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Payment for variations with no instruction

In this third post of a series looking at variations, I consider what is probably the most commonly asked question in this area:

Is a contractor entitled to be paid for undertaking a variation where no formal instruction has been issued?

Before answering this question, it is important to remember why construction contracts incorporate variation mechanisms.

A construction contract will define the works that the contractor must deliver and, unless it contains provisions to the contrary, neither party is entitled to unilaterally change the scope. Since changes will often be necessary or desirable, a contract will typically contain a mechanism to allow the employer to order a variation. Therefore, while one consequence of a variation mechanism is to give the contractor the right to additional payment, the principal purpose of the procedure is to alter the contractor’s obligations as to what it is required to build. After all, in the absence of such an instruction the contractor will not normally be allowed to implement a change.

Therefore, while I started this post by saying that I would consider the question of whether the contractor is entitled to extra money for a variation in the absence of an instruction, a slightly different question should perhaps initially be posed:

Is a contractor in breach of contract for undertaking a variation (and thereby departing from the contract scope) where no formal instruction has been issued?

The answer will often be “yes”. But an employer may give the contractor permission to depart from the contract scope without instructing a variation under the contractual mechanism.

Variation instruction versus permission to change scope

It is important to distinguish between:

  • A contractual instruction, which triggers a right to payment under the contract.
  • A permission, which merely allows the change to be made and ensures that the contractor is not in breach.

If the employer only gives permission, then the contractual variation mechanism will not have been operated and the contractor will not, typically, be entitled to payment.

The employer may give such a permission to change the scope without issuing a formal instruction for many reasons, such as:

  • The need to change the scope arises because of the contractor’s failure. For example, an error in construction by the contractor may mean that the design has to be tweaked part-way through the job.
  • The contractor introduces an improvement to the scope without consulting the employer.

Once implemented, the employer may take the view that, while it is happy for the changed work to remain, it is not an improvement that it places great value by, and therefore does not feel obliged to pay extra. As these examples demonstrate, the employer may give such a permission prior, or subsequent, to the contractor making the change.

Variation instructions under different contracts

Whether the employer’s communication to the contractor qualifies as a contractual variation instruction (or instead merely represents a permission) depends on how the contract defines such instructions. Contracts will typically specify that an instruction should be given in advance of the change being undertaken and that it should be in writing. While these stipulations may be typical, they are not uniform.

Some contracts provide that a written communication given after the change has been implemented will constitute a valid instruction triggering the right to additional payment. The JCT 2011 Standard Building Contract is such an example. Contracts such as this, with a broad definition of what may constitute a valid variation instruction, need to be treated with caution. An employer can quite easily issue a communication to the contractor intending to give permission that discrepant works may remain, while inadvertently finding that it has, in fact, issued a retrospective variation instruction providing for additional payment.

Further complications arise if the contract does not stipulate that the instruction must be in writing. For example, some contracts contain a CVI (confirmation of verbal instruction) procedure or may even provide that verbal instructions are valid irrespective of whether or not a subsequent written record has been made. This can lead to yet further uncertainty because, even if it is agreed that the employer approved the variation, if there is no written record, it may be quite unclear whether the employer instructed a variation or simply gave permission for the alteration to remain.

The question I posed at the start of this post was whether a contractor was entitled to be paid in the absence of a formal contract instruction. While the employer may give permission allowing the change, payment under the variations mechanism will typically only be triggered if a valid contractual instruction has been issued. Indeed, most variation disputes arise where the employer has been prepared to allow the change to be made, rather than refusing approval outright.

Turning a permission into gold

Therefore, it will often be the case that the contractor argues that the employer’s permission gives it a right to payment despite the fact that no contractual instruction has been given. The following four grounds are the most common bases on which such an argument is advanced:

  • Waiver. While the parties’ contract may provide that payment for a variation will only be triggered if the employer has issued an instruction in the prescribed form, the employer may waive this requirement. As with any waiver, it is necessary for the party relying on the waiver to establish that there has been a representation and subsequent reliance to its detriment.
  • Implied promise to pay. The principle is illustrated by Molloy v Liebe (1910) 102 LT 616, PC. The employer and contractor disagreed as to whether an item of work was within the contract’s scope or extra and, on this basis, the employer refused to give an instruction. The contractor undertook the item of work and subsequently sued for payment. The court found that the item of work was outside scope and therefore was additional, whereupon the employer argued that irrespective of this finding, it was nevertheless not liable to pay because of the absence of an instruction. The court found that the employer had refused to give a formal instruction solely because of the disagreement as to the extent of the scope. Therefore, when the item of work was undertaken the employer must have been impliedly promised that it would pay if it was subsequently established that it was wrong as regards the disputed scope.
  • Variation of the contract itself. The product that one party agrees to deliver under a contract represents one of the contractual provisions. The parties can agree to change the stipulated product in the same way that they can agree to change any other contract provision. The variations mechanism is a procedure that empowers the employer to unilaterally order changes to the scope but there is no reason why variations cannot be agreed between the parties ad hoc.
  • Collateral contract. The parties may agree that additional work is undertaken under an entirely new contract that is separate to their original agreement. As such, it is not necessary for the variation procedure under the original contract to be operated.

Establishing a right to be paid under one of these four grounds may superficially appear easier to establish because it will not be necessary to demonstrate that a formal contract instruction has been issued. But other challenges arise. Not least, that it will normally be the case that the employer itself has to agree to the waiver, change or extra work.

Typically, a contractor’s dealings on the project will be with the contract administrator but that individual will not normally have the authority to agree to bind the employer. If, for example, the contractor wants to establish that a variation of the contract itself has been agreed then it will need to show that this has been agreed directly with the employer. The contract administrator, acting as agent of the employer, will not have authority to bind its principal.

It should be emphasised that in order for any of these four grounds to be made out the employer will need to have given consent for the change to be made. Typically, therefore, they arise where the employer maintains that it has given permission but not a formal instruction. It can, instead, be the case that the employer pointedly refuses to approve any change to the works, whether as an instruction or permission. In such circumstances, the contractor will need to establish that the employer was under some form of positive obligation to give approval.

Next time

The next post in this series on variations will consider whether the employer can ever be under such a duty to consent to a change to the scope.

Holman Fenwick Willan LLP Michael Sergeant

8 thoughts on “Payment for variations with no instruction

  1. Some contracts regulate that if the contractor needs a variation, it should send to the employer the cost, HSE, legal and financial impacts of such variation on the project. Also some contracts state that the variation shall be instructed through a form introduced in the contract.

    The employer may after its instruction, by invoking contractual provisions and the excuse that contractual formalities have not been observed (variation has not been instructed via the defined form and analysis of impacts have not been submitted by the contractor) state that such instruction does not entitle the contractor to any payment.

    1. Erfan

      You are absolutely correct to point out that an employer may refuse to pay for extra work on the basis that it has not been instructed in accordance with the contract mechanism. The starting point for any contractor is to ensure that it follows the process set down in the contract – whatever that may be – and as you point out the contract mechanism can involve many hoops.

      But it is important that we don’t forget that the contract variation mechanism represents only one way in which a contractor may be entitled to be paid for changes to the scope. Suppose I hire a builder to refurbish my kitchen and the “scope” includes plastic work-tops. Then, on day one, I orally agree with the builder that he will use more expensive wooden work-tops. Even though our written contract says that “all variations must be in writing”, I cannot refuse payment. The builder and I have agreed to change the scope of works. We have agreed a variation of our contract (see bullet point “Variation of the contract itself” in above post). In other words, the contract mechanism is important but it is not the only basis on which a contractor can get paid for additional work.

      Michael

  2. Michael

    Thanks for an interesting article.

    Just one question – would a ‘variation of the contract itself’ not need to be supported by sufficient consideration?

    Thanks,

    Dean

  3. Dean

    You’re absolutely correct to say that a variation of the contract itself would need to be supported by consideration. So, it will typically be the case that a contractor will undertake additional work and claim payment, on the basis that the parties’ agreement to vary the scope involved the employer expressly or impliedly agreeing to pay for the extra work.

    The employer may argue that the contractor’s additional work was undertaken without any discussion about a price increase and that it was understood between the parties that the work was within the original lump sum and/ or the contractor would not charge extra for this work. For example, see Gilbert v Knight [1968] 2 All ER 248, which related to an employer/ consultant (rather than contractor) situation although the principle is the same. The consultant undertook extra work with the agreement of the employer but the court found that the employer was entitled to expect the extra work to be within the lump sum price because if the price was going to be altered then one would expect clear agreement to this effect.

    Of course, a variation to the scope does not always require an express agreement as to the additional price to be paid. It there is no express agreement then the courts will imply a reasonable sum.

    The employer in the Gilbert case was an individual with no experience of the building trade and the court’s conclusion needs to be considered against that background. Such an argument is less likely to succeed in a commercial situation.

    Michael

  4. If an instruction is given in writing, however it is not agreed to or the sub-contractor does not want to carry out the variation due to mitigating factors, do they have to under the contract? Simply can a written instruction be refused?

  5. We are a firm of Contractor and did some work for the Employer. In the process, there were extra works which was not part of the Contract. The extra works were done and the Employer is now refusing to pay , claiming it was not part of the Contract .
    As the Contractor, do we have any legal rights for payment towards the extra works.

    Thanking you

    1. It may be possible to claim for payment under a quantum meruit (which is a claim for a reasonable sum for the work done and the materials supplied). It can arise in circumstances such as the one you describe, where the parties have agreed a scope of work under the original contract, but work falls outside that scope (for example, if additional work is carried out at the employer’s request and those works do not fall to be valued under the contract’s variations mechanism).

      However, I cannot advise you on whether this principle may apply in your case, but it is one worth exploring further.

  6. Thanks for the informative article. We are facing issues from the Engineer’s comments on our design submissions. We have a group of Engineer’s representatives reviewing our submissions and their comments are clearly asking for additional scope. Usually, our design team incorporated their comments in our design submissions in order to get approvals. For example, the reviewers are requesting spare capacity on certain areas of our system and they were not specified in the contract. Can we treat these comments as instructions to variations and request payment for them?

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