Variation clauses: At your discretion

A construction contract will contain a variation clause so as to allow the employer the right to change its mind and alter the works part way through the project. As a result, a contract will contain a procedure to allow the employer to issue a formal instruction and will stipulate that the contractor only gets paid extra if such an instruction is issued. If not, the contractor would be able to unilaterally increase its scope by undertaking extra works and then claiming payment.

But the need for an instruction can often lead to unfairness. The contractor may not have the time to obtain an instruction before carrying out the additional works. Indeed, it may not be possible for the contractor to complete the project unless there is a change to the scope of works.

For example, the specification may stipulate that a certain product is used but that product may no longer be manufactured. The contractor needs to substitute the product with something that is just as good, but different. This is a variation but if the employer refuses to issue an instruction will the contractor be left without a right to be paid?

The courts recognise that an employer under a building contract is under certain implied duties, irresPective of whether they are expressly stated

Some contracts place a positive obligation on the architect or engineer to issue an instruction in such circumstances. For example, the ICC Measurement Contract 2011 (from the stable that was previously called the ICE contracts) states under clause 51(1) that the engineer “shall order any variation to any part of the Works that is in his opinion necessary for the completion of the Works”.

The courts have, from time to time, been asked to decide upon the nature of the obligation created by this wording. For example, in Yorkshire Water vs Sir Alfred McAlpine (1985) the contractor had been employed on a project to extend the Grimworth Reservoir in North Yorkshire under a contract containing a variation clause with very similar wording to the current ICC contract, quoted above.

McAlpine had to build an outlet tunnel underneath a dam to take the flow of water from the River Dibb. The contract stipulated that the tunnel be built in an upstream direction. This proved impossible and in the absence of a formal instruction, the contractor built in a downstream direction instead. The court found that the wording of this clause meant that the engineer was under an obligation to issue the instruction in order to allow completion of the works and therefore the contractor could claim payment in the absence of a formal order.

But this type of contract wording that refers to the engineer or architect being under a positive obligation to instruct a change is relatively uncommon. The JCT and NEC contracts do not contain equivalent wording. In the absence of such wording can an obligation be implied?

In Holland Hannen vs Welsh Health TSO (1981) the court had to consider such a situation. The contractor had been hired to build a 350-bed general hospital near Rhyl in North Wales under a contract which stipulated that the employer was responsible for the design.

The windows that had been specified were inadequate and leaked. This meant that when the contractor came to undertake the internal finishing works, they proved impossible to carry out. The amount of rain water streaming in through the windows meant that it was not possible for the contractor to complete the finishes. The contractor therefore needed to alter the design of the windows (which was the employer’s responsibility) but the employer refused to issue the necessary formal instruction.

It is recognised by the courts that an employer under a building contract is under certain implied duties irrespective of whether such obligations are expressly stated in the parties’ agreement. One such implied duty is the requirement that an employer co-operate with the contractor to allow it to undertake the works. This is the reason why an employer is under an implied duty to give the contractor the site irrespective of whether the contract expressly states this.

The court in this case found that this implied duty to co-operate meant that the employer was under a positive duty to vary the windows design so as to allow the contractor to complete the works. The contractor recovered payment despite the absence of an instruction.

These cases demonstrate that although it is normally the case that the employer has complete discretion as to what is built, this discretion may not always be absolute.

Michael Sergeant is a partner in the construction team of Holman Fenwick Willan and is the co-author, with Max Wieliczko, of a new book on project change called Construction Contract Variations, published by Informa Law from Routledge