A Fire Destroying More Than Half of the Project Is Not a Cardinal Change Where the Parties Entered into a Separate Agreement to Cover the Fire Remediation Work

IES Commercial, Inc. v. Manhattan Torcon, A Joint Venture, 2018 U.S. Dist. LEXIS 164973 (D. Md. Sept. 26, 2018)

In 2009, the Army Corps of Engineers hired Manhattan Torcon Joint Venture (“MT”) as general contractor to build a biological research facility at Fort Detrick, Maryland.  MT subcontracted with IES Commercial, Inc. (“IES”) to perform the electrical system work.

In August 2013, after IES had completed over 90% of its work, a fire destroyed or damaged more than half of the facility, including significant portions of IES’s work. MT ordered IES to perform significant fire remediation work in addition to the remainder of its base contract work. In November 2013, IES and MT entered into a subcontract amendment referred to as the “Fire Rider,” which included an agreed rate schedule for the fire remediation work, along with a procedure by which IES would perform work at MT’s direction, submit daily work tickets and monthly invoices, and be paid within ten days after MT received payment from its insurer.

The parties performed under the Fire Rider for over four years.  During this time, IES complained that MT was mismanaging the work by, among other things, failing to develop a schedule accounting for fire remediation work in addition to base contract work, and by requiring IES to work out of sequence. In September 2017, MT informed IES it would not be paid for the remainder of its work because MT’s insurer had ceased payments. In December 2017, IES sued MT in federal court in Maryland, asserting breach of contract and cardinal change claims. It also sued MT’s sureties under the Miller Act. MT and its sureties moved to dismiss all counts. The Court denied the motion with respect to the breach of contract and Miller Act claims but granted the motion on the cardinal change claim.

In granting the motion, the Court first reasoned that IES had misconstrued the nature of a cardinal change claim. Under the cardinal change theory, a contractor is entitled to recover damages when work ordered by the government is materially different from the work initially bargained for. In its complaint, however, IES did not allege that MT ordered work materially different from IES’s original scope. Instead, it alleged that the fire itself constituted a cardinal change. Thus, IES failed to allege a valid cardinal change claim.

Second, even assuming that the changed work ordered by MT – rather than the fire itself – was a cardinal change, the Court held that claim still failed because IES failed to allege damages resulting from that work. Instead, IES alleged damages consisting primarily of labor inefficiency costs, allegedly caused by MT’s mismanagement of the project. However, IES did not allege that MT’s mismanagement after the fire was, itself, a cardinal change. Thus, IES failed to allege increased costs resulting from a cardinal change.

Finally, the Court held that the cardinal change claim was barred by the existence of the Fire Rider. According to the Court, a cardinal change occurs when the government demands a contractual alteration that requires the contractor to perform duties materially different from those originally bargained for. Here, however, the parties bargained for and entered into the Fire Rider to account specifically for fire remediation work. Thus, the Court held that the cardinal change claim failed as a matter of law because IES was not ordered to complete fire remediation work materially different from its contractual scope of work. Instead, it agreed to perform the work pursuant to a new agreement.

To view the full text of the court’s decision, courtesy of Lexis®, click here.

Kristopher Berr

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