The Cardinal Change Doctrine
The “cardinal change doctrine” is a legal theory pursuant to which a contractor who is presented excessive, cumulative or otherwise material contract change orders has the right to terminate the contract and/or recover damages from the owner. The basic concept is that if the owner (i) significantly changes the magnitude of the work to be performed; (ii) deviates from the original design to procure a completely different item; (iii) drastically alters the quality, character, nature or type of work contemplated by the original contract; or (iv) amends the work so that the new estimate greatly exceeds the original contract estimate; the owner has, for all practical purposes, materially breached the contract, in which case the contractor has the right to terminate the contract and/or recover damages.
The cardinal change doctrine is well-established under federal law, and Arizona contractors should be aware of the doctrine to the extent that they are working under federal contracts. To begin with, a federal contract is subject to federal procurement contract laws, and will therefore necessarily include a “changes clause” permitting the government’s contracting officer to make unilateral changes to the contract, provided that such changes are contemplated within the general scope of the contract. Once the contracting officer issues a change order, the contractor is then required to perform under the amended contract, whether or not it agrees with the contracting officer’s modifications. Under this scenario, the only recourse for the contractor is to file a claim for an equitable adjustment with the contracting officer pursuant to procedures outlined in federal regulations. However, if the contracting officer imposes obligations on a contractor far exceeding the work contemplated by the contract, such as ordering a drastic modification in the performance required by the contract, the order is considered a cardinal change that constitutes a material breach of the contract. Under such cardinal change, any contractually based procedural requirements or damage limitations are inapplicable and the contractor may pursue common law termination and/or damage remedies against the owner.
Arizona Public and Private Contracts
In the absence of controlling state authority, Arizona courts will look for guidance in public contract law to the federal court of claims and federal board of contract appeals. Therefore, in light of New Pueblo and the law discussed below, while Arizona courts have not expressly applied the “cardinal change doctrine,” to public or private contracts, per se; Arizona courts may follow the cardinal change doctrine and permit recovery through the common law theory of “quantum meruit.” To recover damages under quantum meruit, a contractor must prove that (i) the owner was unjustly enriched at the expense of the contractor; (ii) the contractor performed services benefitting the owner; and (iii) the contractor conferred the benefit under circumstances rendering the owner’s retention of the benefit inequitable. Quantum meruit damages are measured by the value of the services to the owner and are recoverable even under a void public contract.
The quantum meruit theory allows the contractor to recover for the fair value of its work even though it might otherwise fall outside of the contract payment terms due to the cardinal change. In essence, the court views the parties as having formed a new, “implied contract,” under which the contractor is entitled to recover the fair value of its performed services. The Arizona Supreme Court applied the foregoing principle to a county contract in Greenlee County v. Webster in 1923, reasoning that the contractor in the case should have brought an action in quantum meruit instead of breach of contract. The court explained that because the contractor’s performance pursuant to the county’s numerous change orders ultimately shifted the contractor’s work outside of the scope of the original contract’s payment terms, the Court was precluded from affording the contractor recovery under a breach of contract theory but may have done so under quantum meruit. Further with respect to public contracts, Arizona Revised Statutes affirm that “the principles of law and equity, including . . . the common law of contracts as applied in this state. . . supplement the provisions of [the Arizona Procurement Code (APC)].”
Since the doctrine of cardinal change has not been squarely addressed yet by Arizona courts, owners and contractors should consult with knowledgeable construction attorneys about their options when faced with the issue of whether or not a cardinal change has occurred.