[co-author: J. Patrick McNichol]

In Carnell Construction Corp. v. Danville Redevelopment & Housing Authority, 745 F.3d 703 (2014), the United States Court of Appeals for the Fourth Circuit upheld the trial court’s ruling that, without government approval, the Virginia Public Procurement Act (the “VPPA”) caps the amount a public works contractor can recover for changed work. The Fourth Circuit’s March 6, 2014 decision creates a potential problem for contractors that are asked to perform additional work in excess of the statutory cap on public contracts, but without advance government approval. To address the issues raised by the Fourth Circuit’s decision, the Virginia General Assembly recently passed HB 1628 to amend the VPPA.

The Carnell Decision

Carnell Construction Corp. featured a dispute between a public works contractor, Carnell Construction Corporation (“Carnell”), and a government agency, the Danville, Virginia Redevelopment Housing Authority (the “Danville Housing Authority”), on a public housing venture to provide subsidized rental units to low-income residents of Danville.  The Danville Housing Authority entered into a contract with Carnell to complete the site preparation work for $793,541. Eventually, the relationship between Carnell and the Danville Housing Authority deteriorated, in part due to delays attributed by each party to the other. Ultimately, the Danville Housing Authority advised Carnell that it would not extend the contract beyond the stipulated completion date, Carnell left the project, and the Danville Housing Authority declared Carnell in default.

Seeking various damages, including unpaid change order work, Carnell filed a lawsuit against the Danville Housing Authority, where the jury awarded Carnell $515,000 for the extra work. In a post-trial ruling, however, the trial court limited the jury’s award because the VPPA, specifically Virginia Code § 2.2-4309, provides that “no fixed-price contract may be increased by more than twenty-five percent of the amount of the contract or $50,000, whichever is greater, without the advance written approval of the … governing body ….” Accordingly, the trial court decided that Carnell was entitled to only $142,557.57 for the extra work, and the company appealed.

Before the Fourth Circuit, Carnell argued that: (1) the VPPA does not cap all recoveries on contract claims; (2) the VPPA does not apply to Carnell’s contract with the Danville Housing Authority; and (3) the statutory cap is unconstitutional because, in essence, it permits the government to obtain the benefit of additional labor without actually paying for the work. The Fourth Circuit ultimately rejected all three arguments and affirmed the trial court’s decision.

First, with regard to Carnell’s argument that the VPPA does not cap all recoveries, the Fourth Circuit found that ruling in favor of Carnell would permit a contactor to obtain, through a lawsuit, amounts not lawfully obtained through a mutually-agreed modification of the actual contract. Second, with regard to Carnell’s argument that the VPPA did not apply to the specific contract at issue, the Fourth Circuit explained that the contract was, in fact, a fixed-price contract controlled by the VPPA, as evidenced by the bid form incorporated into the contract. Finally, with regard to Carnell’s argument that the statutory cap is unconstitutional, the Fourth Circuit found that the VPPA only affects the remedy available for breach of contract, not the validity of the underlying contractual obligations. Notably, Carnell had no fundamental right to a particular remedy in the contract.

Proposed Legislation

As a result of the Carnell decision, contractors performing work on public contracts in Virginia will be faced with a tough decision if they are asked to perform additional work in excess of the statutory cap without first obtaining the requisite government approval. The contractor will need to decide whether to refuse to perform the additional work, and risk being terminated, or perform the work, but without the certainty that they will be fully compensated. In response to the Carnell decision, Delegate David B. Albo introduced HB 1628 in the Virginia General Assembly to amend the VPPA. The bill passed the House on January 10, 2015 and the Senate on February 24, 2015. The bill is currently with the Governor and will become law, unless the Governor vetoes the bill or amends it and sends it back to the House and Senate.

The proposed amendment to the VPPA provides that the provisions of § 2.2-4309 do not limit the amount a party to a public contract may claim or recover against a public body in the event of a contract dispute. The amendment, if it becomes law, would allow a contractor to assert a claim for the additional work pursuant to § 2.2-4363.

The amendment also provides that contract modifications made by a political subdivision that fail to comply with the provisions of § 2.2-4309 are voidable at the discretion of the governing body, and that unauthorized approval of a modification cannot be the basis of a contractual claim under the VPPA.

Moving forward, contractors performing public contracts in Virginia should keep a close eye on the status of HB 1628. At the time of writing, the bill was with the Governor. Until such time as the amendment to the VPPA becomes law, contractors must be aware of the current cap on recovery for changed work.