Introduction
Disputes about variation claims are a common source of construction disputes. In this Update we examine a recent decision of the District Court of South Australia that highlights the need for parties to read and follow their contract when variations arise.
Background
In January 2016, Mr Crea engaged Bedrock Construction and Development Pty Ltd (“Bedrock”) to fit out a new restaurant in Adelaide. The parties used the standard form Simple Works Contract – ABIC SW – 2008 (“Contract”).
The Contract was terminated on 22 April 2016 by the Architect prior to the works reaching Practical Completion. The parties fell into dispute. This Update deals only with the disputed variations.[1]
The Contract regime
Judge O’Sullivan noted two relevant ways in which a variation can occur under this Contract.
They are:
- The Architect can instruct a Variation in accordance with clause J1.1 (“First Variation Method”).
- The Contractor can request an instruction from the Architect, if it considers a Variation may be required, with that request to be in writing in accordance with clause J1.3 (“Second Variation Method”).
First Variation Method
If the Contractor considers that the written instruction of the Architect under clause J1.1 will cause a change to the date of Practical Completion or a change to the price, clause 2.3 says the Contractor “must notify the Architect promptly in writing” unless the Contractor has been asked to provide further information to the Architect as part of the instruction. Clause J3 requires the Contractor to continue with the works until further instruction is received.
Clause J3 provides the Architect with three options which must be exercised within 5 days:
- Notify that the variation will not proceed;
- Instruct the Contractor to proceed with the variation; or
- Instruct the Contractor to negotiate with the Architect about the variation.
Clause J4 requires the Contractor to proceed “promptly” with the variation if the Architect so instructs.
Second Variation Method
If the Contractor wants a variation, it is required to write to the Architect asking for the variation to be issued. Judge O’Sullivan noted that failing to follow through on this method carried a risk. His Honour stated:
“…the contractor may request an instruction from the Architect if it considers a Variation may be required with that request to be in writing…in doing the work without an instruction the Contractor runs the risk of being precluded from claiming the cost of the work.”
Judge O’Sullivan noted that the variation regime in the Contract is not unusual in the construction industry.
Regardless of which of the methods gave rise to the variation, when the Contractor wished to make a claim for a variation, Clause H1.1 required the Contractor to “promptly” notify the Architect after becoming aware of an event that would result in a claim.
Previous decisions of Courts
In the past, Courts have sometimes required an owner to pay a contractor for a variation even when the procedures in the contract were not followed. Some Courts have held that an owner who is aware of variation work being performed and knows the contractor expects to be paid extra, is required to pay the contractor, based on the principle of quantum meruit. Since the recent High Court decision in Mann v Paterson there has been an expectation that Courts might more rigidly follow the contractual risk allocation.
What happened on site
After the Contract was terminated, Bedrock issued a claim for 22 variations. Before embarking on a consideration of each variation, His Honour stated:
“Where difficulties arise however is where Bedrock carries out work it considers to be a Variation without a written (or any) instruction and/ or without following the Variation and claim procedure set out in the Contract. …
Whether Bedrock can claim the cost of carrying out a Variation … where an instruction to carry out a Variation is given by the Architect, depends on whether or not the Contract requires compliance with the contractual regime as a condition precedent to being able to claim payment for that Variation. …
The question in each case will be whether Bedrock complied with clause H1 and in particular the requirement to give notice “promptly” and details of the claim within the time specified. … in my view clause H1.1 is a condition precedent to Bedrock being able to claim an adjustment to the Contract. The result is that I find that any failure by Bedrock to comply with the contractual regime for “claims to adjust the contract” results in Bedrock not being entitled to claim the cost of carrying out the work.
A number of the claimed variations were the result of a change to the working drawings that formed part of the Contract. The Architect gave evidence that the changes were in fact variations to the contract works and His Honour found the changes to the works were variations. However, in respect of a number of these variations, Bedrock had failed to notify “promptly” as required by clause H1 of its claim under the Contract. His Honour denied Bedrock any payment for these variations, saying that the parties’ risk allocation in the Contract envisaged that such claims would be notified promptly. The failure to follow the contract procedures was fatal to Bedrock’s entitlement.
However, in respect of a variation instructed directly by Mr Crea, rather than by the Architect, His Honour found the Contract regime did not apply. The Contract required variations to be directed by the Architect and not the owner. On that basis, Bedrock was entitled to be paid for the variation.
Two comments
His Honour noted that Bedrock had not relied on the legal principle of estoppel in its claim. If, for example, the parties had conducted themselves in such a manner as to ignore the contract terms when agreeing other variations, it would have been open to Bedrock’s legal team to claim that Mr Crea was “estopped” from relying on those terms to deny it payment for the variations. If that argument had been available on the evidence, it may have changed the outcome.
Finally, there is no reference in His Honour’s reasons to clause H6 of the Contract. That clause entitles the Architect to adjust the contract at any time up to the issue of the final certificate even if the contractor has not made a claim for a variation. Given the express obligation of the Architect set out in clause A6.4 to be impartial and fair and to have regard to the interests of both the owner and the contractor, the Architect, having given evidence at the trial that some of the unpaid variations were in fact genuine, could have exercised this power to award to the contractor the additional costs that were claimed. Maybe this clause had been deleted from the Contract.
Conclusion
The case may be distinguishable on the basis of the two comments made. However, it appears that the Courts are continuing to move towards a rigid application of the contract.
Where the variation clause in a construction contract requires written notification before any adjustment to the contract, contractors should refuse to perform variations until they follow the procedure.
On occasion, this will prove to be inconvenient and disruptive to the works program. However, where the variation terms include a condition precedent such as this Contract, contractors can no longer rely on the principles of equity to ensure that they are paid for variations.
[1] [2020] SADC 124
