CONSTRUCTION CONTRACT VARIATIONS19 FEBRUARY 2014

MICHAEL SERGEANT, PARTNER

T: +44 20 7264 8034michael.sergeant@hfw.com

Qatar Civil Code

Article 709

 

Under a lump sum contract to undertake works to an agreed plan, the contractor may not seek any additional monies because of some alteration or addition to the plan, unless it can be attributed to an act of the employer or the employer has authorised the change and has agreed with the contractor its entitlement.

Basic Principles (1)

A contractor must construct the Scope of Works described in the contract

An employer has no automatic right to insist on a change to the Scope of Works

Variations clauses are included in contracts to give the employer the right to insist on changes

In order for a variation to be validly instructed it must be:

Instructed in accordance with the rules & procedure within the contract

A change that the employer is entitled to order (type of work, value, timing)

Basic Principles (2)

If an employer instructs a valid variation in accordance with the contract provisions then:

The contractor must undertake the changed work

The contractor will get extra money & time in accordance with the contract provisions

If there is no a valid change instruction then:

The contractor may not build something different to the contract Scope of Works

The contractual rights to money & time for variations that arise under the contract are not triggered

Basic Principles (3)

The process of instructing variations is normally undertaken by the Engineer

The Engineer acts as the agent of the employer when ordering variations

As with any agent, the Engineer only has power to act within the scope of the powers he has been given (Qatar Civil Code, Articles 81 – 90)

The construction contract sets out the scope of the Engineer's powers to instruct change

It will typically be the case that the Engineer can only validly instruct changes that are ordered by a formal Variation Order

Common problems

What is within/ outside the Scope of Works?

If the contractor carries out extra work without an instruction can it still claim payment?

Changes that are only needed because of the contractor's failure/ default: Are these variations?

Particular issues that arise when varying under Design & Build contracts

What is within/outside the Scope of Works? (1)

The contractor is typically required to undertake the Scope of Works as described in a large number of documents

The Scope documents will often contain inconsistencies, ambiguities, gaps and contradictions

The process of establishing what the Scope is will involve considering

The relevant law on the interpretation of contracts, such as Qatar Civil Code Articles 169 & 170

Priority of documents clause listing the order of importance of documents; e.g. FIDIC Red Book clause 1.5

Clauses requiring the contractor to identify errors in the employer's documents within a time-scale or take the risk; e.g. FIDIC Yellow Book clause 5.1.

What is within/outside the Scope of Works (2)

Having analysed the relevant rules/ law on interpretation the position can be either:

1. There is a gap/ contradiction in the Scope so the contractor has no obligation to do extra work unless instructed as a variation

2. The contract requires the contractor to undertake all work that is necessary to complete the project even though it is not specifically referred to

What is within/outside the Scope of Works? (3)

One of the benefits of a Design & Build contract is that it limits the risk of "gaps" in the Scope.

A Design & Build contractor should be required to build the works according to a 2-stage test:

1. The contractor must follow the specification, drawings etc. (i.e. the contractor's technical design)

2. But the contractor must also ensure that this achieves the stipulated performance/ design standard (the Employer's Requirements)

Gaps in the contractor's technical design do not mean variations because the contractor must resolve such problems in order to achieve the Employer's Requirements

What is within/outside the Scope of Works? (4)

Under a build-only contract there is a much greater risk of gaps in the description of the works

The contractor will just be required to build in accordance with the technical description: the specification and the drawings

There will not normally be overarching "project aims & requirements" that must be achieved

Risk of a deadlock arising:

The contractor says that it will not build certain work unless a variation instruction is issued

The employer says that it will not issue the instruction because the work is within the Scope

No variation instruction: Contractor still claims extra (1)

The right under the contract to extra money & time for a variation arises precisely because the instruction triggers this entitlement.

Contractors will often claim extra money/ time where there is no instruction.

No variation instruction: Contractor still claims extra (2)

Typical problem situations

1. The contractor makes a change to the Scope because it thinks that it is an improvement. The employer is happy with the improvement but refuses to pay extra because there was no Variation Order.

2. The employer refuses to issue a Variation Order because it thinks that the item of work is within the Scope. The contractor later establishes that the item of work is extra. The employer says it has no obligation to pay because no Variation Order was issued.

No variation instruction: Contractor still claims extra (3)

Typical problem situations

3. The employer asks the contractor to do extra work but does not issue a formal Variation Order. The employer tells the contractor that this does not matter and will not affect his right to money. It later refuses to pay on the basis that there is no Variation Order.

4. The contractor is undertaking excavation and hits unexpectedly bad ground and so cannot undertake the defined Scope. The employer refuses to give a Variation Order.

No variation instruction: Contractor still claims extra (4)

The common arguments raised by contractors:

The contract itself has been varied:

Distinction between a variation instructed under the contract and a variation to the contract terms

The parties to a contract may agree to vary its terms, including the description of the product being sold

The parties themselves must vary the contract – The Engineer will not normally have authority to vary the contract itself

The contract itself may stipulate that variations to the contract terms will only be valid if recorded in a stipulated format

No variation instruction: Contractor still claims extra (5)

The common arguments raised by contractors:

The employer/Engineer has asked the contractor to implement a change and has said that no formal Variation Order is needed

The Engineer has no power as agent of the employer to change the requirement for a Variation Order

The Engineer has no power to change the Scope of Works unless it issues a Variation Order

The Engineer's oral order to change the Scope has no status

No variation instruction : Contractor still claims extra (6)

The common arguments raised by contractors:

The employer/ Engineer refuses to issue a Variation Order on the basis that the work in question is within the Scope and therefore is not a change:

In English law this is treated as an implied promise to pay; i.e. because the VO is refused on a false assumption

Breach of a party's duty of good faith (Qatar Civil Code, Article 172)

No variation instruction: Contractor still claims extra (7)

The common arguments raised by contractors:

The contractor cannot continue with/ complete the project unless it makes a change to the Scope

The employer & contractor have agreed that the defined Scope will be built

The employer is not obliged to receive something that is different

What is the Scope? – e.g. under a D&B contract the contractor may be obliged to depart from the specification/ drawings in order to achieve the Employer's Requirements

A contract will often give the contractor other rights to claim for the costs of necessary changes to the way the works are undertaken; e.g. Ground Conditions clauses (FIDIC Red Book clause 4.12) or loss & expense clauses

Variation required because of contractor's failure/risk (1)

Examples of situations where this arises:

The contractor delays in ordering the specified materials which have a long lead-in time. The contractor wants to order different (more expensive) materials instead to avoid delay.

It becomes clear that the design & build contractor's foundations design is inadequate and therefore it needs to be changed.

The employer may issue a Variation Order but may not expect to pay for the change

Variation required because of contractor's failure/risk (2)

The employer needs to be very careful in these situations

Construction contracts often make no distinction concerning the reasons a variation is instructed - Normally a VO = money & time

There can be a number of reasons why a VO was issued

An employer should give the contractor permission to make the change rather than issue a VO

If the contractor thinks that the change is not its fault then it may insist on a VO before doing the work

Particular issues relating to design liability (1)

Under a design & build contract the contractor has agreed to take design responsibility for the defined Scope of Works

The employer can vary the Scope of Works:

Is the contractor still responsible for the design integrity even though it is not the Scope as contained in the original contract?

If not, then the employer no longer has a full design warranty

Particular issues relating to design liability (2)

Under a design & build contract the employer should change the Employer's Requirements (the output criteria) rather than the specification/ drawings

The contractor therefore takes responsibility for the re-design

But the contractor may still consider that the revised Employer's Requirements are impossible to achieve

Can the contractor refuse to implement the proposed change?

Particular issues relating to design liability (3)

Since the employer changes the Employer's Requirements (the output criteria) then it has limited control over the design solution

This may mean that the employer has limited control over the cost of the change

Potential for dispute as to whether the design solution is over engineered

Provisions allowing for the employer to make requests for design change proposals and to agree on the change (plus cost & time) in advance

Questions

Construction Contract Variations

The book is due to be published on 28 May 2014

It will be the only specialist law book dealing with variations under construction projects

The authors' royalties are being donated to the Lighthouse Club charity