Modifications to Contract Preclude Claim for Cardinal Change

The decision in Williams Building Company v. Department of State, CBCA 6650 (April 26, 2023) is another warning about the risk of executing a contract modification without an appropriate reservation of rights. 

Williams entered into a firm-fixed-price contract with the Government to retrofit two floors of an office building in Wuhan, China, for use by the United States Consulate. During the project, Williams alleged that the issued for construction ("IFC") documents were defective, so the parties executed a bilateral modification whereby Williams agreed to a substitute set of IFC documents for the existing documents in exchange for payment of $1.975M (first mod). Williams did reserve its right to seek a time extension and extended overhead and/or delay costs. Thereafter, Williams entered into a second modification that settled those costs for payment of $1,864,968 (second mod). Williams thereafter sought additional time and money, including a claim for "cardinal change," i.e., a change so substantial it falls outside the terms of the contract. The parties settled these claims (third mod) for $4,999,325.73 but left open the cardinal change claim.

Williams thereafter sought additional costs in a certified claim, which the Government denied.  Following the filing of the appeal, there were a series of Civilian Board of Contract Appeals (CBCA or Board) orders requiring Williams to specify the damages sought (the damages calculation was made more difficult due to the Government terminating Williams for convenience based on COVID).

CBCA Decision

The Board held that since Williams had filed a claim, that claim was not merged into a termination settlement proposal because the claim accrued interest and Williams had not waived its right to interest.

The Board then addressed the cardinal change claim by holding that Williams was precluded from asserting a cardinal change because the agreed-upon modifications established that the changes were not outside the scope of the contract. Where a "contractor accepts a change and performs the changed work without reservation, it cannot subsequently claim that the change was beyond the scope of the contract for purposes of claiming breach of contract."

The Board also noted that many of the errors alleged as part of the alleged cardinal change were released in the first and second modifications and there was no right to recover for those items simply by recharacterizing the changes as a "cardinal change." The Board further found the reservation of "cardinal change" in the third modification did not constitute a waiver of the release language in the first two modifications. The Board noted that as a matter of law, if one sets aside the changes that were settled in the first two modifications, there is an insufficient basis to allege cardinal change. Finally, to the extent there were unrelated changes, Williams claims failed for a lack of a causal connection between the alleged changes and the damages.

Takeaways

The teaching point is that the prudent contractor should ensure that (a) any claims it wishes to reserve are clearly excepted from the general release that typically accompanies Government modifications, and (b) the claims it asserts are consistent with the prior agreed upon modifications.