CHANGE ORDER CLAUSE PRECLUDES “FAIR VALUE” RECOVERY
Pennsylvania Electric Coil, Ltd. v. City of Danville
No. 08-1746
May 11, 2009
Overview
A federal appeals court has ruled that under Virginia law, a contractual change order procedure precludes a contractor's recovery for extra work on a fair value or "quantum meruit" basis.
Background
The City of Danville, Va., awarded a contract to Pennsylvania Electric Coil Ltd. (PEC) to refurbish three hydroelectric units on the Dan River. The fixed-price contract contained the following Changes clause:
"The City, without invalidating any construction contract, and without notice to any surety, may order changes in the work within the general scope of the contract consisting of additions, deletions, or other revisions, providing that the total amount added or eliminated does not exceed twenty-five percent (25%) of the total contract price or $10,000, whichever is greater. All such changes in the work shall be authorized by change order and shall be executed under the applicable conditions of the contract documents."
The 25 percent cap on total changes is mandated by Virginia public contract law.
As the work progressed, PEC requested and received a number of change orders for extra work. Later in the project, PEC complained that all three units were out of alignment, a condition not contemplated by the contract. There was extensive correspondence between PEC and the city engineer regarding problems in the field caused by the misalignment. But, PEC never expressly requested a change order addressing the situation.
PEC completed the project and submitted a final invoice, which included the extra cost of work necessitated by the alignment problem. The city declined to pay that amount. PEC filed suit for breach of contract and quantum meruit.
With regard to the quantum meruit claim, PEC argued that the city was equitably obligated to pay the fair value of the extra work because the city benefited from the work, accepted the work, and knew that PEC expected to be paid for the work. A federal district court granted summary judgment in favor of the city. PEC appealed the denial of its quantum meruit claim.
The Ruling
The U.S. Court of Appeals for the Fourth Circuit said Virginia law is well settled on this matter. When a construction contract contains a provision establishing a procedure for obtaining change orders authorizing extra work, that provision is the exclusive remedy for obtaining payment for extra work. The contractor cannot recover under a theory of quantum meruit. Main v. Department of Highways, 142 S.E.2d 524 (Va. 1965).
"Under Main, quantum meruit relief is not available to PEC because there is a valid, enforceable contract that governs the parties' rights and lays out a change order procedure requiring PEC to obtain approval from a designated person with authority to execute agreements on behalf of the City. PEC's own actions regarding [the earlier change orders] demonstrate that it knew of and was able to follow this change order procedure.... PEC has not disputed the validity of the change order procedure. Nor has it supplied a reason for its failure to continue complying with the provision as work on the units progressed. Like the plaintiffs in Main, PEC failed to follow the prescribed method outlined in the parties' contract to obtain approval and payment for extra work - a method with which it was not only familiar, but which it had in fact utilized."
Conclusion
If a contractor complied with the contractual change order procedure and was wrongfully denied additional compensation, the contractor could sue for breach of contract. But, this would be an action within the contract, not outside the contract as with a quantum meruit claim.
Case participants: For Pennsylvania Electric Coil, Ltd.: Chauncey Reynolds Keller, Jr.
For the City of Danville: Jeremy E. Carroll.
Before: Judges Niemeyer, King and Duncan.
Opinion by: The full court.
Outcome: Summary judgment in favor of project owner affirmed.
No. 08-1746
May 11, 2009
Overview
A federal appeals court has ruled that under Virginia law, a contractual change order procedure precludes a contractor's recovery for extra work on a fair value or "quantum meruit" basis.
Background
The City of Danville, Va., awarded a contract to Pennsylvania Electric Coil Ltd. (PEC) to refurbish three hydroelectric units on the Dan River. The fixed-price contract contained the following Changes clause:
"The City, without invalidating any construction contract, and without notice to any surety, may order changes in the work within the general scope of the contract consisting of additions, deletions, or other revisions, providing that the total amount added or eliminated does not exceed twenty-five percent (25%) of the total contract price or $10,000, whichever is greater. All such changes in the work shall be authorized by change order and shall be executed under the applicable conditions of the contract documents."
The 25 percent cap on total changes is mandated by Virginia public contract law.
As the work progressed, PEC requested and received a number of change orders for extra work. Later in the project, PEC complained that all three units were out of alignment, a condition not contemplated by the contract. There was extensive correspondence between PEC and the city engineer regarding problems in the field caused by the misalignment. But, PEC never expressly requested a change order addressing the situation.
PEC completed the project and submitted a final invoice, which included the extra cost of work necessitated by the alignment problem. The city declined to pay that amount. PEC filed suit for breach of contract and quantum meruit.
With regard to the quantum meruit claim, PEC argued that the city was equitably obligated to pay the fair value of the extra work because the city benefited from the work, accepted the work, and knew that PEC expected to be paid for the work. A federal district court granted summary judgment in favor of the city. PEC appealed the denial of its quantum meruit claim.
The Ruling
The U.S. Court of Appeals for the Fourth Circuit said Virginia law is well settled on this matter. When a construction contract contains a provision establishing a procedure for obtaining change orders authorizing extra work, that provision is the exclusive remedy for obtaining payment for extra work. The contractor cannot recover under a theory of quantum meruit. Main v. Department of Highways, 142 S.E.2d 524 (Va. 1965).
"Under Main, quantum meruit relief is not available to PEC because there is a valid, enforceable contract that governs the parties' rights and lays out a change order procedure requiring PEC to obtain approval from a designated person with authority to execute agreements on behalf of the City. PEC's own actions regarding [the earlier change orders] demonstrate that it knew of and was able to follow this change order procedure.... PEC has not disputed the validity of the change order procedure. Nor has it supplied a reason for its failure to continue complying with the provision as work on the units progressed. Like the plaintiffs in Main, PEC failed to follow the prescribed method outlined in the parties' contract to obtain approval and payment for extra work - a method with which it was not only familiar, but which it had in fact utilized."
Conclusion
If a contractor complied with the contractual change order procedure and was wrongfully denied additional compensation, the contractor could sue for breach of contract. But, this would be an action within the contract, not outside the contract as with a quantum meruit claim.
Case participants: For Pennsylvania Electric Coil, Ltd.: Chauncey Reynolds Keller, Jr.
For the City of Danville: Jeremy E. Carroll.
Before: Judges Niemeyer, King and Duncan.
Opinion by: The full court.
Outcome: Summary judgment in favor of project owner affirmed.