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Contract administrators’ liability for variations

Most employers will want to limit variations as a means of controlling costs. However, on a day to day basis, the power to instruct variations lies with the contract administrator.

Proactive and successful project management may require the contract administrator to direct the contractor without going back to the employer on every occasion. But, if the contract administrator instructs changes that the employer has not authorised, will the employer be liable for the cost of this work?

Underlying principles

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, as with any agency situation, the third party (that is, the contractor) needs to be alive to the question of whether the agent is acting with the principal’s (the employer) authorisation.

When the contractor receives a variation instruction from the contract administrator it has no idea whether the employer has authorised the change. Despite this, the contractor knows it can rely on the instruction because, using the language of the law of agency, the contract administrator has apparent or ostensible authority. In other words, the fact that there is a variations clause in the contract means that the employer has held the contract administrator out as having authority to act on its behalf in this manner, even if this is not actually the case. Provided that the contract administrator’s order is instructed in accordance with the variation clause’s limitations and procedures, then it will bind the employer vis-a-vis the contractor and it will have to pay for the change.

No employer authority for change

On the other hand, the contract between the employer and the contract administrator will often set down limits and procedures for instructing changes. For example, clause 11.1 of the RICS Standard Form of Consultant’s Appointment (entitled “Consultant’s Authority”) states:

“…the Consultant has no authority to do any of the following on the Client’s behalf without the Client’s prior written consent:

(a) Vary the agreed design or specification of work of materials or their quality or quantity from that described in the Building Contract;

(b) Subject to any greater limit of expenditure stated in the Appendix, issue any instruction or notice under the Building Contract or any Client Contract which either delays completion of the Project or increases the cost of the Project (per item or in the aggregate)…”

Consultants’ appointments are often bespoke agreements and the constraints placed on a contract administrator’s discretion to instruct variations are many and varied, such as limiting the value of individual variations that may be instructed without employer approval. But, as an example, the RICS Appointment clause quoted above is extremely extensive and effectively requires the consultant to obtain the employer’s consent for any instructed change.

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, as outlined above.
  • 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.

As with many employer and consultant/contract administrator disputes, the parties typically reach an amicable resolution but such cases do occasionally come before the courts. For example, William Clark Partnership v Dock St PCT (a TCC judgment from last year) involved a project for the construction of a primary health care centre that had run over budget. The court found that the consultant was liable for instructing a number of “unnecessary” variations, the cost of which the employer was entitled to deduct from its outstanding fee account.

Consultants’ procedures

A consultant who is understandably concerned about the extent of its potential liability, may want to introduce procedures that ensure the employer’s consent is obtained in respect of each and every variation instructed on the project. This is fine, in theory, but will be extremely difficult to operate in practice in the context of the provisions that pertain under most construction contracts.

Most construction contracts provide that a variation instruction can amount to any written communication requiring a change to the contract scope. It does not need to be a communication that is formally identified as a variation instruction and therefore any informal email between the consultant team and the contractor’s team will normally qualify. The consultant team may email the contractor requiring it to proceed with certain works that it considers form part of the original scope but which, on closer reflection, prove to be an alteration.

With the best will in the world, it is often far from easy to determine what is, and what is not, a change to the scope, especially where the contractor has design responsibility. As the contractor develops the design, it will seek the consultant’s approval and comments on the detailed design and proposed materials. The approvals and comments given during this process can prove to amount to variations depending on exact details and circumstances. However, determining on which side of the line such a communication falls can prove to be a contentious and complex process, often involving finely balanced exercises in contract interpretation.

The consultant will therefore not necessarily know whether an email could prove to be a variation instruction and it can hardly ask the employer to authorise every communication in advance.

Restrictions on changes within the contract

If employers want to be consulted on changes then you could ask why don’t they include this provision in the construction contract itself? As discussed, the contractor can only rely upon a variation instruction if it is issued in accordance with the contractual limits and procedures. For example, a contract could say that no variation can be instructed for works above £1,000 unless countersigned by the employer.

The contractor would then know that any change above this limit, which was only directed by the contract administrator’s informal email, was not authorised. The contract administrator does not have ostensible authority to order such a change because this is made clear by the contract provisions. Therefore, if the contractor undertook the work, the employer could refuse to pay because under agency law a principal (the employer in this example) is not bound to an agreement where the agent does not have either actual or ostensible authority.

While such an approach could be said to give the employer the control it desires, it leads to an entirely different set of problems. The administration of the project will become considerably more burdensome and expensive as the contractor will understandably refuse to comply with day to day instructions while waiting for formal counter-signed approvals from the employer on quite simple matters.

The typical contractual variations mechanism operates a streamlined process that allows for efficient project management. But, if it is allied with a restrictive approval process in the consultant’s appointment, it can leave the contract administrator in a difficult position.

Next time

In the next post in this series on variations, we will continue looking at this issue from the perspective of the contract administrator, with a review of the duties owed when carrying out the functions of directing and valuing change.

Holman Fenwick Willan LLP Michael Sergeant

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