Breach of Contract in Pennsylvania

Neal Navitsky bought a lot on Plum Run Road in New Oxford, PA, and started planning his new home. William A. Mcintyre & Sons, LLC, agreed to build a 4-bedroom, 2.5 bath, 2,843 SF home on the site for $290,521. Under the contract, signed change orders were required for any work not in the agreement. Navitsky and his bank set up a draw schedule for the job and work started.

During construction, Navitsky asked for three changes. Mcintyre quoted a price of $9,375 for the changes, wrote up change order forms and did the extra work. Navitsky accepted the written change orders but didn’t sign or return any of the forms. Why not? Because Navitsky had a complaint. He figured work done on the house so far was worth far less than the $159,786 McIntyre had already been paid. Navitsky wanted to negotiate change orders when the home was complete

To keep the project moving, Mcintyre did the extra work even before change orders were signed. Mcintyre figured getting signed change orders from Navitsky was only a formality. But when reminded about the un-signed orders, Navitsky refused to sign or pay for the extra work. Mcintyre demanded payment.

Navitsky knew how to handle that. He directed his lender to pay the $41,318 fourth draw to himself, Navitsky, rather than his contractor.

Owed over $50,000, with no prospect of getting paid, Mcintyre pulled off the job and filed suit.

Now What?

Any time a construction project runs off the rails, the contract comes front and center.

• Is the contract legal in every respect?
• If so, what does the contract require?
• Was there a material breach of contract?
• If so, who was the first to commit that breach?

The court had no trouble finding a valid contract. But did the contract require that Navitsky sign change orders and pay when each change was complete? The court didn’t find anything in the contract on that. But every contract requires good faith and fair dealing. In the court’s opinion, “Navitsky’s conduct did not comport with this obligation.” Navitsky should have signed the change orders and paid for changes when done. But was that failure by itself a material breach of contract?

A material breach by one party to a contract entitles the non-breaching party to suspend performance. Who breached first is important. Breach by Mcintyre would void the agreement, leaving the contractor with no profit on the job.

Was failure to sign change orders a material breach of contract that gave Mcintyre a right to stop work? Or did McIntyre breach the contract by demanding payment for changes before doing more work?

In the court’s opinion, Mcintyre’s demand for payment on changes was not material breach of contract. Navitsky was told that work would resume when Mcintyre received payment for the changes. I agree with the court. Any contractor can delay work when payments are late.

But refusing to pay for changes and diverting the fourth draw to himself were material breach by Navitsky. The court awarded Mcintyre $50,693, a judgment affirmed last week by the Superior Court of Pennsylvania.

A Final Point

With the right contract, Mcintyre would have saved two years of litigation. Good construction contracts require payment for changes when each change is complete. It’s easy to draft nothing but good construction contracts. Get Construction Contract Writer. The trial version is free.

 

Change Orders You Can Believe In

A contractor I know took on a small job at a popular ski resort in Colorado a few years ago. The owner of a chalet wanted a new sundeck, plus some interior work in an unfinished basement -- a few week's work. My contractor friend wrote up a bid, offered his usual agreement, got the owner’s signature and started work.

By mid-October, the deck was done. The owner was pleased. My friend started on the basement. But first, the owner wanted some changes – 5/8” wallboard with vinyl finish. My friend wrote up a change order and got a signature – at the cost of labor and materials plus 10%, exactly as required by their contract. Before the wallboard was up, the owner added Pergo flooring to the job. No problem. My friend wrote out another a change order and got a signature, again at cost plus 10%. Before the basement floor was done, the owner wanted another change -- a bar built into a corner of the basement. My friend wrote out another change order at cost plus 10%. Next, the owner decided that the family room upstairs needed new flooring, again at cost plus 10%. By now, it was past Thanksgiving.

You can imagine the rest of the story. My friend worked in that chalet nearly all winter -- at cost plus 10%. Finally, he asked me if there wasn’t some way out of his cost-plus-10% contract. He was working for wages at a time when good-paying contract work was plentiful.

He should have asked sooner.

The law calls it the cardinal change doctrine. Changes to a contract have to be within the general scope of the agreement and have to be relatively small changes. Large changes (or too many small changes) are considered a cardinal change and have to be the subject of a new contract. My friend got into cardinal change territory somewhere between the wallboard and the Pergo.

It Doesn’t Have to Be That Way

Every contractor has an advantage when bidding change order work. If the contract doesn’t cover the subject, the contractor can name the price of changes. There won’t be a competitive bid. Take it or leave it. That’s an uncomfortable position for any owner.

Owners prefer contracts that base the cost of changes on a formula, usually time and materials. That’s where my friend in Colorado got into trouble. He had to prove every penny of extra expense and limit markup to 10%. A deal like that can be a trap. 

Now consider the six states that prohibit cost-plus contracts for home improvement work:

·         California -- Business and Professions Code § 7159(d)(5).

·         Illinois -- Compiled Statutes Title 815, § 513/15
·         Massachusetts -- General Laws 142A, § 2(a)(5)

·         Nevada (residential pools only) -- Administrative Code § 624.6958-2(f)

·         Pennsylvania -- Statutes Title 73, § 517.7(a)(8)

·         Tennessee -- Code Annotated § 62-6-508(a)(5)

In those six states, every change order has to be done at the contractor’s selling price. It’s the law! You have to like that. So would my friend working at the Colorado ski resort.

But Pennsylvania may be about to drop off my list of six. A bill introduced in the Pennsylvania legislature earlier this month would amend Pennsylvania’s Home Improvement Consumer Protection Act -- making cost-plus home improvement contracts legal again in Pennsylvania. Is the bill going to pass? Maybe and maybe not. Regardless, Construction Contract Writer is the best way I know to stay out of trouble with change orders. The trial version is free.