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The Cardinal Change Rule and Its Impact on Primes and Subs

In most federal government contracts, a “changes” clause appears permitting the government to make and direct unilateral changes to the contract’s requirements. See, FAR 52.243. It follows then that an affected prime contractor will likely need to make corresponding changes to its contracts with its subs. The FAR changes clauses are not mandatory flow-downs, so prime contractors will want to ensure that they always include a changes provision similar or more extensive that the one in the government contract to cover change incidences.

In government contracting, a judicially created legal theory known as a cardinal breach exists that prime contractors can assert against the government when the government oversteps is change authority. The U.S. Supreme Court defined it to be “when the government effects an alteration in the work so drastic that it effectively requires the contractor to perform duties materially different from those originally bargained for.” Allied Materials & Equip. Co., Inc. v. U. S., 569 F.2d 562, 563–64 (Ct. Cl. 1978). A “cardinal change is so profound that it is not redressable under the contract, and thus renders the government in breach.” Id. at 564.

While this principle is well-settled in public contract law, it raises the question of whether there is a parallel private of right of action a subcontractor can assert when the government executes a change that it believes is overreaching and the prime attempts to flow-down it down. Additionally, irrespective of the government contract, can a subcontractor sue under the cardinal change rule if a commercial owner orders a change significantly outside the scope of the contract and the prime thereby must effectuate such against its sub. The answer depends on the applicable governing law in the dispute.

In Texas, a subcontractor can assert a claim based on this doctrine in both circumstances. In instances where an owner makes a change to the contract with the prime to the extent that it rises to the level of a cardinal change, which is a fact-based analysis, a subcontractor may sue the prime whether the owner is the government or a commercial entity. Texas courts have made it clear that while the cardinal change rule is a “creature of the body of law which has arisen in the context of disputes over government contracts,” it also applies between private parties and to private projects. Latex Constr. Co. v. Nexus Gas Transmission, LLC, CV 4:20-1788, 2020 WL 7386358, at *8 (S.D. Tex. Dec. 16, 2020).

While the scope of this article is not to survey the law on the extent of the application of the cardinal change rule across jurisdictions, a cursory review by your author found that several states in fact do not recognize it as a private right of action (i.e. Mississippi, Ohio, and Virginia). The distinction seems to be that these courts consider it to be an extracontractual remedy that is not necessary when recovery can be obtained via a breach of contract action.

The net-net is that a private claim under the cardinal change theory varies not only across jurisdictions, but also as to what extent it is recognized – only in public works or also in traditional commercial projects. In Texas, courts acknowledge it in full and in both settings; therefore, it is a right of action for a subcontractor to pursue.

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