| Date | 8 August 2007 |
|
|
| Judgment | SWI Ltd v P&I Data Services Ltd, CA 4 July 2007 |
|
|
| The Issue | What happens when a contract does not contain a provision permitting it to be varied? |
|
|
| Implication |
If a fixed price contract does not contain a provision permitting it to be varied, the contractor is entitled to be paid in full, even if the full extent of the works are not subsequently required. |
printVariations abound on many construction contracts and both clients and contractors often lose sight of the fact that, just because they almost invariably occur, they should not be treated as the norm. All well drafted construction contracts contain provisions that allow the works to be varied and also contain procedures that allow the effects of those variations to be dealt with. Since most projects have lengthy construction periods, such provisions are a sensible way of allowing the works to be changed to reflect any alterations in the client’s requirements that might arise during that period. Of course, many variations actually relate to the completion or correction of the design upon which the contract was based and, in these circumstances, clients sometimes express frustration that there has not actually been any change to what it required and expected. The procedures for dealing with variations are likely to address the direct valuation of the changes to the works brought about by the variation, any delay that the execution of the variation may give rise to and also the consequences upon the execution of any other works that may be adversely affected by the execution of the variation. The comprehensive nature of the provisions typically found only serves to emphasise that, whilst the client is entitled to change its mind, the consequences of doing so are largely at the client’s risk and it must expect to pay for that privilege. The recent Court of Appeal case of SWI v P&I Data Services serves to illustrate what can happen when a contract does not contain a provision permitting it to be varied. Here the subcontractor (SWI) had entered into a subcontract to undertake substantial electrical works on the basis of a very simple contract. The contract itself comprised little more than its fixed price quotation for a scope of works identified by reference to various drawings, which was then accepted by P&I. There were no contractual terms and conditions identified, meaning that any necessary terms would have to be implied. One such source of implied terms in relation to, for example, interim payment would be the Scheme for Construction Contracts. Having entered into this contract, P&I’s client then appears to have varied the extent of works that it required P&I to undertake under the main contract, with the consequence that SWI was required to undertake less electrical work. In such circumstances, what then should SWI be paid, especially bearing in mind that a jointly appointed expert had concluded that the value of the work not undertaken was in the order of £40,000.00? P&I’s first approach, to seek a reduction in the amount payable to SWI, was to suggest that the contract was a “unit priced contract”, where the works undertaken would be measured and valued accordingly. In support of this position P&I sought to rely upon equivalent terms in the main contract with its client which it claimed would then, somehow, “filter down” to the subcontract. This rather vague suggestion did not find favour with either the lower court or the Court of Appeal, who were both certain that the contracts were for a fixed price. Perhaps one of the factors pointing them towards this conclusion was that the subcontract did not actually contain any rates such as would permit this approach to be adopted! P&I’s second approach was to suggest that terms should be implied into the subcontract giving it the right to instruct variations. Here the Court of Appeal thought that, even if it was necessary to imply a term permitting the scope of works to be reduced, it did not follow that a term would also be implied to allow the agreed fixed price sum to be reduced as a consequence. Finally, P&I tried to rely upon the doctrine of substantial performance whereby if a contractor substantially, but not fully, performs its obligations under a contract then it is entitled to be paid the full sum, less a reduction for the work which has not been performed. Unfortunately this approach was not of any assistance either because, as the Court of Appeal pointed out, the doctrine applies in cases where the works are incomplete because of the contractor’s failure to fully perform. That was not the case here, as SWI had been prevented from undertaking its full contracted scope of works by the client’s changes to its requirements. Having considered and dismissed all of P&I’s arguments the court then dismissed the appeal, meaning that P&I was liable to pay the full subcontract sum to SWI, despite it being common ground that SWI had not undertaken all of the work to which that subcontract sum related. The message from all of this is one that has occurred regularly throughout these columns – that being the importance of ensuring that appropriate contractual terms are agreed at the outset. In this regard standard forms of contract, whilst not always perfect, provide a good starting point for ensuring that adequate provision is made in respect of all the normal (and some of the abnormal) events that may arise.
CJ-0731
|
|||
|
© Brewer Consulting |
|||
 |
|||