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.
Normally a contractor will be in breach of contract for undertaking a variation and departing from the scope of the contract where no formal instruction has been
given. An employer may give the contractor permission to depart from the contract scope without instructing a variation under the contractual mechanism.
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.
- The contractor introduces an improvement to the scope without consulting the employer.
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. 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.
Often it will 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
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. 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, it was nevertheless not liable to pay because of the absence of an instruction. The court found that, 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.
Collateral contract. The parties may agree that additional work is undertaken under an entirely new contract that is separate to their original agreement.
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.
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.
Acknowledgement: Thomson Reuters online resource Practical Law Construction Blog
NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is firstname.lastname@example.org.