A workshop on variations in construction contracts.

1. Gareth (ap) Morgan and Louise Forbes
gareth.ap.morgan@olswang.com
louise.forbes@olswang.com
Construction Law Masterclass 5 July 2016
Variations and their consequences

2. |
Introduction
5 July, 20162
1. What is a variation?
2. Why have a variation clause?
3. Do I have a variation?
a) Is the instruction outside of the scope of the Works?
b) Was the variation instructed 'correctly'?
4. When variations become necessary
a) Contractor's wider obligations
b) Other 'necessary' variations
5. Procedures for varying Works
6. Anti-oral variations
7. Agency
8. Omitting work

3. |
What is a variation?
constructiveblog.com3
• In a construction context - a change to the Works to be carried out under the
building contract
• Includes any change to the Works':
• quantity,
• quality, and/or
• (potentially) sequencing

4. |
What is a variation? – JCT Definition
constructiveblog.com4
JCT Intermediate Building Contract with contractor's design 2011
5.1 The term ‘Variation’ means:
5.1·1 the alteration or modification of the design, quality or quantity of the Works
including:
5.1.1.1 the addition, omission or substitution of any work;
5.1.1.2 the alteration of the kind or standard of any of the materials or goods
to be used in the Works;
5.1.1.3 the removal from the site of any work executed or Site Materials other
than work, materials or goods which are not in accordance with this Contract
(continued)

5. |
What is a variation? – JCT Definition continued
constructiveblog.com5
5.1.2 the imposition by the Employer of any obligations or restrictions in regard to the
matters set out in this clause 5·1·2 or the addition to or alteration or omission of any
such obligations or restrictions so imposed or imposed by the Employer in the
Contract Documents in regard to:
5.1.2.1 access to the site or use of any specific parts of the site;
5.1.2.2 limitations of working space;
5.1.2.3 limitations of working hours; or
5.1.2.4 the execution or completion of the work in any specific order."
• Defined as a 'Change' under the JCT Design and Build 2011
• JCT Minor Works contracts 2016

6. |
Why have a variation clause?
constructiveblog.com6
• Preserves the contract while allowing changes, which are often inevitable in long
term contracts. It therefore gives the Employer the flexibility to make changes so
that it can get the product it wants, within the timescale it requires and potentially
at the same or similar prices to that already agreed.
• Ensures that the contract is not frustrated, if it is impossible to carry out the
previously agreed work.

7. |
Do I have a variation? Ambiguity in the scope of works (1)
constructiveblog.com7
• Disputes often occur over whether or not particular works instructed by or on behalf
of the Employer already form part of the Works
• Contradictions between the different technical documents or gaps in what they are
describing can lead to uncertainty as to how the scope should be interpreted
• Generally speaking, to be included within the contract, work must be described in
some part of the contract documents, or be reasonably inferred from those
documents
• Important to consider the precise wording of the underlying requirement to carry out
the Works, as there may be differences in how "all encompassing" such wording
might be

8. |
Do I have a variation? Ambiguity in the scope of works (2)
and entitlement to payment
constructiveblog.com8
• Contract itself will typically provide some assistance as to how discrepancies are
resolved (such as a priorities clause) but common law principles of contract
interpretation will apply
• Entitlement to payment
• No automatic entitlement
• The contractor will have to show that, on a true construction of the contract, there is an
express or implied right to payment for the variation in question. That is:
• The work was outside the scope of the work the contractor agreed to carry out for the
contract sum; and
• The employer needs to have expressly or impliedly agreed to pay for it
• 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
• Depends on the facts of the case

9. |
When variations become necessary - contractor’s wider
contractual obligations
constructiveblog.com9
• 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
• Fitness for purpose warranty - where the technical scope is inadequate to achieve
the performance warranties something has to be changed. The Contractor will
otherwise be in breach
• MT Højgaard A/s v E.ON Climate and Renewables even though the scope of works
didn't achieve a specific performance, the Contractor had provided a 'fitness for
purpose' warranty – the Contractor was therefore obliged to expand the scope of
the works so as not to be in breach of the warranty

10. |
When variations become necessary – other 'necessary'
variations
constructiveblog.com10
• Change to the statutory regime (e.g. Building Regulations)
• The correction of errors in the description of the Works
• Situations may arise under a JCT Standard Building Contract with quantities
2011 where items of work that are required to be undertaken (and shown on the
drawings) are not included in the bill of quantities. Clause 2.14.1 states that
omission of such items will be automatically corrected and will be treated as a
variation (clause 2.14.3)
• Under the JCT Design and Build 2011, if a design error is identified in the
Employer’s Requirements then the Employer’s Requirements are treated as
being altered, unless the contractor has taken on responsibility for/ is warranting
the accuracy of the ERs…

11. |
Do I have a variation? Ambiguity in the instruction
constructiveblog.com11
• Was the varied work a change to the original contract or did it create a fresh
contract?
• Was the work ordered within the scope of the variations clause?
• Were the notice provisions (if there are any) complied with?
• Were the notice provisions a condition precedent?
• Not necessarily required to include information in the notice of which the other party is
already aware (Walter Lilly v Mackay)
• Does failure to comply with the notice provisions imply that the party varying the
contract didn't really mean to do so (an 'accidental' variation)?
• Can it be argued that the employer has waived any notice requirements or is
estopped from insisting on compliance with them?

12. |
Procedures for variation
constructiveblog.com12
• Depends on the wording in your contract, but it is best practice to deal with all
variations in writing
Clause 3.12.1 of the JCT Standard Building Contract with Quantities 2011 Edition
reads:
“Where the… Contract Administrator issues an instruction otherwise than in writing, it shall
be of no immediate effect but the Contractor shall confirm it in writing to the… Contract
Administrator within 7 days, and, if he does not dissent by notice to the Contractor within 7
days from receipt of the Contractor’s confirmation, it shall take effect as from the expiry of
the latter 7 day period.”

13. |
What is an Anti-Oral Variation Clause?
5 July, 201613
• Seeks to restrict any amendments to the agreement only to those variations agreed
by the parties in writing
• Often found in or alongside an 'entire agreement' clause. Subtle distinction.
• "No variation of this agreement shall be effective unless it is in writing and signed by the
parties (or their authorised representatives)."

14. |
Why use an Anti-Oral Variation Clause?
5 July, 201614
• Variations can be made either orally or also by conduct
• To exclude the possibility of informal or inadvertent variations being made to the
agreement
• Designed to prevent disputes arising out of informal exchanges that may waive
particular requirements, change deadlines etc.
• Historic position on AOV clauses traditionally unclear:
• United Bank Ltd v Asif - no oral variation of the written terms could have any legal effect
• World Online Telecom Ltd v I-Way - "[i]n a case like the present the parties have made
their own law by contracting, and can in principle unmake or remake it"

15. |
Globe Motors Inc v TRW Lucas Variety Electric Steering Ltd
[2016] (1)
5 July, 201615
• Contained the following clause:
"6.3 Entire Agreement; Amendment
This Agreement, which includes the Appendices hereto, is the only agreement between
the Parties relating to the subject matter hereof. It can only be amended by a written
document which (i) specifically refers to the provision of this Agreement to be amended
and (ii) is signed by both Parties."
• Court of Appeal addressed the conflicting case law of the past:
• "The parties have freedom to agree whatever terms they choose to undertake, and can
do so in a document, by word of mouth, or by conduct. The consequence in this context
is that in principle the fact that the parties' contract contains a clause such as Article 6.3
does not prevent them from later making a new contract varying the contract by an oral
agreement or by conduct."

16. |
Globe Motors Inc v TRW Lucas Variety Electric Steering Ltd
[2016] (2)
5 July, 201616
"The governing principle, in my view, is that of party autonomy. The principle of
freedom of contract entitles parties to agree [upon] whatever terms they choose,
subject to certain limits imposed by public policy ... The parties are therefore free to
include terms regulating the manner in which the contract can be varied, but just as
they can create obligations at will, so also can they discharge or vary them, at any
rate where to do so would not affect the rights of third parties. If there is an analogy
with the position of Parliament, it is in the principle that Parliament cannot bind its
successors."

17. |
What does this all mean?
14 June 201617
• Clarification but still only obiter commentary…
• Principle of freedom of contract has been favoured
over any policy arguments (i.e. promote certainty /
avoid frivolous claims of oral agreements)
• Never assume an anti-oral variation clause will be
effective
• Are anti-oral variation clauses effectively
pointless? No…
• Still have value for two reasons:
• Evidentiary value – harder to establish a variation
• Practical value – encourages good practices

18. |
Time bars to claims
constructiveblog.com18
• 20.1 of the FIDIC Conditions: if a contractor wishes to claim an extension of time
or additional payment it must give notice no later than 28 days after it became
aware, or should have become aware, of the event or circumstances giving rise to
any such claim
• NEC 3rd Clause 61.3: Contractor notifies PM within 8 weeks of becoming aware of
an event which has happened or which he expects to happen

19. |
Agency - who authorised the variation?
constructiveblog.com19
• 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 the contractor needs to
be alive to the question of whether the agent is acting with the principal’s (the
employer's) authorisation
• The contract between the employer and the contract administrator will often set
down limits and procedures for instructing changes
• 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.
• 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

20. |
Valuing a variation
constructiveblog.com20
• The contract may contain a mechanism to value the variation.
• For example, under clause 5.2.1 of the JCT SBC11 with quantities and with
approximate quantities, the value of any variation "shall be such amount as is
agreed by the Employer and the Contractor or, where not agreed... valued by the
Quantity Surveyor" in accordance with the valuation rules of the contract
• This contract also contains an alternative mechanism for valuation, where the
contract administrator may ask the contractor to submit a "Variation Quotation"
when the variation is instructed. If the quotation is accepted by the contract
administrator, it takes the place of a valuation under the valuation rules
• For other JCT forms, the concept of a "Variation Quotation" does not exist, but the
valuation rules are nevertheless set out expressly

21. |
Omitting Work (1)
constructiveblog.com21
• Usually the case that a contractor is entitled to perform all the contract work
• Contract clauses that permit omissions generally address situations where the
employer does not wish to have the work carried out at all, as opposed to where
the employer wants to take work away from the contractor and engage another
contractor to carry it out
• However, where the contract carries a power for the employer to order additional
work, there is no implied term that if the employer requires additional work, it must
employ the contractor to carry it out
• AMEC Building Ltd v Cadmus Investment Company The architect instructed the
omission of certain fitting out work covered by a provisional sum in the contract.
The court held that withdrawal was arbitrary and the contractor should be
compensated

22. |
Omitting Work (2)
constructiveblog.com22
• Abbey Developments Ltd v PP Brickwork Ltd The court held that the contractor had
a duty to carry out the work it contracted to do and a corresponding right to be able
to do so. Variation provisions of contracts that allow an employer to vary the work
should be construed carefully so as not to allow the contractor to be deprived of its
opportunity to carry out the work
• Trustees of Stratfield Saye Estate v AHL Construction One week into the works, the
employer cancelled the works. The contractor started an adjudication for
compensation for cancellation of the works. While the issue of enforceability of the
adjudicator's award was before the court, it also considered whether there was a
contract for a defined scope of work. The court approved Abbey Developments and
held that the employer's power to omit works was limited. The employer could not
change the basic nature of works by omission

23. |
For more information please contact
Olswang:
Changing Business.
www.olswang.com
Gareth (ap) Morgan
+44 20 7067 3535
gareth.ap.morgan@olswang.com
Louise Forbes
+44 20 7067 3632
louise.forbes@olswang.com
Brussels
+32 2 647 4772
London
+44 20 7067 3000
Madrid
+34 91 187 1920
Munich
+49 89 206 028 400
Singapore
+65 6720 8278
Paris
+33 17 091 8720
Thames Valley
+44 20 7071 7300