Contract changes

During the last year, the courts and boards only issued a few decisions that had any major impact on the field of contract changes; only two merit discussion. Both cases involve issues with little precedent, and which are interesting to practitioners because, if for no other reason, they may help to fill the gaps in these areas.

Impracticable Standards

Last year's Year in Review (1) commented on Raytheon Co., (2) a case in which the Army's rush to get a contract into place before funds expired ultimately cost the Army millions of dollars. In Raytheon, the Armed Services Board of Contract Appeals (ASBCA) held that the Army knew that its technical data package (TDP) for the Chaparral missile guidance section was defective, yet failed to disclose this superior knowledge to a second-source developer. This non-disclosure of superior knowledge was a constructive change to the contract, entitling the contractor to an additional $7.4 million in compensation. (3) Raytheon also argued that its contract was commercially impracticable. (4) When the board rejected the commercial impracticability claim, (5) Raytheon appealed to the CAFC. (6)

The CAFC began its analysis by noting that a contract is impracticable if, due to unforeseen events, "it can be performed only at an excessive and unreasonable cost." (7) Raytheon argued that the board erred in determining whether this standard was net by comparing the estimated cost of completion to the contract price at the time of termination. Raytheon contended that the board should have instead compared the estimated cost of completion with the original contract price. (8)

Rejecting this contention, the court specifically pointed out that Raytheon had offered no legal authority to support its contention that the original contract price was the correct yardstick for determining Raytheon's damages. The court went on to hold that the board's use of the contract price at the time of termination was reasonable since the "adjusted contract price would accurately reflect the cost of performing the entire contract as adjusted, rather than as awarded." (9) The court never explained this circular reasoning. Apparently, the government gets the benefit of any adjustments to the contract price determined under the changes clause before calculating whether the contract is commercially impracticable.

California Abandons Cardinal Changes

This past year, the California Supreme Court decided Amelco Elec. v. City of Thousand Oaks, (10) a case involving a California state government contract that may, by analogy, impact the "cardinal change" doctrine in federal government contracts. In Amelco, the City of Thousand Oaks, California solicited for electrical work as part of a construction effort involving several major civic projects, including a civic center and office building, a 400-seat theater, an 1800-seat performing arts theater, and an outdoor arena. Amelco's bid of $6,158,378 was the lowest, and the city awarded the contract to Amelco. The city subsequently issued over a thousand drawings to the various contractors working on these projects, to either clarify or change the original contract drawings. To compensate Amelco for its changed work, the city paid it $1,009,728 over the initial contract price. (11)

Amelco was not satisfied with this amount because it was only compensation for the additional work not contained in the initial contract. Amelco claimed that it was also entitled to an additional $1.7 million for "the noncaptured costs of the change orders." (12) Amelco alleged that the vast number of changes made it difficult to keep track of its responsibilities and that the changes required Amelco to delay or accelerate certain tasks, or to shift workers between tasks to accommodate other contractors. Essentially, Amelco claimed it had to perform much more extensive managerial oversight in the contract as changed than it anticipated when it bid on the initial contract. When the city denied Amelco's claim, Amelco filed suit alleging alternatively that the city had abandoned and breached the contract. (13)

Under California's abandonment doctrine, when a construction project "become[s] materially different from the project contracted for, the entire contract ... is deemed inapplicable or abandoned, and the plaintiff may recover the reasonable value for all of its work." (14) The trial court ruled that Amelco had satisfactorily demonstrated that the city's project had become sufficiently different so as to be deemed abandoned. The appellate court affirmed. The California Supreme Court, however, overturned the lower courts' rulings dealing with abandonment in a five-to-one ruling, determining that the doctrine did not apply to public contracts "since such a theory is fundamentally inconsistent with the purpose of the competitive bidding statutes." (15) Crucial to the court's holding was a state law that required agencies to award all contracts in excess of $5000 to the lowest responsible bid on the basis of competitive bidding. The court concluded that deeming a public contract to be abandoned would violate this statute because it would result in the creation of an implied contract for quantum meruit payment that did not result from a competitive bidding process. (16)