Contracts Management and Administration (Based...

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Contracts Management and Administration

(Based on FIDIC Standard)

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Sub-Clause 13.1

“Variation” or “Right to Vary”

The Unilateral Right of the Employer

to Alter a FIDIC Contract Agreement


LEARNING OBJECTIVES

1. Provide “Supporting” Case Law

examples to FIDIC Concept that

“Variations cannot be proposed by

the Employer simply to remove

works away from the existing Main

Contractor and allow this same

works to be given to another

Contractor”;


LEARNING OBJECTIVES

2. “Is a Particular ‘Instruction’ a

Variation or just an instruction?”.

3. Provide the specific UAE Civil

Codes references applicable to

FIDIC 1999 RB Sub-Clause 13.1 –

and discuss the differences

between the two areas.


WHAT IS A “VARIATION?”


IMPORTANT DEFINITIONS FOR

“VARIATIONS” – WHAT IS IT?

• Changes are required to the works

at some point on most construction

projects.

• Hence, a mechanism enabling the

employer to instruct, and the

contractor to implement, variations

is important.




• The power to vary is an essential

part of very construction contract

but the scope of the power to vary

differs considerably between

different forms.




• Sub-Clause 13.1 confers a very

wide power and it will only be in

unusual circumstances that the

Contractor will not be obliged to

follow a variation instruction.




• A variation (sometimes referred to as

a ‘Change Order’ ) is an alteration to

the scope of work originally

specified in the contract, whether

by way of an addition, substitution

or omission to the works, or through

a change to the manner in which

the works are to be carried out.


DEFINING VARIATION


DEFINITION OF “VARIATION”

• There is no useful definition of the

term “Variation”. The definition in

Sub-Clause 1.1.6.9 is not very helpful:

–“’Variation’ means any change to the

Works which is instructed or approved

as a variation under Clause 13

[Variations and Adjustments]’”



• This at least makes it clear that any

INSTRUCTION about the

Works not instructed or

approved as a variation under

Clause 13 is not a Variation.



• This has implications when an

Engineer issues an instruction

under Sub-Clause 3.3. Sub-Clause

3.3 attempts to deal with this by

stating that:

–“If an instruction constitutes a

variation, Clause 13 [Variations

and Adjustments] shall apply”



• Thus it seems that contrary to

Sub-Clause 1.1.6.9, a Variation is

not only a change to the Works

instructed under Clause 13 but

may also be instructed under

Sub-Clause 3.3.



• In order words – “For an

instruction to amount to a

‘Variation’ - the Contractor

must act on it.”


CASE STUDY –

“INSTUCTIONS” AND “VARIATIONS”

Obrascon Huarte Lain SA v HM

Attorney General for Gibraltar

• the Engineer issued a document entitled

“draft fill guidelines”, which gave

directions about undertaking certain

works, which if implemented would

have amounted to a Variation.


CASE STUDY –


• The Contractor, however, chose not

to act upon the draft fill guidelines

when removing contaminated

material from site and dealt with

the contaminated material by

another accepted method.


CASE STUDY –


• The Court of Appeal therefore

stated:

–“Accordingly the issue of the draft

fill guidelines did not constitute a

variation instruction.”


PURPOSE OF A VARIATION


PURPOSE OF “VARIATION”

• “…to enable an employer to avoid

having to enter into a new

contract with the same

contractor, or perhaps another

contractor, to have him perform

the variation…”.


PURPOSE OF “VARIATION”

• If employer were to approach a new

contractor – he would face re-

tendering costs, possible increases in

prices, delay and clashes between the

original and new contractors on site.

• The “Right to Vary” allows employer to

minimize costs and inconvenience to

Main Contractor/Subcontractors.


EXAMINATION:

Sub-Clause 13.1

“RIGHT TO VARY”


EXAMINATION

13.1 – Right to Vary (FIDIC 1999 RB)

• Variations may be initiated by

the Engineer at any time prior

to issuing the Taking-Over

Certificate for the Works,either by an instruction or by

a request for the Contractor

to submit a proposal.


EXAMINATION


• The Contractor shall execute and be

bound by each Variation, unless the

Contractor promptly gives notice to

the Engineer stating (with supporting

particulars) that the Contractor cannot

readily obtain the Goods required for

the Variation.

• Upon receiving this notice, the

Engineer shall cancel, confirm or vary

the instruction.


EXAMINATION


• Each Variation may include:

–(a) changes to the quantities of anyitem of work included in the Contract(however, such changes do not necessarilyconstitute a Variation),

–(b) changes to the quality and othercharacteristics of any item of work,


EXAMINATION



–(c) changes to the levels, positions

and/or dimensions of any part of theWorks,

–(d) omission of any work unless it is tobe carried out by others,


EXAMINATION



–(e) any additional work, Plant,Materials or services necessary for thePermanent Works, including any associatedTests on Completion, boreholes and othertesting and exploratory work, or

–(f) changes to the sequence or

timing of the execution of the

Works.


EXAMINATION



• The Contractor shall not make any

alteration and/or modification of the

Permanent Works, unless and until

the Engineer instructs or approves a

Variation.


LEARNING OBJECTIVE 1

“Supporting” Case Law Examples


CASE STUDY – OMITTED WORKS

AMEC BUILDING Ltd v. CADMUS

INVESTMENTS CO Ltd (1996)

In AMEC Building Ltd v Cadmus

Investments Co Ltd (1996) the

contractor claimed for loss of profit

in relation to a provisional sum

which was omitted from the

contract and the work given to

others to undertake.



AMEC BUILDING Ltd v. CADMUS

INVESTMENTS CO Ltd (1996)

AMEC claimed for loss of profit and

referred the matter to arbitration.

The arbitrator found in favor of

AMEC and the matter was then

referred to the court by Cadmus



AMEC BUILDING Ltd v.

CADMUS INVESTMENTS CO Ltd (1996)

“…It seems to me that the arbitrator was perfectlycorrect in deciding that such an arbitrary withdrawal ofwork from the provisional sums and the giving of it to thethird party was something for which AMEC were entitledto be compensated and the compensation that he arrivedat namely the loss of the profit having accepted figuresput forward to him in evidence is one which is not opento be impugned on appeal as a matter of law…”



• Carr v J A Berriman (1953)

In this case the court held that if work

is omitted from the contract and given

to others to carry out the contractor is

entitled to be paid loss of profit.

The reasoning being that the

contractor is entitled to undertake all

the work in the contract unless the

terms state otherwise.



• Carr v J A Berriman (1953)

In transferring work to

others, the employer is in

breach of contract and loss of

profit would form part of the

damages which would

become payable.



Can a “Variation” become

a “Separate Order?”


STANDARD FORMS OF CONTACT

• The standard forms of contract

try to circumvent this argument

before it is raised.

• The ICE conditions state that no

variation shall vitiate or

invalidate the contract.



• Similar wording exists in the JCT

Forms which state that no variation

required by or subsequently

sanctioned by the Architect shall

vitiate the contract.

• The intention behind the wording is

that no variation will have the effect

of creating a separate contract.



• While this may be the intention,

in the final analysis it will be the

court or tribunal who decides

whether or not a separate

contract arises out of the varied

work.


LEGAL PRECEDENCE

• There have been a number of

cases where this matter has

been placed before the court for

a decision.


CASE STUDY –

Thorn v London Corporation (1876)

• In this case the judge said “if the

additional or varied work is so

peculiar so unexpected and so

different from what any person

reckoned or calculated on, it may

not be within the contract at all”


CASE STUDY –

Thorn v London Corporation (1876)

• A mere increase in the quantities of the

work will not invalidate the original

contract even though substantial.

• The work ordered must be totally

different from that contracted for and

this being the case the contractor will

be entitled to payment on a quantum

merit basis and not the contract rates.


CASE STUDY –

Bush v Whitehaven Trustees (1888)

• In this case a contractor undertook to

lay a water main and divert certain

streams on the understanding that the

work would be carried out in the month

of June, Due to delays on the part of the

employer the contractor was unable to

proceed before the winter when wages

were higher and the works more

difficult due to the weather conditions.


CASE STUDY –

Bush v Whitehaven Trustees (1888)

• The court held that these

changed circumstances were

such that the contractor became

entitled to payment on a

quantum merit basis.


CASE STUDY –

Blue Circle v Holland Dredging (1987)

• A contract was let under the ICE

5th Edition for dredging work in

Lough Larne. The dumping of the

dredged material was to be in areas

agreed with the local authority.

• A variation was issued to facilitate

the dumping of the dredged

material to form a bird island.


CASE STUDY –

Blue Circle v Holland Dredging (1987)

• It was held that as the island

construction was completely

outside the original dredging Holland

was not obliged to accept the work

as a variation.

• Hence the island became the

subject of a separate agreement.


CASE STUDY –

McAlpine Humberoak v McDermott Int’l (1996)

• In this case a contract was let for

the construction of four huge

pallets in connection with the

construction of an oil rig.

• The number of drawings used

increased from 22 which were

available at tender stage to 161 for

the construction of the work.


CASE STUDY –


• In addition, the contractor

raised many TQs (technical

queries) in relation to the

drawings.


CASE STUDY –


• The lower court held that the

changes were so extensive that the

old contract had been replaced.

• When the dispute was referred to

the Court of Appeal a different

view was taken when it was

decided that the changes fell

within the variations clause.


CASE STUDY

• Costain Civil Engineering Ltd v

Zanen Dredging and Contracting Co

Ltd (1996).

• This case arose out of a subcontract inconnection with the construction of a tunnelunder the River Conway.

• The subcontract employed was the ICE BlueForm of Subcontract and the work comprisedsite preparation and dredging operations.


CASE STUDY –

• Costain Civil Engineering Ltd v

Zanen Dredging and Contracting Co

Ltd (1996).

• A part of the work was the backfilling of acasting bay which had been used for theconstruction of the concrete units whichformed the tunnel.

• It was decided that rather than backfilling thecasting bays the void would be used toconstruct a marina.


CASE STUDY –

• Costain Civil Engineering Ltd v Zanen

Dredging and Contracting Co Ltd

(1996).

• It was argued that the work relating to themarina should be valued at contract rates with anuplift of around 10%.

• The judged ruled that the marina was

not a variation but a separate contract

and that this method of valuing the

works was not appropriate.



“Is a Particular Instruction

a ‘Variation’ or not?”.


Is an “Instruction” a “Variation?”

• One of the most common disputes

under construction contracts is

where the Contractor and the

Engineer differ on whether a

particular instruction is or is not a

variation.



• If the Contractor considers that the

instruction constitutes a Variation

he will make an application for

payment on that basis, and, if the

Engineer refuses to pay, the issue

will become a matter for dispute.



• Where, as is common, the

Engineer issues an instruction,

believing it to be a simple

instruction and not a Variation;



• However, it is subsequently

shown to be a Variation, but the

Engineer had no authority to do

so because of a limitation

imposed by a Particular

Condition in the Contract, the

Contract provides no clear

solution.



SCENARIO:

“WHAT CONSTITUTES A VARIATION?”

• Contractor begins trenching pipeline

for 2 meters depth – per his

understanding of the contract

instructions.

• Site Engineer makes a verbal “site

correction/instruction” and tells the

on-site contractor crew that they

need to be digging down to 3 meters

depth – not 2 meters.


SCENARIO:


• Site Engineer follow’s up verbal site

instruction with email in the same day –

to the contractor – “citing the

contractor’s error and requesting

immediate correction”.

• Contractor sees the email instruction

from the earlier verbal site instruction –

and immediately complies with the

“variation” order.


SCENARIO:


• Contractor also begins assessing

and accounting for costs due to

the variation order – and

instructs his contracts

administrator to draft up an

official claims notification to be

given to the Engineer upon finish.


SCENARIO:


• Engineer does not consider his

site instruction any more than a

correction – as he believes he

did not issue a variation since

the contract calls for a 3 meter

depth, not a 2 meter depth.


SCENARIO:


Question:

• Is there a “variation” in this scenario?

• If so, is the contractor entitled to any

extension of time and cost?

• Is it possible for an “impasse” to take

place in this scenario, and if so, would an

Extension of Time and/or Costs be

granted by the client?




Provide the specific UAE Civil Codes

references applicable to FIDIC 1999

RB Sub-Clause 13.1


UAE Civil Code – QUESTIONS

Relating to “Right to Vary”

1. IS THE EMPLOYER ENTITLED TO VARY THE

WORKS TO BE DONE UNDER THE

CONTRACT? IS THERE ANY LIMIT ON THAT

RIGHT?

–The employer is entitled to vary the

works under the contract. Article 877

(Civil Code) states that;

“…the contractor must complete

the work in accordance with the

conditions of the contract…”




1. EMPLOYER ENTITLED…THE CONTRACT?

IS THERE ANY LIMIT ON THAT RIGHT?

–Thus, if the contract provides that

the scope of works may be varied,

then the contractor must comply

with the conditions applicable to

the execution of variations.




• SC 13.1 – Second paragraph – adds thefollowing enforcement language – reinforcing UAECivil Code Article 877:

“…The Contractor shall execute and be

bound by each Variation, unless the

Contractor promptly gives notice to

the Engineer stating (with supporting

particulars) that the Contractor cannot

readily obtain the Goods required for

the Variation...”




• THE EXISTENCE OF A

VARIATION CLAUSE DOES NOT

GIVE THE EMPLOYER A FREE

HAND IN MAKING LARGE-SCALE

OR SIGNIFICANT CHANGES TO

THE NATURE AND SCOPE OF

THE WORKS.




• “…No such variation shall…vitiate…”

–Under common law in the U.K.

and elsewhere, a variation that

changes the whole character

or the works cannot be

interpreted as a variation.




• Sub-Clause 52.3 of the FIDIC Red

Book 4th

Edition

• Entitles the contractor to a fair

valuation of variations that increase

or decrease the Contract Price by

more than 15%.




• Sub-Clause 52.3 of the FIDIC Red

Book 4th

Edition

• Such “excess variations” are not

valued in accordance with the Bills

of Quantity as other variations but

are to be agreed between the

contractor and the employer;




• However, if no agreement is

reached then such an amount is

to be determined by the

engineer, having due regard to

the site status and general

contractor over-heads.




• Under FIDIC Red Book 1999 –

SC 12.4, “Omissions” - Whenever

the omission of any work forms

part (or all) of a Variation, the

value of which has not been

agreed, if:




• (a) the Contractor will incur (or

has incurred) cost which, if the

work had not been omitted,

would have been deemed to be

covered by a sum forming part

of the Accepted Contract

Amount;




• (b) the omission of the work will

result (or has resulted) in this

sum not forming part of the

Contract Price; and

• (c) this cost is not deemed to be

included in the evaluation of any

substituted work;




•Then the Contractor shall

give notice to the Engineer

accordingly, with

supporting particulars.




• Upon receiving this notice,

the Engineer shall proceed in

accordance with Sub-Clause

3.5 [Determinations] to agree

or determine this cost, which

shall be included in the

Contract Price.




• Article 886 of the UAE Civil Code,

states:

–If an estimated quantity is

going to be exceeded ‘by a

significant amount’, the

Contractor should

immediately notify the

employer;




• Article 886 of the UAE Civil Code,

states:

–If he does not do so - he

shall lose his right to

recover the excess costs

over the value of the

measured quantity.




• Article 886(2) further provides –

–The employer is then

entitled to ‘withdraw from

the contract and to suspend

the execution’;




• Article 887 provides –

– “That the Contractor cannot

demand additional payment in the

carrying out of works unless the

employer has consented to

changes”




• Actual Language of the UAE

Civil Code – Article 887, states:

• 1 - When a contract is concluded

on a lump sum basis according to

an agreed plan , the contractor has

no claim to an increase in price

required for the execution of the

plan .




• Actual Language of the UAE

Civil Code – Article 887:

• 2 - If a modification or addition is

made to the plan , with the consent

of the master , the current

agreement with the contractor , as

regards such a modification or

addition , shall be observed .

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