As we enter the holiday season, some people have strict guidelines about when the Christmas tree or other holiday decorations are allowed to takeover our daily lives, offices, and homes. The red and white ribbons and the colored lights of Christmas cannot be hung until after the orange pumpkins, brown leaves and turkey carcasses are thrown away. In other words, it is premature to celebrate one holiday before the other holiday has occurred. In the world of construction claims, according to one court, these same rules apply—it is premature to award damages before the claim has been considered and either approved or rejected.
In VVM Builders, LLC v. Atkins Construction Group, LLC, No. CV195021541S (Oct. 31, 2019), the Superior Court of Connecticut squarely addressed this precise issue in a case involving a change order dispute between a contractor and subcontractor. The subcontractor filed a demand for arbitration against the contractor, seeking both its contract balance and approximately $40,000 in extra and/or change order work. The parties’ contract provided that “the subcontractor shall have no claims for additional work or changes in the work without written authorization.” The subcontractor submitted invoices for the extra work, but, according to the testimony at the hearing, the contractor had neither approved nor rejected the subcontractor’s claim.
Nonetheless, the arbitrator essentially awarded prospective damages based upon “not yet approved” changes or extra work, stating the following:
The [subcontractor] has submitted invoices for this extra work. The [contractor] testified that [it] has not yet approved any of those extra work/change order items and, therefore, the [subcontractor’s] claim cannot be awarded at this time. I find that should the contractor approve said work then the [subcontractor] shall recover same.
The contractor paid the contract balance to the subcontractor, but the subcontractor filed a motion to confirm the award on the change order work. The court summarily denied the subcontractor’s motion, finding that the contractor’s interpretation of the arbitration award was correct. While not explicitly stated in the one-page opinion, the court concluded that the arbitrator could not base its award on a change order claim that had not yet been approved (or even considered) by the contractor.
The short opinion makes sense—an arbitrator cannot rule on a claim that has not gone through the process required by the contract. So what? A more difficult scenario arises when the claim has been submitted and either the contractor or the owner have refused to respond to the claim. It is not clear from the VVM Builders case how long the subcontractor’s invoices for extra work had been pending, but I suspect it was not an excessive or unreasonable amount of time. If it had been, the subcontractor could make an argument that the refusal to provide a response to the claim was a “deemed” denial and, therefore, gave the subcontractor the right to proceed with arbitration. Better yet, parties should draft a time limitation period within their contract for review and response to a submitted claim (i.e., “In the event Owner fails to respond to Contractor’s written claim for additional work within ten (10) days, the claim shall be deemed approved.”).
On a more personal note, to you and your family, Happy Thanksgiving!