WHEN DOES A VARIATION IN CONSTRUCTION BECOME A SEPARATE CONTRACT?

Most standard forms of contract include a clause under which the employer or his representative is able to issue an instruction to the contractor to vary the works which are described in the contract. A change in shape of the scheme, the introduction of different materials, revised timing and sequence are all usually provided for by the variations clause. It will also usually include a mechanism for evaluating the financial effect of the variation and there is normally provision for adjusting the completion date. In the absence of such a clause the employer could be in a difficulty should a variation to the works be required. The contractor could either refuse to carry out the work or undertake the work and insist upon payment on a quantum meruit or fair valuation basis. Calculation of the price for the extra work applying this method could involve payment well in excess of the contract rates.

Separate Contract

Even where a contract includes the usual variations clause there may be circumstances which could lead to additions or changes introduced by the employer which falls outside the variations clause. Contractors who find themselves with unattractive contract prices would find it to their advantage to be able to argue that a change introduced by the employer fell outside the variations clause thus leaving the way open to argue that payment for the change should be on a quantum meruit or fair valuation basis.

This situation arose in the UK case of Blue Circle Industries v Holland Dredging Co (1987). The works involve dredging in Larne Lough in Ireland to enable larger vessels to dock. The tender referred to the dredged material being deposited in areas approved by the public authorities, the intention being to discharge the material excavated in suitable areas in the lough. Resistance to the plan came from several quarters including the Larne Harbour Board and as a result an alternative plan was agreed to use the excavated material to form an artificial bird island. It was argued by the contractor that this was not a variation to the works within the confines of the contract but a separate contract in its own right.

The decision in Thorn v Mayor and Commonalty of London a case heard way back in 1876 influenced the court. In this case it was held that if the additional or varied work were so peculiar, so unexpected and so different from what any person reckoned or calculated upon to such an extent that it is not contemplated by the contract then it would constitute a separate contract. The judge in the case considered that the construction of the bird island was wholly outside the scope of the original dredging contract and therefore constituted a separated contract.

Experience In The USA

The position in the USA is similar but more developed. It addresses a situation where a large number of changes are instructed which individually fall within the ambit of the variations clause but collectively have the effect of completely changing the scope of the works. This situation is referred to as either abandonment or cardinal change and deals with the situation where the employer makes excessive changes to a project beyond what the parties reasonably could have anticipated at the time the contract is entered into. Courts will look at a number of factors in helping to decide whether the changes have been excessive. The starting points are the size, complexity and expected duration of the contract. Other factors to be considered are the number of changes, how many changes were anticipate when the project started, the magnitude of the work involved in the changes and the length of time in which such changes were made.

There is no required intention on the part of the employer to abandon the contract by introducing excessive changes; this will often be implied as a result of constant interference or change. If the parties ignore the procedural provisions of the contract with regard to variations this could help influence the court into accepting that abandonment has occurred.

Conclusion

It is difficult to be hard and fast as to when additional or changed work will constitute a separate contract or convert the contract the parties entered into a different one. Courts in the USA seem to be more sympathetic to the contractor’s case for abandonment or critical change than in most other countries. Courts and arbitrators in the UK and like jurisdictions find themselves in the long grass when trying to decide what is due if payment is to be on a quantum meruit or fair valuation basis. They feel more comfortable in dealing with additions or changes priced at contract rates and are inclined to play it safe in holding that the facts as presented have not resulted in a separate contract. Employers who are perhaps starting to feel uneasy about the prospect of the USA attitudes creeping into the thinking of judges or arbitrators could give consideration to rewording the variations clause to give a wider definition of additions and change.

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