Think it through first

An East Coast case of why claim agreements require consideration

Larry Caudle / December 05, 2016
Larry Caudle
Larry Caudle

Most contractor claims never reach the formal claims process and are resolved on the project level after one or more negotiation sessions. These negotiations culminate in a change order, typically enforceable against both parties, which contains the specifics of the agreement. As a case decided in New York reminds us, however, unless these agreements are supported by valuable consideration, they may be subject to challenge.

GII Industries, Inc. v. New York State Department of Transportation, 2009 WL 3030737 (Bkrtcy. E.D.N.Y.) involved a contract let by the New York State Department of Transportation (NYSDOT) to reconstruct the West Side Highway in the city of New York between West 25th and West 40th streets. To insure the smooth flow of traffic, the contract required the project to be constructed in five stages.

During the first stage of construction, the contractor discovered a large underground pipe that was not shown on the project drawings, and was forced to halt all work. The contractor promptly provided notice to NYSDOT of a differing site condition, and NYSDOT launched an investigation. In the meantime, NYSDOT instructed the contractor to proceed with stage two work, out of sequence. Subsequently, NYSDOT informed the contractor that the pipe, which was owned by the Long Island Railroad, must remain in place while work in stage one was performed.

The contractor tracked its costs pursuant to the force account provision of the contract and submitted a request for nearly $8 million, which NYSDOT rejected because the contractor allegedly failed to comply with the contract’s recordkeeping requirements. A few months later, the department relented and issued a change order granting 579 additional days to the contract. Soon thereafter, NYSDOT issued another change order compensating the contractor for $3 million while the parties attempted to resolve the balance of the compensation due the contractor.

Eventually, the contractor agreed to recalculate its claim by totaling its actual costs for the affected work and then subtracting from that the contract revenue it received for such work. This led to NYSDOT offering $7,112,438.60, which the contractor accepted.  In the formal change order, the sum was capped at $7,112,438.60, and the final amount would be determined in an audit of the contractor’s “actual, reasonable and verifiable costs.”  

Several months later, NYSDOT concluded its audit and determined that the contractor’s actual costs were less than originally reported; it thus reduced the contractor’s claim accordingly. The contractor disagreed and filed suit for over $10 million and contended that its costs were actually higher than $7,112,438.60 as originally thought.

In its Answer to the Complaint, NYSDOT asserted that the settlement agreement established a cap of $7,112,438.60 on the contractor’s recovery.  The contractor countered that the agreement is unenforceable because it lacks valuable consideration. In particular, the contractor argued that under the terms of the agreement there is neither a benefit received by it nor any right or interest given up by NYSDOT. The contractor thus contended that its recovery in the case should be its actual reasonable and verifiable costs and should not be limited to $7,112,438.60.

At the conclusion of a four-day trial, the court ruled on this threshold legal issue. NYSDOT argued that its compromise of a claim potentially worth less than the amount specified served as adequate consideration for the settlement agreement. The court rejected that argument because (1) under the contract NYSDOT was already obligated to pay the contractor its actual reasonable and verifiable costs; and (2) the $7,112,438.60 amount constituted nothing more than a cap on the contractor’s recovery without any obligation by NYSDOT to pay a particular amount. The court concluded that under the settlement agreement, NYSDOT obligated itself to do nothing more than was required of it under the contract.     

Typically, one party’s willingness to agree upon a fixed amount to compromise a claim serves as adequate consideration for a settlement agreement or change order. However, in this case, there was no fixed or minimum payment amount specified and, therefore, no benefit conveyed or right given up by NYSDOT. This case thus serves as a reminder that contractors and state highway departments must scrutinize their change orders and settlement agreements to insure they are supported by valuable consideration and are not subject to challenge.

About the Author

Caudle is a principal in Kraftson Caudle LLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction. Caudle can be contacted via e-mail at [email protected]

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