Recovery of additional time and money arising from Covid-19 by way of variation clauses: a contractor’s perspective

Mino Han and JB KimTuesday 29 June 2021

Image credit: Gary A Corcoran Arts/Shutterstock.com

Substantial discussions through webinars and publications have taken place regarding the applicability of force majeure, hardship, and change in law clauses. Under many standard form contracts, including the FIDIC conditions, a contractor may be entitled to an extension of time if Covid-19 is deemed a force majeure event.^[1] However, this would not allow the contractor to recover additional costs incurred as a result of the pandemic. Nor would the jurisprudence of hardship (at least under English law) entitle a contractor to seek payment of additional costs from the employer. Alternatively, a contractor could frame its additional cost claim as a change in law claim, which however is problematic, absent any mandatory governmental acts or measures.^[2]

This prompted the authors to raise the following question: Would a contractor be entitled to recover additional costs resulting from the Covid-19 pandemic by invoking a variation clause in a construction contract? If yes, this would generally provide the contractor with a broader scope of recovery, because the valuation of a variation is commonly agreed to be on the basis of unit rates and prices stated in the contract which is usually more convenient to quantify than the actual costs incurred.

To answer this question, this article will address the following three sub-topics: (1) the typical elements of a variation claim and the possibility of pursuing a variation claim with regard to the Covid-19 pandemic; (2) the benefits of relying on a variation claim as compared to a force majeure or a change in legislation claim under the FIDIC conditions; and (3) common formality requirements that a contractor should be aware of in preparing a variation claim. The discussion will principally focus on the relevant provisions of the FIDIC Yellow Book 1999 and the FIDIC Red Book 1999 and the Joint Contracts Tribunal (JCT) conditions.

Covid-19-related monetary claims: can it be packaged as a variation claim?

What constitutes a variation? Variation is defined in sub-clause 1.1.6.9 of the FIDIC Red Book: ‘Variation means any change to the Works, which is instructed or approved as a variation under Clause 13 [Variations and Adjustments].’ A slightly different definition of variation is provided in sub-clause 1.1.6.9 of FIDIC Yellow Book as: ‘Variation means any change to the Employer’s Requirements or the Works, which is instructed or approved as a variation under Clause 13 [Variations and Adjustments].’

The above definitions of a variation are consistent with that under common law (eg, English law) where the following elements are generally required to be considered a variation under a construction contract:
(1) extra work falling outside the scope of the contract; (2) a specific or implied promise to pay for the work;^[3] (3) formal requirements. Requirement (1) will be reviewed in more detail in this section, and requirements (2) and (3) will be addressed later in the article.

Works that are outside the scope of the contract

An employer’s instruction for works already included in the original work scope does not constitute a variation order. Only extra work that exceeds the contractor’s obligations under the contract can constitute a variation.

What is part of the contractor’s original work scope is not always clear cut. Clause 4.11 of the FIDIC Red Book and Yellow Book, respectively, state on the contractor’s obligations that:

‘[…] the Accepted Contract Amount covers all the Contractor’s obligations under the Contract […] and all things necessary for the proper design, execution and completion of the Works and remedying of any defects.’

Similarly, under English law, where the contractor completes a set job for a lump sum, the courts infer a promise on its part to provide everything ‘indispensably necessary’ to complete the project.^[4]

It follows that where required work is not specified and that work is indispensably necessary to complete the project, an instruction to carry out these works would not constitute a variation order. In Williams v Fitzmaurice,^[5] the contract required the contractor to build a house ‘to be completed and dry and fit for occupation’. The specification required the contractor to provide all the required materials, but the floorboards had been omitted from the specifications. When the contractor was instructed to install the floorboards, the contractor refused to do so, unless he would receive extra payment. To this, Pollock CB said:

‘It is clearly to be inferred from the language of the specification that the plaintiff was to do the flooring, for he was to provide the whole of the material necessary for the completion of the work; and unless it can be supposed that a house is habitable without any flooring, it must be inferred that the flooring was to be supplied by him. In my opinion, the flooring of a house cannot be considered an extra any more than doors or windows.’

If a contractor is provided with inaccurate quantities or drawings, would that automatically allow the contractor to pursue a variation claim? Keating states the English law position on this point to be that:

‘a contractor who has been put to unexpected expense because of inaccurate quantities or drawings or impracticable plans cannot usually recover the expense by bringing an action for breach of an implied warranty that the plans, drawings or bills of quantities are accurate or practicable. Such warranties are not implied merely from the fact that these documents are submitted to the contractor for tender.’^[6]

Comparably, in the US, there is an implied warranty obligation acknowledged under the Spearin doctrine relating to the plans and specifications provided by the employer.^[7] The employer’s responsibility to provide accurate plans and specifications is not overcome by general clauses in the contract requiring the contractor to visit the site, check the plans and inform themselves of the requirements of the work.^[8]

Can the employer demand from the contractor to carry out extra work that is outside the scope of the contract in a limitless fashion? Construction contracts do not generally set a limit on the permissible extent of variations.^[9] However, Professor Uff suggests that ‘there must be some limit to what may be varied to a contract.’^[10] In other words, an employer may not utilise the variation mechanism under the contract if they have decided to change the nature of the work that was originally set out and agreed upon. In Blue Circle v Holland Dredging,^[11] it was held that the construction of an artificial island could not be the subject of a variation order in a contract for dredging.

The term ‘cardinal change’, more often used in the US, refers to one or more changes ordered by the employer that are beyond the scope of the contract and constitute a ‘drastic modification’ in the performance required by the contract.^[12] The issue whether one or more changes are sufficient to constitute a cardinal change must be analysed on its own facts and in light of its own circumstances, with considerations to the magnitude and quality of the changes ordered.^[13]

Is the change to work procedures or methods due to Covid-19 a variation?

It is worth noting that the FIDIC Red Book sub-clause 13.1 provides a non-exhaustive list of variations, which includes ‘changes to the sequence or timing of the execution of the Works’. Similarly, other standard forms of contract frequently stipulate that the restriction of the contractor’s execution or completion of the work in any specific order will be dealt with under the variation clause.^[14] For example, the JCT DB 2016 clause 5.1.2 states that a variation means:

‘[…] the imposition by the Employer of any obligations or restrictions in regard to the following matters or any addition to or omission of any such obligations or restrictions that are so imposed or are imposed by the Contract Bills or the Employer’s Requirements in regard to:

1. access to the site or use of any specific parts of the site;

2. limitations of working space;

3. limitations of working hours; or

4. the execution or completion of the work in any specific order.’

(emphasis added)

On this issue, two UK court cases provide further guidance on whether a change to work procedures or methods arising from Covid-19 may constitute a variation.^[15]

First, in English Industrial Estates Corporation v Kier Construction Ltd,^[16] an engineering contract entitled the contractor to either: (1) crush and use hard materials arising from the excavation and demolition works for filling purposes; or (2) import suitable material. However, the engineer instructed the contractor to crush all hard materials arising from the excavation and demolition works and only use that as the fill materials. Consequently, the instruction was held to be a variation as it involved a change to the method by which the works were undertaken in the sense that it restricted the contractor’s legitimate choice.

Second, in Strachan & Henshaw Ltd v Stein Industrie (UK) Ltd and GEC Alstom Ltd,^[17] the project was for the construction of a power station, and the subcontractors, Stein Industrie and GEC Alstom, were required to install the generators. They employed Strachan & Henshaw Ltd as sub-subcontractors, who provided approximately 150 workers, the clocking-in and out facilities and the welfare facilities. These facilities were initially adjacent to the generators that were to be installed. However, Stein Industrie and GEC Alstom instructed Strachan & Henshaw to relocate them half a mile away, resulting in increased walking time and reduced productivity.

In this case, clause 27.1 of the relevant conditions of contract stated: ‘In these Conditions the term “variation” means any alteration of the Works whether by way of addition, modification or omission’. The term ‘Works’ was defined in clause 1.1 as ‘all plant to be provided and work to be done by the Contractor under the Contract’. ‘Plant’ is defined in condition 1.1(g) as: ‘[...] machinery, computer hardware and software, apparatus, materials, articles and things of all kinds to be provided under the Contract other than Contractor’s Equipment.’

The Court of Appeal held that the instruction to move the facilities was not a variation by adopting a narrow interpretation of the variation clause. It held that:

‘In my view the “work to be done by the Contractor under the Contract” means simply what it says and should not be distorted so as to encompass the arrangements made by the contractor to bring its workforce to the workplace (see Photo Production Limited v Securicor Transport Limited (1980) AC 827 per Lord Diplock at pages 850 and 851).’

In short, under UK law, it will ultimately depend on the language of the contract and its construction whether or not a change to work procedures or methods (due to Covid-19 or otherwise) may constitute a variation.

Many design-and-build contracts require the contractor to submit to the employer or the engineer either all or specified parts of their design for review and approval. ^[18] In some contracts, approval by the engineer on behalf of the employer must be obtained before the relevant part of the work commences.^[19] One advantage of this approach is that risks regarding inadequate design by the contractor that may result in defects and safety issues can be avoided or mitigated. However, it may also limit the contractor’s options in achieving an optimal and economical design. If the contractor proposed an optimised design at a later stage, this could constitute a variation.^[20] It is not always easy to draw a clear line between design development that was contemplated when each party entered into the contract, and any additional requirements by the employer after the contract was executed.^[21]

On this issue, the recently published FIDIC Guidance Memorandum on COVID-19 sets out a relevant question:^[22]

‘The local authorities or government have promulgated changes to the Laws restricting construction activities and works on the Site. We are still able to proceed with the Works, however the Contractor is suffering delay and/or incurring additional Cost as a result of those changes. How to handle this situation?’

One of the possible solutions is stated as follows: ^[23]

‘Such changes in Laws may impose specific COVID-19 health and safety measures on construction activities (ongoing or on resumption) such as social distancing, supply of face masks and sanitisers, alternative arrangements for transportation, facilities, working hours for staff and labour, etc. Those changes may well be treated as a Variation owing to the “adjustment to the execution of the Works” that they may cause, or to the “changed or new applicable standards” that they may constitute. In the alternative, they may be treated as a claim event.’

(emphasis added)

For reference, the New Zealand government has recently provided guidance for the construction sector on variations in contracts to encourage employers and contractors to agree on a fair value for any variations due to the Covid-19 lockdown in relation to NZS 3910:2013 contracts.^[24] In most cases, these guidelines provide that, contractors would be entitled to recover costs as a variation to the contract. The guidance includes a set of principles for parties to follow when negotiating the cost of the variation and outlines the factors that need to be taken into account.^[25] It lists the types of costs that contractors can claim and also states it must be demonstrated that they have incurred these costs and tried to mitigate them where possible.

In light of the above, it is submitted that changes to both permanent and temporary works due to the Covid-19 pandemic may entitle a contractor to pursue a variation claim against the employer, which would then entitle the contractor to recover not only time but also cost.

The benefit of framing a contractor’s Covid-19-related claims as a variation instead of a force majeure or a change in law claim

Force majeure: time only

Provided it could be deemed that Covid-19 constitutes a force majeure event under the FIDIC conditions, contractors may be entitled to an extension of time,^[26] subject to the fulfilment of any relevant notice requirements.

However, the FIDIC conditions, similar to other widely used standard form contracts, do not provide for monetary compensation as a remedy for a Covid-19 type of force majeure event. The FIDIC Yellow Book 1999 sub-clause 19.4 (b) states:

‘if the event or circumstance is of the kind described in sub-paragraphs (i) to (iv) of Sub-Clause 19.1 [definition of force majeure] and, in the case of sub-paragraphs (ii) to (iv), occurs in the Country, payment of any such Cost.’

Sub-paragraphs (ii) to (iv) of sub-clause 19.1 do not refer to anything like Covid-19 as a force majeure event. Therefore, it is unlikely that the contractor will secure monetary compensation based on Covid-19 relying on force majeure, even if Covid-19 would constitute a force majeure event.

Changes in law: time and money as ‘cost’

The contractor may be entitled to an extension of time and payment of costs under the FIDIC standard forms if Covid-19 constituted a change in legislation under sub-clause 13.7 ‘Adjustments for Changes in Legislation’, subject to notice requirements under sub-clause 20.1 being met.

In such case, however (and putting aside for a moment the additional hurdle that a ‘change in law’ as defined in the contract must exist), monetary compensation is based on Cost which is defined in sub-clause 1.1.4.3 as follows: ‘“Cost” means all expenditure reasonably incurred (or to be incurred) by the Contractor, whether on or off the Site, including overhead and similar charges, but does not include profit’.

In contrast, under the FIDIC and JCT conditions, the valuation of a variation is generally based on the rates and prices contained in the contract rather than by reference to reasonably incurred cost.^[27] Calculation based on agreed rates and prices is generally thought to be simpler to prove quantum. For example, proving the value of additional staff or labour costs resulting from a variation may not require actual wage or salary-related information. This may (or may not) include and consider elements such as base salaries, bonuses, overtime fees, pensions, benefits, insurances, allowances, expenses and so on – but none of that requires actual proof. Alternatively, these elements may be set out as a combined rate termed as ‘day work rate’^[28] or ‘defined Cost.’^[29] Therefore these contract rates, stipulated in the contract, can be used for the valuation of variations, but not for any other claims. There is consequently a significant practical advantage in framing a claim as a variation claim as opposed to a change in law claim.

Availability of statutory remedies – the right to adjudicate under the Security of Payment Act (SOPA) in Singapore

A variation claim, unlike a force majeure or change in law claim, may grant the contractor additional statutory remedies – for instance, the right to adjudicate under the SOPA in Singapore.

Section 5 of the SOPA in Singapore, amended in 2018, provides that: ‘Any person who has carried out any construction work, or supplied any goods or services, under a contract is entitled to a progress payment.’ It is submitted that payments on account^[30] for any construction or supply work carried out (including such work pursuant to a variation) is within the scope of the SOPA and, therefore, the contractor can benefit from Singapore’s speedy adjudication process.^[31] The adjudicator has to determine an adjudication application within 14 days of the commencement of the process or within such longer period as may have been requested by the adjudicator and agreed to by the claimant and the respondent.^[32]

There are, however, some hurdles to pursue damages claims for loss and expense under the SOPA.^[33] The new section 17(2A) of the SOPA clarifies that adjudicators are to consider claims for damages, losses and expenses only when the quantum of such claims can be supported by documents:^[34]

‘In determining an adjudication application, an adjudicator must disregard any part of a payment claim or a payment response related to damage, loss or expense that is not supported by –

a) any document showing agreement between the claimant and the respondent on the quantum of that part of the payment claim or the payment response; or

b) any certificate or other document that is required to be issued under the contract.’

Singapore’s Parliament clarified the intent behind the limitations imposed, citing a previous adjudication which lasted for 129 days because a large portion of the amount claimed was prolongation costs.^[35] The Minister of State for National Development, Zaqy Mohamad, explained that the new provision was intended to avoid an adjudicator delaying the process and ensuring that it served its intended purpose, which is to resolve payment disputes quickly and cost effectively.^[36]

The procedural formalities of a variation claim

The potential benefits of the use of variations borne in mind, the contractor should also be aware of the procedural requirements for the use of a variation clause.

The importance of the engineer’s instruction

The employer or the engineer have no implied power to vary the terms of the contract or the agreed contract works.^[37] Instead, construction contracts generally give the engineer a specified power to instruct a variation.^[38] Consequently, the starting point for a contractor to implement a variation is generally an instruction from the engineer.^[39]

Not all instructions from the engineer constitute a variation; sub-clause 3.3 of the FIDIC Yellow Book 1999 stipulates: ‘If an instruction constitutes a Variation, Clause 13 [Variations and Adjustments] shall apply.’ Put differently, a variation instruction or approval from the employer or engineer has to result in a change of the work method for permanent or temporary works, as specified in the contract in the section ‘contractor’s risks’, if implemented by the contractor.

It must be noted that a change of work method due to an error in the drawings and specifications from the outset is unlikely to be deemed a variation. In the leading case Thorn v London Corporation,^[40] the employer’s engineer had specified caissons on which the foundations were to be built, which later turned out to be unbuildable. Consequently, the bridge had to be built in an entirely different way. The contractor obtained the engineer’s instruction to change the work method in place of using caissons as per the contract and the specification drawn up by the engineer. It was however held by the court that: (1) there is no implied warranty by the employer that a project could be built in accordance with the drawings and specifications produced on the employer’s behalf; and (2) the contractor ‘ought to have informed himself of all particulars connected with the work and especially as to the practicability of executing every part of the work contained in the specification’.

Under the FIDIC conditions, a variation cannot generally be obtained in the absence of written instructions – such written instruction would be a condition precedent to a variation. Sub-clause 3.3 of the FIDIC Yellow Book 1999 states: ‘The Contractor shall comply with the instructions given by the Engineer or delegated assistant, on any matter related to the Contract. These instructions shall be given in writing.’

Undertaking a variation without an instruction may result in the finished project being non-compliant with the contract, thereby constituting a breach of contract by the contractor. The contractor is therefore taking a significant risk if it proceeds with changes to the work without a prior written instruction.

Project impasse

In construction projects, it is quite common that a contractor and an employer would disagree on whether certain works fall within the originally agreed contract scope or constitute a variation.^[41] This is often a difficult question to answer given the complexity of the construction process and the extensive technical documentation available to describe these works.^[42] The contractor may need to carry out work that is not specifically referred to in the technical documents but still falls under ‘indispensably necessary’ works to complete the project and that would not result in a variation under the contract.^[43]

These disagreements are common in construction disputes and may lead to a further delay of a project. In some cases, this may even result in the termination of the contract should the employer and the contractor continue to argue whether certain instructed works are a variation of the contractor’s original work scope.

It was held in Brodie v Corporation of Cardiff that the decision to refuse an instruction by the engineer could be reopened and amended by an arbitral tribunal.^[44] In this case, the engineer had asked the contractor to use ‘Cyfartha clay’. The contractor argued that this was a variation since the contract allowed for the use of a cheaper material ‘Neath clay’. There was a disagreement and the engineer refused to issue a formal variation instruction, although a written instruction was a condition precedent to trigger payment for varied works.

Nevertheless, the contractor carried out works using ‘Cyfartha clay’ without a formal variation instruction and later commenced an arbitration seeking additional payment. The legal issue put to the arbitrator was whether the contractor was entitled to be paid for the alleged variation works without a written instruction, a condition precedent, being issued.

The House of Lords held that a formal instruction was indeed a condition precedent to the right for payment of variation works. However, it also stated that the arbitral tribunal has the power to award the payment for the extra works by way of reviewing the engineer’s refusal to issue an instruction:

‘These are some of the consequences which might ensue if as between the engineer and the contractor each resolutely stuck to, and acted upon, his own opinion as to the nature of the work required to be done […] natural to expect that where the parties by their contract provided an alternative mode of avoiding these embarrassing contingencies, and escaping from such an impasse – namely, arbitration – they intended that that arbitration should have a reach and operation adequate to solve the matters in dispute, and not an arbitration so restricted in its scope as to be absolutely abortive, leaving the parties to it in a position, for all practical purposes, the same as that which they occupied before it had been held.’

In light of the above, probably the only practical way to escape the project impasse problem may be for the contractor to perform the works in the first instance with no agreement as to whether such works constitute a variation and reserve its rights to later seek payment for the disputed variation.

Notice: time bar

Many variation clauses provide for a notice requirement as a condition precedent to a variation claim, failure of which may lead to a complete deprivation of the entitlement of the claim. The purpose of such notice requirement is explained in Multiplex v Honeywell,^[45] where Jackson J held:

‘Contractual terms requiring a Contractor to give prompt notice of delay serve a valuable purpose; such notice enables matters to be investigated while they are still current. Furthermore, such notice sometimes gives the Employer the opportunity to withdraw instructions when the financial consequences become apparent.’

The notice period for a variation claim is subject to party agreement – the FIDIC Red Book 1999 provides for 28 days from either: (1) the day on which the variation has arisen; or (2) the day on which the variation has taken effect. In the case of a variation claim based on Covid-19, it may not be clear when the works have been varied or when the implementation of a variation (ie, works requiring a new work method or sequence) resulted in additional time and cost. That is particularly so because, unlike typical variations, it may not be clear to a contractor when a work instruction by the employer or engineer has been made to proceed with the works under the contract by applying a new work method or sequence to it.

It is therefore advisable that a contractor proactively seeks a written variation instruction from the employer or engineer in a timely fashion. Should the employer or engineer refuse to issue an instruction, it would be prudent for the contractor to keep contemporaneous records as to when the works that require a new work method or sequence (due to Covid-19) were started. The contractor is also better protected if it sends notices to the employer or engineer within the notice period agreed in the contract counting from the day it internally considered the works as a variation. Such internal records may be subject to document production at a later stage should the parties end up in an arbitration.

Conclusion

It is submitted that contracts based on the FIDIC conditions may allow contractors to recover, as a variation claim, additional time and cost resulting from new work procedures, methods and sequences due to Covid-19. The benefits are clear: a variation claim enables the contractor to recover additional cost (hence provides a more complete remedy than force majeure), and the valuation of a variation is based on contractually agreed rates and prices which makes the quantification of it much easier, as compared to a change in law claim.

The difficulty with a variation claim is likely to be that the employer or engineer is reluctant to issue a formal written variation instruction, or even any specified work instruction that could be relied on by the contractor as an implicit variation instruction. It is advisable therefore that in such case, the contractor: (1) requests from the employer or engineer a formal written variation instruction, and if that is not provided; (2) leaves as many contemporaneous records as possible demonstrating an instruction to carry out works requiring new methods or sequences, in order to rely on such documentary evidence at a later stage if it needs to establish a variation claim by way of formal dispute procedures.