Variations in Construction Contracts

Variations in Construction Contracts

Variations in construction contracts can mean changes to the terms of the contract or it can mean changes to the scope or character of the works. In this article, Lim Chuen Ren looks at variations in construction contracts in the latter sense. Variations to the scope of construction works are necessary because no project is impeccable and changes are required to meet unforeseen circumstances or changed requirements. Thus, variation can be in the form of additions, omissions or substitutions. Functions of Variations Clauses Variation clauses are a common feature in construction contracts. It is useful to note, at the outset, that the proprietor is not entitled as of right to direct variations (Ashwell Nesbitt v Allan & Co (1912) Hudson's Building Contracts (4th ed) Vol 2 at page 462). Hence the need for a variation clause. Secondly, they ensure that contractors can recover payments for variations properly directed (Knight Gilbert Partners v Knight (1968) All ER 248). Issues Concerning Variation Broadly, problems concerning variations arise in three areas: 1. scope (was it a variation or was the contractor bound to do it anyway?); 2. non-compliance with procedural requirements; and 3. valuing the variations. Whether the variation work is within the scope of the contract will depend, firstly, on the terms of the contract, which sometimes beg the question: what is the contract? In many cases, the documents forming the contract are defined. An example is clause 1.1 of PC-1 (PC-1, 1988 Project Contract by Property Council of Australia) which provides:
Contract The contractual relationship between the parties is constituted by: (a) the Formal Agreement to which these Conditions of Contract are attached; (b) these Conditions of Contract; (c) the Contract Particulars; (d) the Works Description; and (e) the other documents (if any) referred to in the Contract Particulars.

Even without such explicit provisions, it is probably true to say that the court will not confine itself to the written agreement alone in determining the scope of the contract: specifications, drawings, correspondence, etc, all form part and parcel of the contract. Having determined the contract documents, there is the further issue of inconsistencies in or between parts of the contract. Different contracts deal with the issue differently. FIDIC, in clause 5(2), provides for a priority list of documents as follows:
The several documents forming the Contract are to be taken as mutually explanatory of one another, but in the case of ambiguities or discrepancies the same shall be explained and adjusted by the Engineer who shall thereupon issue to the contractor instructions thereon and in such event, unless otherwise provided in the contract, the priority of the documents forming the contract shall be as follows: (i) The contract Agreement (if completed).

Variations in Construction Contracts

(ii) The Letter of Acceptance. (iii) The Tender. (iv) Part II of these conditions. (v) Part I of these conditions. (vi) Any other document forming part of the Contract.

The JCC-D 1994 contract (section 2, JCC-D 1994 Building Works Contract without Quantities issued by the Joint Contracts Committee, Australia) provides for a similar precedence of contract documents but goes one step further by requiring the contractor or architect, if they discover any discrepancy, to inform the other. The architect will then give to the contractor an instruction explaining, determining or correcting the discrepancy. Implied or Necessary Works As indicated, whether a particular work is a variation will depend on whether it comes within the general scope of the contract. Some works, although not specifically described, are nevertheless considered as implied or form a necessary part of the contract. An early case on this point is Williams v Fitzmaurice (1858) 157 ER 709. In that case, the contractor undertook to provide 'the whole of the material mentioned or otherwise in the foregoing particulars necessary for the completion of the work' and 'to perform all works of every kind mentioned and contained in the foregoing specifications for the sum of 100.00 pounds'. Flooring was not specifically mentioned and the issue was whether it was included in the contract. The court held that it was. Similarly, in Walker v Randwick Municipal Council (1929) SR (NSW) 84 the contractor agreed to 'do and perform the whole of the works required in or about the construction of a concrete retaining wall'. In performing the works, Walker had to remove a sandbank to construct the retaining wall. The plan (which was not incorporated in the contract) showed the bank to be 6 feet wide. Walker claimed the bank was in fact 12 feet wide and claimed for work and labour in removing the extra 6 feet. The majority of the court held that the contract was an entire one to build a retaining wall at a fixed price and that the risk lay with contractor. Rogers J said (at page 87):
The contract is not to perform the work set out in any plan; all work necessarily required for the construction must be done whether set out in the plan or not.

Formal Requirements - Written Directions A variation is usually effected through an instruction from the principal's architect or superintendent. Such instructions are usually required to be in writing. Whether this is a pre-requisite to the contractor's right to recover payment will depend on whether the requirement is a condition precedent. This is a matter of interpretation of the contract. Lord Blackburn in District Road Board of Broadmeadows v Mitchell (1867) 4 WW & A'B (L) 101 (FC) has this comment: It is common enough to have provisions, as these are here, more or less stringent, saying that no extra work shall be paid for unless it is ordered in writing by the engineer, and if such conditions are properly made, and there is nothing fraudulent or iniquitous in the way they are carried out, these conditions would be quite sufficient and effectual (Tharsis Sulphur & Copper Co v M'elvoy & Sons (1878) 3 AC 1040 at pages 1050-1051). What constitutes 'writing' is sometimes also an issue. In Wormald Engineering Ltd v Resources Conservation Co (1992) 8 BCL 158, sketches in the architect's office describing the variations to be done was held not to be sufficient to satisfy the clause requiring alterations to be directed in writing in the architect's hand, but in Bedford v Borough Of Cudgegong (1900) 16 WN (NSW) 142, a letter signed by the architect authorising the work was held to be sufficient. Recovery in the Absence of a Written Direction Whilst failure to comply, on the whole bars, a claim, there have been cases where courts have allowed the contractors to recover on the basis of an implied promise to pay: Liebe v Molloy (1906) 4 CLR 347, or estoppel: Update Constructions Pty Ltd v Rozelle Child Care Centre (1990) 20 NSWLR 251, or on the basis of unjust enrichment - standing by and taking the benefits: Hill v South Staffs Railway (1865) 12 LT (NS) 63, or on the basis that the works ordered are outside the scope of the contract and, therefore, constitutes a separate contract: Pavey & Mathews v Paul (1987) 61 ALJR 151.

Variations in Construction Contracts

Limitations on the Power to Vary Variation clauses, even if widely drafted, nevertheless have limitations. One such limitation is the issuance of the practical certificate of completion. Commissioner of State Bank v Constain (1983) 3 ACLR 1 illustrates the point that the power to order variations is not in force after the certificate of practical completion as it then reaches the stage for maintenance and rectification of defects. This restriction is now reflected in AS 4000 Clause 40. Secondly, the contractor is not required to undertake works that are outside the scope of the variation clause itself. As Cook J in J & W Jamieson Construction v City Of Christchurch (unreported, 8 November 1984, Christchurch High Court) said:
To my mind, if a variation may fairly be said to be a change to the works as these described, whether it comprised an addition, reduction or substitution to the works or effects the carrying out of the works, then it is a variation which the contractor is under an obligation to carry out, if it is beyond that, it is not.

A third limitation that is sometimes canvassed is this. A variation is defined as something which bears some relationship to the current contract works (Blue Circle Industries plc v Holland Dredging Co Ltd 37 BLR 40 per Purchas LJ). Thus, the variations directed must be 'of a character and extent contemplated by, and capable of being carried out under, the provisions of the contract' (AS 4000 Clause 36.1). A similar qualification is to be found in the JCCD 1994 Contract, Clause 6.10.01 ('Unless otherwise agreed all Variations shall be within the general scope of this Agreement so as to be of a character and extent contemplated by and capable of being executed under the applicable conditions of this Agreement.'). Clauses like these prevent the proprietor from effecting fundamental changes to the building design or works under the guise of variations. Other limitations relate to the right of the proprietor to omit works from the contractor. Generally, the power to vary the scope of works does not allow a proprietor to deprive the contractor of the benefit of that work altogether. In Commissioner of Main Roads v Reid [1974] 131 CLR 378 (see also JA Berriman v Carr (1953) 89 CLR 327), a clause in the contract allowed that:
if sufficient topsoil to meet the requirements of the works cannot be obtained within the right-of-way, the engineer may direct the contractor in writing to obtain top soil from other approved locations.

The contract also contained a clause allowing the engineer to omit any of the works. The engineer, instead of allowing the contractor to obtain the required topsoil from other approved locations, decided to omit the works from the contractor and awarded the works to another contractor, at a cheaper rate. The High Court of Australia held that the clause only gave the engineer the choice between directing the contractor to obtain the topsoil or to omit the works. It did not confer on the engineer the right to have the works performed by a third party. Stephen J (at page 382) made the point that:
Were he [the engineer] legally entitled to do so it would, I think, run counter to a concept basic to the contract, namely that the contractor, as successful tenderer, should have the opportunity of performing the whole of the contract works.

Chadmax v Hansen & Yunken Pty Ltd (1985) BCL 52 is a case that illustrates the dilemma sometimes faced by the main contractor when compelled by the proprietors to omit certain works. In this case, the subcontractor was engaged to install 'wallflex' to stairwells and corridors. The architect subsequently deleted a substantial portion of that particular work from the main contract and the main contractor did likewise with the subcontract. The subcontractor sued the main contractor for repudiation of contract and succeeded. The judge in the first instance, Brebner J, commented that:
I would have held that the power in the defendant to require increases or decreases in or omissions from the sub-contract work or changes in the character or quality of any material a work could not be construed as a power to cancel virtually the whole of the subcontract works.

The main contractor joined the owners as a party to the action but, unfortunately for the main contractor, the 'wallflex' works in the main contract constituted only a minor part and their omission from the main contract was held to be within the general scope of the contract.

Variations in Construction Contracts

Valuing the Variation If the variation falls within the terms of the contract, the rates prescribed will be used to value the work. Clause 36.4 of AS 4000 is one such clause, which also allows a reasonable sum for profits:
36.4 Pricing The Superintendent shall, as soon as possible, price each variation using the following order of precedence:

a. prior agreement; b. applicable rates or prices in the contract; c. rates or prices in a priced bill of quantities, schedule of rates or schedule of prices, even though not
contract documents, to the extent that it is reasonable to use them; and

d. reasonable rates or prices, which shall include a reasonable amount for profit but not overheads.
That price shall be added to or deducted from the contract sum.

In most cases, valuation using the rates prescribed in the contract presents no real problem. But what is the position if the contract is terminated or if the works are carried out under a separate, and usually oral, contract? In such cases, the courts will usually award a reasonable rate or a rate on a quantum meruit basis. As Giles J said in Atlantic Civil Pty Ltd v Water Administration Ministerial Corpn (unreported, 16 October 1992, NSW Supreme Court):
[A] variation was to be valued in accordance with schedule rates so far as applicable or, in the absence of agreement, by determining a reasonable rate a price. No doubt the referee considered that the Schedule rates were inapplicable, and when he referred to 'a quantum meruit basis under the contract' I consider that he meant a reasonable sum for the additional work. Thus, the referee was not assessing a sum outside and in defiance of the contract. In my opinion the defendant's submission was based on a misconception of the report.

Conclusion Variation is almost an inevitable part of any construction claim. Given the competitive environment that the construction industry is usually in, many contractors probably rely on the proprietor's variations to make a reasonable return for their contracts. In addition, variation works commonly affect the completion date and, therefore, impact on delay claims by the proprietor. This explains, to some extent, why the resolution of issues concerning variations is never easy, especially if the dispute is heard way after the building is completed and records are scarce, making physical measurement of the works completed difficult.

Lim Chuen Ren CR Lim Construction Lawyers, Melbourne [Editorial Note: The writer is interested to receive comments and feedback on his article, which may be emailed to: crlim@bigpond.com]