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The contract administrator’s discretion in relation to variations

The contract administrator has two distinct roles in relation to variations under most construction contracts:

  • Responsibility for issuing variation instructions on the employer’s behalf.
  • Undertaking the necessary valuation and determining how much money the contractor is due.

The contract administrator’s decisions made under both roles can prove contentious. But how much discretion does it have in undertaking those roles and to what degree can its decisions be challenged?

Different roles

There are fundamental differences between these two roles.

When a contract administrator instructs a variation it is acting as the employer’s agent. The variations clause gives the employer the power to alter the contract scope. This power to change the scope is normally triggered by the contract administrator issuing an instruction and, as discussed in my last post, it is important that it has the employer’s approval when undertaking this function. But since the employer is entitled to decide what is built, naturally you would expect the power to vary to be subject to challenge.

This may be contrasted with the valuation role where the contract administrator acts as the certifier and has a duty to act fairly as between the parties. In this role it is, quite plainly, not acting as the employer’s agent but rather as a referee determining the parties’ entitlement in accordance with the contract’s provisions. As such, you would expect the process to be subject to the scrutiny of the courts, adjudicator or arbitrator because the valuation must be undertaken in accordance with the rules of the contract and not left to the contract administrator’s unfettered discretion.

While this distinction between these two roles, and the degree of discretion that applies to them, broadly holds true there are important exceptions. In particular, there can be constraints on the freedom to instruct variations and limits on the parties’ power to challenge valuations.

Valuation role: discretion to choose

Most construction contracts contain quite detailed rules setting out how variations should be valued, whether this is by reference to rates in a bill of quantities, a separate pricing schedule, a breakdown of lump sum prices or even market rates. The contract administrator is obliged to follow those rules. There may be a debate as to whether the contract administrator has followed the rules but, normally, there are clear pricing rules that must be followed.

However, contracts are not always drafted in this manner and the parties need to be alive to the differences that then arise.

Contracts will sometimes provide that the valuation is within the certifier’s discretion rather than having to be assessed in accordance with specified rates and rules. This is what occurred in the Australian case, WMC Resources v Leighton Contractors. The employer was the certifier under the contract (although the same principles would apply if there was a third party contract administrator operating under the same provisions). The contract provided that the parties should seek to agree the valuation of all variations but, in the absence of agreement, the certifier (the employer) “…shall… determine such value in its sole discretion”.

The court recognised that this provision did not require the valuation to be undertaken by reference to objective criteria, such as specified contract rates. Instead, the contract gave the certifier the power to assess entitlement by reference to its sole discretion. This being the case, there were very limited grounds on which any objection could be raised. Since the certifier was entitled to use its absolute discretion there were no grounds on which the court could determine that its assessment was incorrect.

This is not to say that, in these circumstances, there will be no basis on which to challenge the certifier’s valuation. The contract administrator must undertake the process in accordance with the usual standards of independence and honesty. But the usual expectation that the valuation of a variation can be challenged because it is not in accordance with contract, market rates or reasonable cost will not always hold true. The contract administrator may have an absolute (and unchallengeable) discretion on what the correct figure is.

Instructions: limits on discretion

The decision whether or not to issue an instruction ordering a variation will normally be entirely within the employer’s discretion, with the contract administrator typically acting as its agent. However, again, things are not entirely clear cut as to the degree of discretion that may be exercised.

We are used to situations where a contract administrator’s decision, determination or award is opened up and revised by a tribunal because it has “got it wrong”, for example, in the assessment of an extension of time. But you would have thought that the decision to change (or not change) the scope of works could not be said to be either “right” or “wrong”. However, it all depends on the context and there is judicial authority from the highest level which indicates that the decision not to issue a variation instruction can be viewed in this way.

The House of Lords case, Brodie v Corporation of Cardiff, involved the construction of a reservoir in Wales. Part way into the project the engineer told the contractor that it had to use “Cyfartha clay”, which the contractor considered to be a change to the scope on the basis that the contract allowed the use of the cheaper “Neath clay”. There was a disagreement between them as to the type of clay the contract specified and the engineer refused to issue a formal variation instruction (required under the contract to trigger payment) for Cyfartha clay on the basis that this was what the contractor was required to use anyway.

The contractor undertook the work using Cyfartha clay and then commenced an arbitration claiming additional payment. The arbitration clause allowed the arbitrator to review and revise any certificate, decision or finding of the engineer, and questions concerning the extent of the arbitrator’s powers ended up before the courts.

The House of Lords found that the engineer’s decision not to issue a variation instruction in such circumstances was indeed something that the arbitrator could validly open up and revise, if the engineer had wrongly refused to give the instruction. This does not, of course, mean that any refusal by a contract administrator not to issue a variation instruction is wrongful. The employer is, after all, entitled to decide on what changes it wants to make to the scope. The refusal in this situation was wrongful because the engineer’s assessment of whether Cyfartha clay was (or was not) required under the contract scope was incorrect. The engineer’s interpretation of the scope was found to be misjudged and therefore a variation instruction should have been issued.

On the question of whether the contract administrator should have issued a variation instruction, the court was able to intervene and determine that it had “got it wrong” because this turned on an objective assessment of whether the work was within the contract scope. In this sense, the tribunal was reviewing the contract administrator’s decision-making process in the same way as it would when opening up and revising an extension of time assessment. It was not seeking to determine whether the employer should have changed the scope, since the engineer had made it clear that the Cyfartha clay was required.

Next time

In the next post in this series, I will look at the substantive issues that underlie valuations by considering some of the difficult legal issues that arise in determining the sum due to the contractor for such changes to scope.

Holman Fenwick Willan LLP Michael Sergeant

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