Cunning developers who want to terminate a contractor’s employment without facing claims are altering contracts to omit all future works. Can they get away with it?
Most standard forms of building and engineering contract contain clauses that allow parties to make changes and variations. This includes mechanisms that allow you to add, substitute or omit work and allow these changes to be evaluated. The valuations identify the time consequences of the changes, as well as what remains of the work.
Contracts also typically include separate provisions that allow the employment of either party under the contract to be determined (that is, terminated).
This is not intended to be exclusive of the Common Law rights based on repudiatory breach. If a party feels it has been wronged in this way, it can claim damages for its loss.
If employment under the contract is determined, as well as the contract itself being scrapped, the contractor should still be able to recover the amount of profit it would have generated if the works had continued to completion.
However, with the market in the state it is in, resourceful developers are employing an ingenious way of bringing a contract to an end without being responsible for the contractor’s loss of profit.
What may have at one stage seemed an excellent development opportunity may well prove otherwise, if there is no purchaser or lessee. A developer may wish to abandon the project, but will not want to pay the contractor the profit it would have derived from the balance of the work. Alternatively, the employer may belatedly realise that in a hardening economic climate, it could retender specific portions of the works and get a better price.
In such a situation, many parties are choosing to “vary” the contract so as to omit the whole of the remainder of the work. This practice is now being implemented by several developers and their QS teams.
In such a situation, a developer would have to accept that the contractor’s site-based costs or preliminaries would have to be adjusted to reflect the fact that it would be on site for a shorter period of time. However, this is a small price to pay compared with a potential loss of profit claim.
So, does this practice make sense? It is accepted that a contractor, once appointed, will undertake the whole of the works, and any attempt to prevent this would constitute a breach of contract. The question is whether this obligation to allow the contractor to continue can be avoided by applying this variation clause.
The question is whether this obligation to allow the contractor to continue can be avoided by applying this variation clause
Parties to a building contract are, of course, at liberty to make whatever bargain they want, but the answer in the absence of any express entitlement is “no”.
Such an issue came before His Honour Judge Humphrey LLoyd in the case of Abbey Developments vs PP Brickwork in 2003. The judge concluded that the purpose of the variation clause in a labour-only subcontract for brickwork and blockwork was to alter the scope of the work to meet the employer’s requirements.
Employers are often of the view that some change in scope is necessary in order to give them what they want, be it by way of addition, substitution or omission. The motive or intention behind such a decision is irrelevant.
The judge decided it was necessary to look dispassionately at the wording of the variations clause and identify whether or not it was drafted sufficiently widely to displace the contractor’s right to be able to perform the works in its entirety. Could it be said that “omission” was analogous with “termination”?
No rule of law prevented such an interpretation, but the contract had to clearly and plainly provide for such a situation, especially if its effect would be to take away the contractor’s rights. Thus, in this instance, the contractor succeeded.
It is also doubtful whether the standard forms of building contract are worded to allow the variation mechanism to be construed in this way. Thus a variation cannot remove the contractor’s rights to perform the balance of its works.
However, there is a requirement for vigilance. Contractors would be well advised to consider carefully the contents of all specific contract amendments that employers make.
Jeffrey Brown is a consultant at Reynolds Porter Chamberlain