Practical Law

The previous post in this series on variations considered whether a contractor could be entitled to payment for implementing a change in the absence of a formal instruction. It discussed the fact that an employer may grant the contractor permission to alter the works and that this permission may open up a right to payment despite the lack of a formal order. For example, the employer’s communication may represent an agreement to pay for additional works under a collateral contract or a waiver of the normal requirement for a formal instruction as a pre-requisite to payment.

However, the employer may not give such permission and may point blank refuse to alter the scope. Where does this leave the contractor in a claim for payment for the changed works? Can the employer ever be under a positive duty to vary the scope and, if so, can this be relied upon by the contractor to trigger payment?

It should be remembered that there are two consequences of an employer’s refusal to agree a change that a contractor wants to implement:

• Perhaps most importantly, a contractor’s unauthorised departure from the scope amounts to a breach and it may need to undertake corrective work and/or pay damages.
• The contractor will not be entitled to be paid for the unauthorised variation.

Impossibility of building the scope

The solution is, of course, for the contractor to abide by the contractual scope. But life is not so simple. It can often be the case that it is simply not possible to build the contractually defined scope of works. For example, the specification may refer to an item of equipment that is no longer available. The employer’s refusal to agree to any sort of change places the contractor in a very difficult position. It may well feel that it is being penalised for an error in the specification, even though that document was produced by the employer. After all, the only alternative to the specified item of equipment may involve significant extra expense.

If a contractor cannot build the works that are described by the contract scope then it will, of course, be in breach. This is sometimes referred to as the contractor’s buildability obligation. In the absence of express words to the contrary, the contractor promises to deliver the product described by the contract. If it proves to be the case that it is impossible to construct then the contractor is in breach. It does not matter that the specification was drafted by the employer because the employer gives no implied warranty that the contract scope can be built. For example, in:

• Tharsis v McElroy (1878) 3 App Cas 1040, the works involved the construction of steel girders to specified dimensions. However, the contractor discovered during the process of casting them that they were liable to warp and crack if built to the specified dimensions and that it had to build them thicker to avoid distortion. The contractor would have been in breach had the employer not approved the change because the contractor was obliged to deliver the defined product.
• Thorn v London Corporation (1876) 1 App Cas 120, the contractor had promised to build a bridge in accordance with a method of construction that involved the use of caissons to create a dry working environment. The caissons failed and the contractor had to build instead at low tide in a more costly manner. Again, the contractor’s failure to build in accordance with the contractually defined scope meant that it would have been in breach had the employer not been prepared to allow a change.

Express duty to instruct a variation

Some contracts expressly alter the normal balance of risk and specify that the contractor is not under an obligation to build the defined works if this proves to be impossible. Such contracts, which qualify the contractor’s obligation to deliver the defined scope, will often also place on the employer an obligation to instruct a variation in such circumstances. Such complementary provisions are found in the ICC Measurement Contract 2011 (previously known as the ICE suite). Clause 13(1) qualifies the contractor’s obligation to build as follows:

“Save in so far as it is legally or physically impossible the Contractor shall construct and complete the Works in strict accordance with the Contract…”

While clause 51(1) of the same contract states:

“The Engineer… (a) shall order any variation to any part of the Works that is in his opinion necessary for the completion of the Works…”

In Yorkshire Water v Sir Alfred McAlpine (1985) 32 BLR 114, the court considered the same wording as it appeared in the earlier ICE version of this contract. As part of the works, the contractor was required to build an outlet tunnel, constructing in an upstream direction.

This method of working proved impossible and the contractor instead constructed the tunnel in a downstream direction. The court found that the combination of clauses 13(1) and 51(1) meant that the contractor was not obliged to build in the upstream direction since this was impossible and that the engineer was under a positive duty to instruct a variation to allow the works to be built in a downstream direction instead. It went on to find that the contractor was entitled to be paid extra in accordance with the variation instruction that should have been issued. After all, the contractor had only promised to build the defined scope to the extent that this was possible and if it was necessary to implement a change, then this was a variation for which it was entitled to extra money.

Can a duty to vary be implied?

Provisions such as the one found at clause 51(1) of the ICC form of contract, placing a positive obligation on the engineer to instruct a variation if this is necessary for completion, are relatively rare. If there is no express contractual requirement for the employer, or its representative, to instruct a variation in such circumstances, then can one be implied?

The court in Holland Hannen v Welsh HTSO (1981) 18 BLR 80, held that such an implied duty could exist. The contractor had been employed to build a hospital but experienced particular difficulties with the construction of the windows, which leaked. Since the employer had produced the design, the fact that they leaked was not the contractor’s responsibility. However, the water ingress through the windows was so extensive that the contractor could not properly complete other aspects of the project such as the finishing trades. The contractor therefore needed to modify the design of the works and construct something different to the contract scope, if it was going to be able to build non-leaking windows and thereby finish the project.

The court found that the employer was under an implied duty to issue a variation instruction on the basis of the usual implied duty of cooperation. This duty is the basis of all implied obligations placed on an employer and was expressed by Lord Blackburn in Mackay v Dick (at 263):

“Where in a written contract it appears that both parties have agreed that something should be done which cannot effectively be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing though there may be no express words to that effect.”

The court found that without a variation instruction it was impossible for the contractor to complete its works and that this implied term required the employer to issue such an instruction.

Implied duty v buildability risk

The judgment in Holland Hannen arose out of a preliminary issues hearing and sought to address a number of specific questions the parties identified. As such, the court did not comprehensively analyse the parties’ respective liabilities and, in particular, it did not consider the relationship between such an implied duty to vary and the contractor’s buildability obligation. Had it done so, it may have questioned whether a duty to vary can arise where the contractor is in breach of that obligation.

The express duty to vary under the ICC conditions makes sense because that contract also provides that the contractor does not have an obligation to build in accordance with the scope if that proves impossible. But in the absence of such a provision, the contractor will be in breach if it cannot build in accordance with the defined scope, even though (as in Holland Hannen) the employer prepared the design.

If, in such circumstances, the contractor is in breach because it cannot build what has been promised then it seems somewhat illogical to place the employer under a positive obligation to vary the scope. The employer’s implied duty of cooperation is designed to place an obligation on the employer to positively act so as to allow the contractor to fulfil its contract obligations. But, by instructing a variation, the employer is asking the contractor to build something quite different to the planned scope, and is therefore not facilitating compliance with the original contractual bargain. In such circumstances, therefore, it is unclear how the employer can be under an implied duty to vary the scope where the contract does not reverse the usual buildability risk.

This post, and my previous post, considered the extent to which the contractor may have a right to be paid for additional work where the employer has not given an instruction. I considered, in my last post, the way in which a permission to depart from the scope may trigger payment and, in this post, whether a positive duty to instruct a variation may exist. But, when it comes to additional payment under a contract, variations are only half the story. Most contracts also contain other provisions to allow a contractor to claim for additional payments, such as loss and expense or unexpected ground conditions.

Next time

In the next post in this series I will consider the relationship between variations and other contract claims provisions. In particular, whether and to what extent does a contractor have a choice when it formulates its submission for additional entitlements and what may influence its decision.