Essential law: Variations, part four

As a general rule, the starting point is that there is no common law right in building contracts to omit works from the agreed scope. The courts have held that a contractor has both an obligation to do the works instructed under a building contract, and a corresponding right to be able to do those works.

This principle protects the contractor from a situation where it has, for example, turned away work or procured specialist equipment on the basis that it will be carrying out the work agreed under the building contract in the amounts specified in the contract. If an employer had free rein to omit those works, the contractor could be exposed to significant losses.

In what circumstances can the employer omit works?

For the employer to omit works, there must be an express provision in the contract which allows for such omission. For example, the JCT Design and Build Contract 2016 includes in the definition of a “change”, at clause 5.1.1.1, the right to issue an instruction for the “addition, omission or substitution of any work”.

However, even these express provisions will be subject to limitations on the extent of the work that can be omitted, and whether that work can be redistributed to other contractors (or carried out by the employer itself).

What can or cannot be omitted?

As an omission is, by its nature, a variation, it will necessarily be subject to the restrictions on variations discussed in our first article in this series (6 March, page 42).

In particular, the employer cannot issue an omission instruction that changes the fundamental characteristic of the works or the basic bargain between the parties. An instruction to omit will need to be considered with this in mind – the works must still be capable of being identified as the “works” following the omission. The courts will not allow the right to omit works to be used as, in effect, a right to terminate for convenience.

Can the employer redistribute the works, taking the work from one contractor and giving it to another, or even to itself?

The courts have found that the employer should not be able to relieve itself from having struck a bad bargain through the omissions clause, by taking work from one contractor and passing it to another. Building contracts will therefore generally contain an implied term (or, in some cases, such as certain FIDIC contracts, an express term) that instructions to omit works for the purpose of awarding those works to another contractor are prohibited. If the employer intends to do this, there needs to be clear wording in the contract allowing it.

The same principle applies where the employer would otherwise carry out the omitted work itself. An omission instruction must be for the genuine purpose of omitting those works from the overall works (that is, where it is no longer required for the contract). The employer cannot simply omit the works and carry them out itself, without an express provision to the contrary.

Looking at the JCT Design and Build Contract 2016, redistribution of the works is not expressly permitted and therefore any instruction of that nature could lead to the employer being in repudiatory breach.

What happens if an employer omits works when it is not entitled to do so?

If an employer omits work where it is not entitled to do so, the courts have held that can be a repudiatory breach of the building contract (because it shows an intention by the employer not to be bound by the contract). A repudiatory breach gives rise to a common law right for the contractor to either elect to affirm the breach, or to terminate the contract. In either case, the contractor would be entitled to claim damages incurred as a result of the breach, including damages for the profit it would have made on the omitted work. If the contractor elects to terminate, the contractor could also claim for the loss of profit on the remainder of the uncompleted works.

What is the valuation of the omitted works?

Where a valid instruction to omit is issued, it is likely that the contract sum will be varied to reflect that omission. The basis of the variation to the contract sum will depend on the terms of the valuation regime for variations in the relevant contract. However, such valuation will usually be based on either the price of the omitted work under the contract or the cost to the contractor that would have been attributable to the omitted work.

How will omitting works affect the completion date?

This will depend on the terms of the relevant contract. For example, under the JCT Design and Build Contract 2016, an omission can allow the completion date to be brought forward, but the completion date can never be brought forward earlier than the original completion date.

This article concludes our summary of variations law. The next topic in the Essential Law series will be liquidated damages.

James Worthington is a partner and Vanessa Jones an associate at Charles Russell Speechlys