A problem which is often encountered in building contracts arises when a building contractor carries out a variation to the specified contract works, without first obtaining a formal instruction from the employer, authorising the contractor to carry out that variation. In those circumstances the employer may refuse to pay the contractor for the cost of the additional works. In what circumstances would the contractor be entitled to obtain payment from the employer?
A written construction contract will define the works that the contractor must deliver and 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. One consequence of a variation mechanism is to give the contractor the right to additional payment.
But an employer may give the contractor permission to depart from the contract scope without instructing a variation under the contractual mechanism. It is therefore 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 ensure 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.
Typically, the contractor will argue 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 had issued an instruction in the prescribed form, the employer may waive this requirement. As with any waiver, it is necessary for the party relying on the waiver to establish that there has been a representation and subsequent reliance to its detriment.
- Implied promise to pay. The principle is illustrated by the 1910 case of Molloy v Liebe. The employer and contractor disagreed as to whether an item of work was within the contract’s scope or was an extra and, on this basis, the employer refused to give an instruction. The contractor undertook the item of work and subsequently sued for payment. The court found that the item of work was outside the scope and therefore was additional, whereupon the employer argued that irrespective of this finding, it was nevertheless not liable to pay because of the absence of an instruction. The court found that the employer had refused to give a formal instruction solely because of the disagreement as to the extent of the scope. Therefore, when the item of work was undertaken the employer must have 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. The variations mechanism is a procedure that empowers the employer to unilaterally order changes to the scope but there is no reason why variations cannot be agreed between the parties ad hoc.
- Collateral contract. The parties may agree that additional work is undertaken under an entirely new contract that is separate to their original agreement. As such, it is not necessary for the variation procedure under the original contract to be operated.
Complicated and costly disputes can be avoided if the parties to a construction contract ensure that they are familiar with the terms of the contract before the works are started, and that they operate in accordance with those terms whilst the works are being carried out.
Chris Harper is a partner and head of the dispute resolution team in Exeter. He specialises in commercial litigation and is named as a leader in his field by independent guides to the legal profession Legal 500 and Chambers. To contact Chris please call 01392 210700 or email drx@stephens-scown.co.uk.