When a general contractor is confronted with an underperforming subcontractor and wants to get rid of them, at least for part of the work, there are a few options to consider. There is always the “termination for cause” option (if the subcontractor is in default and will not, or cannot, cure the default). There is also the “termination for convenience” option (if the cause of the default is inconclusive, or if the prime contractor does not wish to get into a long, drawn-out battle in court).

But can the problem be averted simply by taking away the bulk of the subcontractor’s remaining work through a “credit change order”? A recent decision by an appeals court in New York makes that route a bit more fraught.

In Graciano Corp. v. Lanmark Group, Inc., Graciano, the masonry subcontractor, sued Lanmark, the general contractor, for breach of contract on a NYC School Construction Authority project. The issue at trial was whether a contract addendum that Lanmark had issued could lawfully remove specific work from Graciano’s contractual scope. Graciano argued that the magnitude of the deletion constituted a “cardinal change” and an “abandonment” of the project, which excused its further performance. Lanmark contended that the contract permitted it to “delete” or “modify” Graciano’s scope of work and that Graciano’s work stoppage constituted a breach.

A cardinal change is a change of such magnitude as to affect “the essential identity or main purpose of the contract, such that it constitutes a new undertaking.” Cases holding that a cardinal change has occurred are exceedingly rare because a “cardinal” change order must be so monumental as to virtually turn a contract for the construction of a bridge into one for a tunnel.

Here, however, the facts presented in the non-jury trial of this dispute painted an unusual picture. Lanmark conceded that the deletion of work was not made out of necessity. Rather, Lanmark believed that Graciano was angling to assert a delay claim against Lanmark, even before it set foot on the project site. Although the subcontract contained a no-damage-for-delay clause, Graciano started sending “notice of delay” letters from the onset of its work. Lanmark argued that Graciano was the cause of the delays to the project while Lanmark was simultaneously telling the SCA that the project was on schedule.

As the schedule continued to slip, Lanmark, without consulting the SCA, issued the addendum that deleted at least 30% of Graciano’s work—the work with the highest profit margin—and decided to perform that work itself. 

Affirming the decision of the lower court, the appellate court held that the deletion of such a significant and profitable part of Graciano’s work constituted a “cardinal change” and, thus, a breach of the subcontract by Lanmark. Ironically, because Lanmark was itself in breach, Graciano could treat the subcontract as abandoned, and Lanmark, adding insult to injury, could not avail itself of the no-damage-for-delay clause.

The only silver lining for Lanmark was that the court treated the issuance of this cardinal change as tantamount to termination “for convenience.” Thus, while Graciano was able to recover all its costs expended on the Project through the date it walked off the job (and any delay impact costs that were expended to the point of the issuance of the addendum), it was not permitted to recover lost profits on the work it never performed.

Each side may have dodged a bullet. Graciano gambled that it could walk off a problem job and won. Lanmark gambled that it could take back for itself a very large portion of the (high-margin) work without having to pay lost profit damages and won. But it could have gone horribly wrong for both sides.

When contemplating removing a subcontractor from a project, doing it by credit change order without the consent of the subcontractor may not be the most ideal route.