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Department 7 of the Washoe County Business Court entered November 29, 2016 Order and December 2, 2016 Order enforcing Nevada’s Prompt Payment Act in favor of a Nevada drilling contractor that sought a $2.3 million change order due to unanticipated subsurface drilling conditions.

Factual Background

Plaintiff National EWP, Inc. (“National”), a licensed Nevada drilling contractor, entered into an agreement to construct a single production well for Defendant Mineral Ridge Gold, LLC (“Mineral Ridge”) in the Silver Peak Range, Esmeralda County, Nevada. Construction of the first production well was halted after National encountered difficulties regarding subsurface minerals and Mineral Ridge claimed that the well did not conform to the contract requirements in terms of alignment and plumb. National began drilling a second well and again encountered substantial difficulties and additional costs due to the subsurface drilling conditions.

On December 4, 2012, National’s President sent an email entitled “Change Order Request” to a representative of Mineral Ridge. The December 4, 2012 email requested payment of $2.3 million for the additional work. By email dated January 2, 2013, Mineral Ridge requested further information regarding the costs sought by National. On January 14, 2013, National sent Mineral Ridge a letter described by the Court as “specifically responding to each of the questions posed by Mineral Ridge in its January 2nd letter.” On February 2, 2013, Mineral Ridge sent National letter stating, in part, that “[h]aving said all this the Board also noted that in fairness National should be compensated for going beyond the call of duty.” The Court determined that Mineral Ridge did not send any further correspondence “declaring either that the response was unreasonable or setting forth any written reasons why the change order was unreasonable or any explanation that additional information or time was necessary to make a determination.”

National initiated business court litigation after Mineral Ridge declined to pay the additional $2.3 million that National requested.

Legal Discussion

The Business Court granted summary judgment in favor of National in the amount of $2.3 million.

NRS 624.610(1)(d) states that if:

Within 30 days after the date that a written request for a change order is submitted by the prime contractor to the owner, the owner fails to:

(1) Issue the change order; or

(2) If the request for a change order is unreasonable or does not contain sufficient information to make a determination, give written notice to the prime contractor of the reasons why the change order is unreasonable or explain that additional information and time are necessary to make a determination,

the prime contractor may stop work after giving written notice to the owner at least 10 days before stopping work.

NRS 624.610(3)(a) then states that “[i]f an owner fails to issue a change order or give written notice to the prime contractor pursuant to the provision of [NRS 624.610(1)(d)], then “[t]he agreement price must be increased by the amount sought in the request for a change order.”

Mineral ridge argued that the parties’ contract addressed extra work and stated that claims for extra work not authorized in writing prior to the work being done would be rejected. Mineral Ridge also contended that the work was completed prior to National’s December 4, 2012 “change order request” email.
The Court at least impliedly determined that Nevada’s Prompt Payment Act overrode the contractual limitation on payment for extra work.

The Court concluded that the December 4, 2012 email was a valid request for change order. It also concluded that Mineral Ridge’s January 2, 2013 response seeking additional information was valid under the Prompt Payment Act. The Court further concluded that National’s January 14, 2013 response answering Mineral Ridge’s questions validly triggered a new 30 day response time pursuant to 624.610(1)(d). While noting that the Prompt Payment Act is somewhat ambiguous on this point, the Court relied on case law precedent stating that “the object of statutes such as the Mechanics Lien Law (NRS 108.221, et seq.) is to secure payments for those who perform labor or furnish material to improve the property of the owner.” The Business Court also relied on California case law stating that “[public] policy strongly supports the preservation of laws which give the laborer and materialman security for their claims.” The Court further noted that “contractors are generally in a vulnerable position because they extend large blocks of credit; invest significant time, labor, and materials into a project; and have any number of workers vitally depend upon them for eventual payment.”

The Court then concluded that “[t]he February 12th, 2013 email is not a valid response by an owner under NRS 624.610(1)(d) because it neither informs National that the Updated Change Order Request is unreasonable and provide the reasons why it is unreasonable, nor does it inform National that the Updated Change Order Request does not contain sufficient information to make a determination and explain that additional information and time are necessary to make a determination.” The orders do not directly analyze the effect under the Prompt Payment Act of Mineral Ridge’s contention that all construction was completed prior to National sending its December 4, 2012 “change order request” email.