The title of this post is the first line of a judgment recently entered in a construction case by a federal judge in Atlanta.  The judge issued a 35-page opinion for a matter involving approximately $60,000 of extra work claims, which ultimately turned into a judgment of nearly $275,000 for the contractor.  The case is Circle Y Construction, Inc. v. WRH Realty Services, Inc. and WRH Hidden Colony, LLLP and a copy of the judge’s order is found here.

Here’s a brief summary of the facts:

  • WRH entities (owner) owned and managed an apartment complex in Georgia.  WRH entered into a standard AIA-form contract with Circle Y (contractor) to perform renovation work on certain units at the complex.
  • After the contractor completed the work, one or more of the owner’s employees/agents asked the contractor to perform additional work, which it did.
  • When the contractor invoiced the owner approximately $60,000 for the additional work, the owner took the position that it did not have to pay for the extra work because: (1) there were no executed change orders as required by the contract; and (2) the additional work was not authorized by employees or agents having authority to bind the owner.
  • The owner did not dispute that the extra work was done but simply disagreed with the amount being charged by the contractor—significantly, the owner believed the extra work was worth $37,000, but refused to pay the contractor any portion of the invoiced amount unless the contractor agreed to abandon its claim for the disputed portion of charges.
  • The judge, relying on long-established case law relating to construction claims, awarded the contractor every penny of its $60,000 claim (plus additional amounts for work that contractor had performed but failed to include in its original complaint), plus interest and attorneys’ fees totaling more the $196,000.  In the end, the judgment against the owner totaled approximately $275,000, which is more than 10 times the amount that the owner originally disputed as owing ($23,000).

There are some good lessons here for managing construction disputes—or, more precisely, for how not to manage them—and they include:

1.   Pay undisputed money—don’t withhold it as leverage to beat down “downstream” parties when there are disputes over and above the undisputed amounts;

2.  Don’t rely on a contractual requirement for change orders to be in writing—clauses requiring change orders to be in writing and/or requiring signatures by only “authorized” representatives are not always enforced and may not be valid defenses to non-contractual claims for relief; and

3.  Act in good faith—behaving badly may result not only in a bad result, but also in payment of the other side’s attorneys fees, even where those fees appear to be totally out of proportion to the amount in issue.

I found one point made by the judge to be of particular significance because it is a complaint that is commonly made by contractors and suppliers at every tier on a construction project about the payment process, and that is:  “Defendants were aware that the materials and labor for the invoiced work had to be paid by Circle Y, a small contractor, out of pocket, and calculated that if they waited long enough, Circle Y would agree to their pennies-on-the-dollar offer due to the financial pressures a small contractor faces in these difficult economic times.”

Do you agree that owners and upstream contractors are using cash-flow pressures as financial leverage in negotiating disputed (or undisputed) change orders or contract payments?

Note:  The case is on appeal, which means that it isn’t over yet.  We’ll follow it as it makes its way through the appeal process and keep you posted.