REUTERS | Jason Lee

Liability for variations

This is the first of a series of bi-monthly blog posts on the subject of variations.

This post deals with a subject that should be considered the logical starting point for any discussion about extras: the scope of works. After all, in order to assess whether something is a variation, it is first necessary to determine what the contract requires the contractor to build.

Scope of works

Disagreements concerning the scope of works are common. Ultimately, this is often the case because the product being delivered under a construction project is technically complex and is described in a large number of overlapping technical documents appended to the contract. Those documents will have often been produced by different people coming to the project from different perspectives. Perhaps inevitably, there will often be contradictions between the different technical documents or even gaps in what they are describing. This leads to uncertainty as to how the scope should be interpreted.

Resolving ambiguities in scope of works

In seeking to resolve such ambiguities it will be necessary to draw upon the common law principles of contract interpretation. The aim of such principles is to determine the common intention of parties which leads, for example, to the courts placing greater weight on documents drafted specifically for the project as opposed to standard boilerplate documents.

In addition to such common law principles, the contract itself will typically provide some assistance as to how discrepancies are resolved. For example, contracts will often provide a priorities clause, setting down the relative priority that the different technical documents should be accorded when resolving contradictions between them. Another common contract strategy to the resolution of such errors is for the contractor to undertake a review in the first few weeks of the project, and for any contradictions not notified within that time scale to be interpreted against the contractor.

Therefore, where the specification refers to a component being made of steel and the drawings refer to it being made of titanium, the common law principles and the contract provisions will both need to be considered in order to resolve the discrepancy.

While such inconsistencies in the description of the works can be open to a variety of arguable interpretations, the principles involved are relatively straightforward. The aim is to determine the common intention of the parties by seeking to read the various contract documents together while using common law principles and the relevant contractual clauses to resolve differences. This, in turn, will often mean that one description of the works will be favoured above another.

Contractor’s wider contractual obligations

Determining what the contractor is required to build assumes a greater level of complexity when you also need to take into account the contractor’s wider obligations under the contract. The contractor may be obliged to undertake additional or altered works either in order to satisfy its obligations as to the performance of the project or because it has taken the risk in relation to certain risks arising, such as the discovery of unexpected ground conditions.

For example, suppose a design and build contractor agrees to construct a facility in accordance with a defined scope with a fitness for purpose warranty. During the course of construction it transpires that the facility will not achieve the fitness for purpose standard and the design needs to be changed. The technical scope will need to be altered so as to ensure that the contractor’s warranty as to the performance of the works is achieved.

Where the technical scope is inadequate to achieve the performance warranties something has to be changed. The contractor will otherwise be in breach. This is not a situation where there is a discrepancy between two contradictory descriptions in a scope of works, where one can be preferred and the other ignored. The contractor has promised to do both, that is, to build in accordance with the description of the works so as to achieve the performance warranty. This is the equivalent of someone agreeing to sell their 20 year old, one litre engine car while promising that it will accelerate 0 to 200mph in three seconds. The scope will not achieve the performance standard.

MT Højgaard A/s v E.ON Climate and Renewables

MT Hojgaard v E.ON, a case reported last year, concerned the construction of the foundations for a wind farm off the UK coast. One element of the work involved the use of an industry standard called J101. However, as well as agreeing to build in accordance with this standard industry specification, the contractor also gave a 20 year warranty in respect of the works. After completion, it transpired that there was an error with the standard industry specification and the foundations would not last for 20 years without subsequent remedial works. The contractor argued that there was a contradiction between these different provisions which described the works and that the 20 year warranty could be rejected as part of the process of interpretation. The court agreed with the employer that the contractor had agreed to do both, that is to build in accordance with the industry standard along with a promise that the works would last 20 years.

Altering the scope of works

In MT Hojgaard, the deficiency in the scope only became apparent after completion. Where such a problem becomes apparent during the construction phase an alteration to the scope will need to be agreed. Even though the contractor is responsible for the change, it is likely that this will be treated as a variation under the contract. After all, a variations process is there to give the employer control over what is being built. While the onus will be on the contractor to find a design solution that will ensure that the scope is altered, such that the performance warranty can be satisfied, this will still be an alteration to the scope that the employer must approve.

But whether a change to the planned scope, necessitated by the need to achieve a performance warranty, is a variation ultimately depends on the contract provisions. In certain circumstances, an employer may be happy to structure the contract to give the contractor control over such changes.

For example, if the employer wants a facility that simply produces a defined product and it has no preference as to how this is achieved, then it may have no desire to influence the design solution. Suppose the contract involves the construction of a process plant that is required in order to produce certain specified products, then the employer may define the subject matter by reference to the “outputs” that the plant must supply. All the employer cares about are the performance warranties rather than the scope describing how the facility will be built and what it looks like. In such circumstances, the employer may give the contractor the discretion to move away from the original design solution without the need for such changes to be approved as a variation, provided that the plant achieves the performance outputs specified. Indeed, it may be preferable not to instigate what could be a time-consuming variation approval process since this could result in delay that the employer is responsible for.

The approach taken to temporary works and the method of construction is a further example. Many contracts define the variations that an employer may instruct as including changes to the temporary works or construction methodology. But, equally, an employer may take the view that the scope of works that the contractor is obliged to follow should only include the permanent works, with decisions as to how the works are built being left to the contractor. Changes to the planned method of construction would not then be a variation and would not need employer approval.

The approach to be adopted will depend on the project and, crucially, whether the employer has a legitimate interest in controlling how the works are undertaken.

If the change to the scope is required because of a risk for which the contractor is responsible then the employer will not expect to pay for the variation. But it may be necessary to follow the variation process even though the employer does not plan to pay for the change. It should be remembered that the variations mechanism is primarily there to give the employer control over changes to the scope. If the contractor makes an alteration without approval then it will be in breach. And just because the employer approves the variation does not mean that it will be liable to pay for it.

However, employers need to be very careful when it comes to instructing variations in such circumstances. Cases have arisen where an employer has been found to be liable to pay for an instructed variation even though it was only required because of the contractor’s design failure. This was the surprising outcome in Simplex Concrete Piles v Borough of St Pancras (1958) 14 BLR 80, which will be considered in the next post in this series.

Holman Fenwick Willan LLP Michael Sergeant

2 thoughts on “Liability for variations

    1. While Hojgaard v E.ON has been overturned by the Court of Appeal, the decision turned on the correct interpretation of the contractual obligations and the scope of works. In other words, the principle that a contract can require the contractor to (i) build in accordance with a description or specification, but also (ii) achieve a particular result or performance obligation, is still valid. It is just the case that while, at first instance, the court interpreted the contract provisions in this way, the Court of Appeal placed a different interpretation on the agreement.

      The above post quoted Hojgaard in order to illustrate this principle that such a dual, and contradictory, duty can exist. See the Court of Appeal confirmation of this general principle at paragraph 79 of the judgment. Two Canadian cases, also referred to in both the first instance and Court of Appeal Hojgaard judgments also illustrate the point, being cases where the contract in question was found to contain such a dual obligation: Steel Co of Canada v Willand [1966] SCR 746 and Greater Vancouver Water v North American Pipe [2012] BCCA 337.

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