Subcontractor Recovers $4,000,000 on Abandoned Contract

by James R. Keller

This article appeared in St. Louis Construction News & Review, p. 18, September-October, 2004.

The Eighth Circuit Court of Appeals recently upheld a federal district court's judgment in St. Louis for a subcontractor of almost $4,000,000 against a joint venture general contractor. The court concluded that the general contractor and the subcontractor had abandoned their written contract and thus the subcontractor was not limited in its recovery to the contract's lump sum price.

The case is O'Brien & Gere Technical Services, Inc. v. Fru-Con/Fluor Daniel Joint Venture, Case No. 02-4156, decided August 26.

The project was a paper-manufacturing complex in Cape Girardeau, Missouri. Procter & Gamble Company hired Fru-Con Construction Corporation and Fluor Daniel, Inc. as the Joint Venture general contractor to build the complex.

The Joint Venture then hired O'Brien & Gere to design and build six buildings in the complex for a lump sum of $15,300,000. After many project delays and changes, the Joint Venture terminated O'Brien & Gere before it had completed its work, but after it had received $21,800,000.

O'Brien & Gere sued the Joint Venture in quantum meruit for the reasonable value of its services in excess of the contract's lump sum price and the $21,800,000 it already had received. To recover in quantum meruit, O'Brien & Gere successfully convinced a federal district court judge in St. Louis that the contract with the Joint Venture had been legally abandoned.

The project was ambitious, complicated and had numerous problems. The scope of work changed by $7,000,000 before the contract was even signed.

According to the court, both the Joint Venture and O'Brien & Gere created delays through faulty design and performance. They had agreed to use an expedited "design-build" process on the two most important buildings. The plan was to take the completed design for Building 51 and use it for Building 52 with only minor changes.

Performance delays occurred in part because the Joint Venture made eighty changes in Building 51's design elements, including the weight and location of the mezzanines and the number, weight and size of the air-handling units on the roof. These changes affected the structural design. This caused O'Brien & Gere within a four-month period to reissue its "Issued for Construction" drawings for the foundation eight times and for the roof ten times.

O'Brien & Gere created design flaws by understating in its bid the amount of steel and concrete needed to meet earthquake requirements. There also were delays due to a late start date for the steel erection sub-tier contractor and undisclosed poor subsoil and pre-existing fire lines. This affected the design and size of a 300-foot-long retaining wall, which caused a resequencing in the work on Building 51.

The Joint Venture and the subcontractor disagreed over the costs arising from accelerating the dry-in date for Building 51. They disputed whether the Joint Venture had directed O'Brien & Gere to spread the $1,800,000 acceleration cost over six change order requests.

The Joint Venture did sign the six change order requests for $2,900,000 and prepared the subcontract modifications. It never issued them, however. Instead, the Joint Venture wrote a letter to all its subcontractors stating that it could only approve changes of no more than $5,000.

O'Brien & Gere also experienced serious cash-flow problems, creating issues in paying its sub-tier contractors. To keep everyone on the job, the Joint Venture and O'Brien & Gere executed an amendment to the subcontract calling for advance payments of up to $4,000,000 in exchange for O'Brien & Gere's completion of new milestone dates.

The Joint Venture then learned that O'Brien & Gere had offered settlements with its sub-tier contractors of 50 to 60 cents on the dollar. Upon learning this, the Joint Venture became more concerned that the sub-tier contractors would quit, a concern that bolstered the Joint Venture's decision to terminate O'Brien & Gere.

Under Missouri law, recovery in quantum meruit generally is limited to the contract price but there is no such limitation if the contract has been abandoned. To uphold the trial court's finding of abandonment, the Eight Circuit emphasized that the parties could not follow the aggressive, tight construction schedule.

The actual project became substantially different from the contract job, having changed in scope, quantity and frequency of changes. Halfway through the project, the parties no longer could agree on what documents defined the base scope of the work and the design stage. They also changed the method of payment from that specified in the contract.

Finding abandonment, the trial court calculated the reasonable value of O'Brien and Gere's subcontract work by adding the base price of $15,300,000 to the seven approved modifications of $8,040,057, for a total of $23,340,057. Subtracting the $21,772,082 paid left a balance of $1,567,975 due on the base work.

From there the court added $3,797,891 for the unpaid change work, based on uncontroverted testimony that the change order requests represented the accurate amount for this work.

The court deducted $1,369,007 for back charges for O'Brien and Gere's scheduling delays and for the Joint Venture's costs in completing and redoing O'Brien & Gere's work. This left O'Brien & Gere with a net recovery of $3,996,859.

The court noted that while the Joint Venture argued throughout that O'Brien & Gere had underbid the contract, the value of its services actually might have exceeded the damages awarded.

James R. Keller is a partner at Herzog Crebs LLP, where he concentrates his legal practice on complex business litigation, construction law and alternative dispute resolution. He also is an arbitrator with the American Arbitration Association and a mediator.