principle of contract law is that one party cannot unilaterally change the terms of the agreement. Nevertheless, most construction contracts include provisions allowing the owner to unilaterally change the scope of the contractor’s work. These provisions often outline a process by which the parties can negotiate an additional amount of time or compensation owed to the contractor as a result of the change, but the contractor is typically required to perform the changed work right away, before any decisions about additional time or compensation have been made. An owner’s right to change the scope of work on a project is not unlimited, however. Enter the “cardinal change doctrine.”
Generally speaking, the cardinal change doctrine prohibits an owner from directing changes that fundamentally alter the nature of the project. For example, an owner that contracts for the construction of a house could direct the contractor to use a different paint color, but it could not direct the contractor to build a second house. Such a drastic modification to the scope of the original contract is considered a “cardinal change,” and an owner’s directive to perform such a change constitutes a breach of the contract. The “cardinal change doctrine” thus serves as an important check on an owner’s ability to direct changes to a contractor’s scope of work. But the cardinal change doctrine’s applicability is both rare and circumstance specific, as a recent decision by the Appellate Court of Connecticut shows.
In Semac Elec. Co., Inc. v. Skanska USA Building, Inc., the Appellate Court of Connecticut was asked to resolve competing breach of contract claims arising out of a project to renovate a hospital in Stamford, Connecticut. About a year into the project, the work had already fallen several months behind schedule. The general contractor sought to make up the time by increasing the pace of its subcontractors’ work. Among other things, the general contractor demanded that its electrical subcontractor work overtime hours and commit additional manpower to the project beyond what the subcontractor had promised in its original bid. The general contractor also demanded that the electrical subcontractor increase its flexibility in working around other trades and in working between sections of the building. The subcontractor asserted that the cumulative effect of these scheduling and sequencing changes constituted a cardinal change. Accordingly, it informed the general contractor that it was stopping all work until the general contractor agreed to provide additional compensation and revised financial terms. Instead, the general contractor terminated the electrical subcontractor and took possession of its materials, tools, and equipment. The subcontractor filed suit and alleged that the general contractor breached the contract under the cardinal change doctrine. The general contractor’s counterclaim alleged that the subcontractor breached the contract by abandoning the project.
The court rejected the subcontractor’s breach of contract claim, finding that the changes the general contractor directed did not rise to the level of a cardinal change. The court also found that the subcontractor had breached the contract by stopping work without sufficient justification. In support of its decision, the Court pointed to the fact that numerous provisions in the subcontract indicated that the parties had contemplated the possibility of delays and sequence changes. Among other things, the Court pointed to:
- A provision in the contract permitting the general contractor to revise and amend the project schedule;
- A provision in the contract permitting the general contractor to direct the subcontractor to increase its labor force or perform overtime work;
- A provision in the contract requiring the subcontractor to coordinate its work with the general contractor, the owner, and other subcontractors; and
- Various provisions in the contract in which the subcontractor affirmed that it had anticipated and accounted for any potential hindrances or delays to its work in agreeing to the contract price.
The court also relied on the fact that, in executing each of the thirty-eight change orders that resulted from the project delays, the subcontractor certified that it had been fully compensated for any delays, acceleration, or loss of efficiency it had encountered. The court found that these certifications undercut the argument that the changes were so profound they could not be addressed under the terms of the contract. Finally, the Court highlighted the fact that the parties’ communications leading up to the subcontractor’s cardinal change notice did not reflect the kind of urgency that would suggest a radical change in the scope of work.
The only silver lining for the subcontractor was the court’s holding that the general contractor also breached the contract by terminating the subcontractor without providing the required forty-eight hours’ notice. Otherwise, the subcontractor would have been required to pay the general contractor’s costs to complete the project.
Practical Takeaways
Semac Elec. Co., Inc. v. Skanska USA Building, Inc. serves as an important reminder of some key lessons that contractors should bear in mind generally, but particularly when it comes to dealing with scope changes:
- First, before executing any contract, review the language carefully to understand exactly how the scope of work is defined, what you are attesting to as far as anticipating changed conditions, and the breadth of the owner’s authority to direct additional changes.
- Second, throughout the course of the project, carefully review the language of any pay applications and other certifications you are required to submit in order to be sure that you are not preemptively waiving or releasing any claims that have not yet materialized.
- Third, if the scope of the project begins to change in ways that seem excessive or problematic, communicate that fact to the owner or higher-tier contractor and create a record of those communications.
Finally, review the contract language carefully and consider all the potential risks before threatening to walk off a project.
Joshua E. Holt is an associate with Smith, Currie & Hancock LLP. He concentrates his practice in the area of construction law. His practice includes advising and representing construction owners, architects, engineers, general contractors, subcontractors, and suppliers on both public and private projects. He can be reached at jeholt@smithcurrie.com or 703.506.1990.