April 28, 2005
Author: W. John Irwin II
It is imperative that project oversight include management of claims and disputes, whether arising during the construction or continuing thereafter. It behooves the owner, construction manager, contractor and the designer, to be familiar with the various contemporary issues affecting claims. Last month's article on "Current Issues to Watch For in Construction Claims" discussed Total Cost Claims, Cumulative Impact Claims and Delay Claims. This article continues the discussion with three other contemporary construction claims issues: False Claims, the "No Damage for Delay" clause, and "Abandonment of Contract" claims.
Beware of False Claims
With the advent of the 1986 Amended Federal False Claims Act (original act 1863) and the subsequent adoption by many states of false claims acts, government agencies, assisted by whistleblowers, and qui tam plaintiffs (citizens suing on behalf of the government rewarded with a share of the award) have pursued contractors in arenas such as the health field and public construction. False claims are any false records or statements used by any party to induce the government to pay money, grant property or to approve work. Innocent or negligent mistakes are not false claims, especially if corrected immediately when a party becomes aware of them. Penalties can be substantial: up to $10,000 per false claim, which some have alleged to apply to each separate false statement in a construction claim document, in addition to treble damages for any damage sustained by the government.
Parties should insure that any certifications, pay requests, change order requests and claims are truthful, accurate and backed up by proper documentation. The contractor should not overstate its claim, with the idea that it will settle for less. Government agencies should not file a false claim action that is frivolous or only meant to harass and squelch the other party's claim. Contractors and other parties may be able to recover costs and damages against such actions by the government.
Be Aware of "No Damages for Delay" Clause in the Construction Contract
With the growth of construction delay claims in the 1970's and 1980's, owners began fighting back by including the "No damage for Delay" clause in the construction contract. This clause prevents the contractor from recovering dollar damages, including extended site and home office overhead, for owner-caused delay. The contractor can only obtain a "non-compensable" time extension. Courts have supported the use of this clause in private contracts.
However, some state public works codes have disallowed the No Damage for Delay Clause. Since 1984, the California Public Contract Code has disallowed the use of this clause when the delay is not contemplated at bid time by the parties or when the delay is unreasonable. While it can be argued whether the delay was contemplated or reasonable, generally the "No Damage for Delay" clause has been unenforceable in public contracts in California. The California Code also prohibits any effort by the governing agency to require the contractor to waive the Code's prohibition of this clause. Contractors should be careful when signing contracts that include the "No Damage for Delay" clause.
Cardinal Change and Abandonment of Contract
"Cardinal Change" in the federal courts recognizes that construction projects could be so altered during construction that the project no longer resembles the bid project. Cardinal change is usually based upon a change in the project scope, for example, a one-story building changed to a two-story building. Contractors have also argued, with less success, in federal courts that even without drastic scope changes, disruption due to owner-caused events can qualify as a cardinal change. Cardinal change is difficult to substantiate and depends on the circumstances of each project. Under a cardinal change, the contractor may be able to submit a claim for all of its reasonable costs.
State laws may also recognize that the actions of an owner in a construction project may change the project to one completely different from that bid. In a landmark decision in 1985 the California courts concluded that a private owner had abandoned the contract by issuing an excessive number of changes, by delaying the project an unreasonable extent and by failing to follow the contract changes clause. (See C. Norman Peterson Co. v. Container Corporation of America) Consequently, the contractor was entitled to recovery of the full value of its work: all of its costs, overhead and reasonable profit, i.e., effectively a Total Cost recovery.
However, in a February 4, 2002, decision, the California Supreme Court ruled that the abandonment theory may not be used in public construction contracts. (Amelco v. City of Thousand Oaks) In the subject project, the contractor argued that the multitude of changes and disruption due to incomplete design and actions of the owner during the construction period amounted to an abandonment of the contract. The contractor claimed damages calculated by a modified Total Cost Method (Total Cost minus any costs due to contractor-caused problems). The court rejected the abandonment theory, ruling that the public would not be well served by allowing a contractor to in effect rewrite its own competitively bid price and subject the government agency to liability for unpredictable costs.
Consequently, rather than arguing cardinal change or abandonment, a contractor may be better served by filing claims within the claims clauses of the contract and submitting specific claims with identifiable impacts, delays and costs attributable to each claim.
Summary: Managing Claims
The successful prosecution or defense of claims demands that the construction professional be aware of these issues concerning construction claims. If necessary, specialized expertise can be obtained from experienced attorneys and claims consultants.
W. John Irwin II, PE, has an independent practice as a Mechanical Engineer and Construction Consultant, located in Valencia, CA. He has over 30 years experience in design, construction, construction management and construction claims/forensics. He specializes in forensic consulting and expert witness assignments in construction claims and disputes and in building mechanical systems. His clients include attorneys, owners, contractors, designers, and insurance companies. He teaches in the Construction Management program at California State University-Dominguez Hills and is a frequent speaker at Lorman seminars on construction topics. He can be reached at [email protected]