variations and their consequences - olswang construction law masterclass - 5 july 2016

Gareth (ap) Morgan and Louise Forbes

[email protected]

[email protected]

Construction Law Masterclass 5 July 2016

Variations and their consequences

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Introduction

5 July, 20162

1. What is a variation?

2. Why have a variation clause?

3. Do I have a variation?

a) Is the instruction outside of the scope of the Works?

b) Was the variation instructed 'correctly'?

4. When variations become necessary

a) Contractor's wider obligations

b) Other 'necessary' variations

5. Procedures for varying Works

6. Anti-oral variations

7. Agency

8. Omitting work

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What is a variation?

constructiveblog.com3

• In a construction context - a change to the Works to be carried out under the

building contract

• Includes any change to the Works':

• quantity,

• quality, and/or

• (potentially) sequencing

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What is a variation? – JCT Definition


JCT Intermediate Building Contract with contractor's design 2011

5.1 The term ‘Variation’ means:

5.1·1 the alteration or modification of the design, quality or quantity of the Works

including:

5.1.1.1 the addition, omission or substitution of any work;

5.1.1.2 the alteration of the kind or standard of any of the materials or goods

to be used in the Works;

5.1.1.3 the removal from the site of any work executed or Site Materials other

than work, materials or goods which are not in accordance with this Contract

(continued)

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What is a variation? – JCT Definition continued


5.1.2 the imposition by the Employer of any obligations or restrictions in regard to the

matters set out in this clause 5·1·2 or the addition to or alteration or omission of any

such obligations or restrictions so imposed or imposed by the Employer in the

Contract Documents in regard to:

5.1.2.1 access to the site or use of any specific parts of the site;

5.1.2.2 limitations of working space;

5.1.2.3 limitations of working hours; or

5.1.2.4 the execution or completion of the work in any specific order."

• Defined as a 'Change' under the JCT Design and Build 2011

• JCT Minor Works contracts 2016

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Why have a variation clause?


• Preserves the contract while allowing changes, which are often inevitable in long

term contracts. It therefore gives the Employer the flexibility to make changes so

that it can get the product it wants, within the timescale it requires and potentially

at the same or similar prices to that already agreed.

• Ensures that the contract is not frustrated, if it is impossible to carry out the

previously agreed work.

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Do I have a variation? Ambiguity in the scope of works (1)


• Disputes often occur over whether or not particular works instructed by or on behalf

of the Employer already form part of the Works

• Contradictions between the different technical documents or gaps in what they are

describing can lead to uncertainty as to how the scope should be interpreted

• Generally speaking, to be included within the contract, work must be described in

some part of the contract documents, or be reasonably inferred from those

documents

• Important to consider the precise wording of the underlying requirement to carry out

the Works, as there may be differences in how "all encompassing" such wording

might be

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Do I have a variation? Ambiguity in the scope of works (2) and entitlement to payment


• Contract itself will typically provide some assistance as to how discrepancies are

resolved (such as a priorities clause) but common law principles of contract

interpretation will apply

• Entitlement to payment

• No automatic entitlement

• The contractor will have to show that, on a true construction of the contract, there is an

express or implied right to payment for the variation in question. That is:

• The work was outside the scope of the work the contractor agreed to carry out for the

contract sum; and

• The employer needs to have expressly or impliedly agreed to pay for it

• If the change to the scope is required because of a risk for which the contractor is

responsible then the Employer will not expect to pay for the variation

• Depends on the facts of the case

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When variations become necessary - contractor’s wider contractual obligations


• The Contractor may be obliged to undertake additional or altered works either in

order to satisfy its obligations as to the performance of the project or because it has

taken the risk in relation to certain risks arising, such as the discovery of

unexpected ground conditions

• Fitness for purpose warranty - where the technical scope is inadequate to achieve

the performance warranties something has to be changed. The Contractor will

otherwise be in breach

• MT Højgaard A/s v E.ON Climate and Renewables even though the scope of works

didn't achieve a specific performance, the Contractor had provided a 'fitness for

purpose' warranty – the Contractor was therefore obliged to expand the scope of

the works so as not to be in breach of the warranty

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When variations become necessary – other 'necessary' variations


• Change to the statutory regime (e.g. Building Regulations)

• The correction of errors in the description of the Works

• Situations may arise under a JCT Standard Building Contract with quantities

2011 where items of work that are required to be undertaken (and shown on the

drawings) are not included in the bill of quantities. Clause 2.14.1 states that

omission of such items will be automatically corrected and will be treated as a

variation (clause 2.14.3)

• Under the JCT Design and Build 2011, if a design error is identified in the

Employer’s Requirements then the Employer’s Requirements are treated as

being altered, unless the contractor has taken on responsibility for/ is warranting

the accuracy of the ERs…

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Do I have a variation? Ambiguity in the instruction


• Was the varied work a change to the original contract or did it create a fresh

contract?

• Was the work ordered within the scope of the variations clause?

• Were the notice provisions (if there are any) complied with?

• Were the notice provisions a condition precedent?

• Not necessarily required to include information in the notice of which the other party is

already aware (Walter Lilly v Mackay)

• Does failure to comply with the notice provisions imply that the party varying the

contract didn't really mean to do so (an 'accidental' variation)?

• Can it be argued that the employer has waived any notice requirements or is

estopped from insisting on compliance with them?

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Procedures for variation


• Depends on the wording in your contract, but it is best practice to deal with all

variations in writing

Clause 3.12.1 of the JCT Standard Building Contract with Quantities 2011 Edition

reads:

“Where the… Contract Administrator issues an instruction otherwise than in writing, it shall

be of no immediate effect but the Contractor shall confirm it in writing to the… Contract

Administrator within 7 days, and, if he does not dissent by notice to the Contractor within 7

days from receipt of the Contractor’s confirmation, it shall take effect as from the expiry of

the latter 7 day period.”

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What is an Anti-Oral Variation Clause?

5 July, 201613

• Seeks to restrict any amendments to the agreement only to those variations agreed

by the parties in writing

• Often found in or alongside an 'entire agreement' clause. Subtle distinction.

• "No variation of this agreement shall be effective unless it is in writing and signed by the

parties (or their authorised representatives)."

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Why use an Anti-Oral Variation Clause?

5 July, 201614

• Variations can be made either orally or also by conduct

• To exclude the possibility of informal or inadvertent variations being made to the

agreement

• Designed to prevent disputes arising out of informal exchanges that may waive

particular requirements, change deadlines etc.

• Historic position on AOV clauses traditionally unclear:

• United Bank Ltd v Asif - no oral variation of the written terms could have any legal effect

• World Online Telecom Ltd v I-Way - "[i]n a case like the present the parties have made

their own law by contracting, and can in principle unmake or remake it"

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Globe Motors Inc v TRW Lucas Variety Electric Steering Ltd [2016] (1)

5 July, 201615

• Contained the following clause:

"6.3 Entire Agreement; Amendment

This Agreement, which includes the Appendices hereto, is the only agreement between

the Parties relating to the subject matter hereof. It can only be amended by a written

document which (i) specifically refers to the provision of this Agreement to be amended

and (ii) is signed by both Parties."

• Court of Appeal addressed the conflicting case law of the past:

• "The parties have freedom to agree whatever terms they choose to undertake, and can

do so in a document, by word of mouth, or by conduct. The consequence in this context

is that in principle the fact that the parties' contract contains a clause such as Article 6.3

does not prevent them from later making a new contract varying the contract by an oral

agreement or by conduct."

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Globe Motors Inc v TRW Lucas Variety Electric Steering Ltd [2016] (2)

5 July, 201616

"The governing principle, in my view, is that of party autonomy. The principle of

freedom of contract entitles parties to agree [upon] whatever terms they choose,

subject to certain limits imposed by public policy ... The parties are therefore free to

include terms regulating the manner in which the contract can be varied, but just as

they can create obligations at will, so also can they discharge or vary them, at any

rate where to do so would not affect the rights of third parties. If there is an analogy

with the position of Parliament, it is in the principle that Parliament cannot bind its

successors."

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What does this all mean?

14 June 201617

• Clarification but still only obiter commentary…

• Principle of freedom of contract has been favoured

over any policy arguments (i.e. promote certainty /

avoid frivolous claims of oral agreements)

• Never assume an anti-oral variation clause will be

effective

• Are anti-oral variation clauses effectively

pointless? No…

• Still have value for two reasons:

• Evidentiary value – harder to establish a variation

• Practical value – encourages good practices

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Time bars to claims


• 20.1 of the FIDIC Conditions: if a contractor wishes to claim an extension of time

or additional payment it must give notice no later than 28 days after it became

aware, or should have become aware, of the event or circumstances giving rise to

any such claim

• NEC 3rd Clause 61.3: Contractor notifies PM within 8 weeks of becoming aware of

an event which has happened or which he expects to happen

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Agency - who authorised the variation?


• A contract administrator acts as the employer’s agent when it orders additional or

changed works on its behalf

• The law of agency governs the instruction of variations and the contractor needs to

be alive to the question of whether the agent is acting with the principal’s (the

employer's) authorisation

• The contract between the employer and the contract administrator will often set

down limits and procedures for instructing changes

• If the contract administrator instructs a variation outside the limits of its discretion

(and it has not obtained express employer consent) then it is in breach of contract.

In those circumstances:

• The unauthorised instruction will bind the employer to pay the contractor on the basis of

the ostensible agency principle.

• The employer’s remedy is against the contract administrator, who will be in breach of its

obligations and therefore liable to compensate the employer for the additional project

costs incurred

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Valuing a variation


• The contract may contain a mechanism to value the variation.

• For example, under clause 5.2.1 of the JCT SBC11 with quantities and with

approximate quantities, the value of any variation "shall be such amount as is

agreed by the Employer and the Contractor or, where not agreed... valued by the

Quantity Surveyor" in accordance with the valuation rules of the contract

• This contract also contains an alternative mechanism for valuation, where the

contract administrator may ask the contractor to submit a "Variation Quotation"

when the variation is instructed. If the quotation is accepted by the contract

administrator, it takes the place of a valuation under the valuation rules

• For other JCT forms, the concept of a "Variation Quotation" does not exist, but the

valuation rules are nevertheless set out expressly

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Omitting Work (1)


• Usually the case that a contractor is entitled to perform all the contract work

• Contract clauses that permit omissions generally address situations where the

employer does not wish to have the work carried out at all, as opposed to where

the employer wants to take work away from the contractor and engage another

contractor to carry it out

• However, where the contract carries a power for the employer to order additional

work, there is no implied term that if the employer requires additional work, it must

employ the contractor to carry it out

• AMEC Building Ltd v Cadmus Investment Company The architect instructed the

omission of certain fitting out work covered by a provisional sum in the contract.

The court held that withdrawal was arbitrary and the contractor should be

compensated

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Omitting Work (2)


• Abbey Developments Ltd v PP Brickwork Ltd The court held that the contractor had

a duty to carry out the work it contracted to do and a corresponding right to be able

to do so. Variation provisions of contracts that allow an employer to vary the work

should be construed carefully so as not to allow the contractor to be deprived of its

opportunity to carry out the work

• Trustees of Stratfield Saye Estate v AHL Construction One week into the works, the

employer cancelled the works. The contractor started an adjudication for

compensation for cancellation of the works. While the issue of enforceability of the

adjudicator's award was before the court, it also considered whether there was a

contract for a defined scope of work. The court approved Abbey Developments and

held that the employer's power to omit works was limited. The employer could not

change the basic nature of works by omission

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For more information please contact

Olswang:Changing Business.

www.olswang.com

Gareth (ap) Morgan+44 20 7067 3535

[email protected]

Louise Forbes+44 20 7067 3632

[email protected]

Brussels

+32 2 647 4772

London

+44 20 7067 3000

Madrid

+34 91 187 1920

Munich

+49 89 206 028 400

Singapore

+65 6720 8278

Paris

+33 17 091 8720

Thames Valley

+44 20 7071 7300



variations and their consequences - olswang construction law masterclass - 5 july 2016

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