In this article, Colm O’Suilleabhain examines the extent to which a contract can be interpreted under English law to have accommodated significant changes in its scope. He then discusses the legal considerations in relation to such changes and considers whether or not the American ‘Cumulative Impact Doctrine’can be applied in the United Kingdom.

CONTRACTUAL CONSIDERATIONS

All standard forms of contract define variations and provide a procedure that is to be followed for the assessment and determination of their impact in terms of both time and value. Most, if not all, standard forms of contract expressly provide that no variation required or sanctioned by an Architect, Engineer, Contract Administrator or other empowered party shall vitiate the Contract. Generally speaking, the definition of variations and the extent to which they are permitted by a contract is extremely wide and will allow substantial leeway to the issuing party.

This can be an area of concern for contractors as they may be obliged to carry out works through variations which, although not strictly beyond the scope of the contract works, may not be adequately covered by the rates included within the contract.

Contractors may also be concerned in respect of the time impact that may arise from the instruction of multiple variations. Such an impact might not be immediately evident when each variation is taken in isolation but when taken cumulatively may amount to a significant period of time.

A contractor must give serious consideration to how an instructed change or revised design will be interpreted and whether such a change could or would be considered to have been contemplated for by the contract before making a decision on which course of action to take to remedy the potential impact on both time and cost.

To date, English case law in relation to the interpretation of variation clauses has been mixed. In McAlpine Humberoak v MacDermott International, the Court sought to apply the provisions of a contract, while in Blue Circle v Holland Dredging, the Court found that the changes instructed were beyond the scope of the contract and that a separate agreement had been created between the parties.

In Thorn v London Corporation, the Court, applying the doctrine of ‘Non haec in foedera veni’ (‘It was not this I promised to do’), commented that circumstances can arise in which a contractor was effectively being required to perform a different contract from that originally envisaged. This doctrine was subsequently relied upon in the Blue Circle case.

In situations where the scope and nature of the works has been fundamentally altered by the inclusion of a variation(s), and the contract rates no longer adequately reflect the cost involved, the contractor may wish to consider other methods that may be available for the evaluation and payment of the work carried out.

‘Quantum Meruit’ (meaning ‘as much as he has deserved’) is a UK Common Law doctrine whereby a party to a contract may be entitled to paymentof a reasonable sum which reflects the value of the work carried out or theadvantage derived there from. Insome cases it will amount to payment on a cost-plus basis while in others it will amount to payment at fair and reasonable commercial rates. To the extent that any additional work is found to be outside the scope of the original contract, and a separate contract is found to exist, then a contractor may be entitled to payment on a Quantum Meruit basis.

If a contractor can successfully obtain payment on a Quantum Meruit basis then it may also be able to successfully argue that time has been set ‘at large’ and it is therefore entitled to a reasonable time for completion. Understandably, such a position can have significant commercial benefits to a contractor.

In order to successfully make a claim for payment on a Quantum Meruit basis, a contractor must ensure that the existing contract has been rescinded and/or otherwise discharged, or that what has been instructed is not within the contemplation of the original agreement. A contractor may proceed with work which it considers itself entitled to payment on a Quantum Meruit basis for provided that a clear indication has been given that continued endeavours on its part do not constitute an affirmation of, or agreement with, the variation to the original agreement.

In this respect, it is important for a contractor to clearly state that any work being undertaken is done so without prejudice to any rights or remedies which may be available. If this action is not taken it will become more difficult to pursue any claim for payment on a Quantum Meruit basis or seek a reasonable adjustment of the time for completion.

LEGAL CONSIDERATIONS

 In the United States, there is an accepted albeit poorly defined doctrine known as the ‘Cumulative Impact Doctrine’ which states that consideration must be given to the magnitude and quality of any changes/variations as well as their cumulative effect upon a project. This doctrine arises from the doctrine of ‘Cardinal Change’ as identified in Allied Materials & Equip. Co. v United States.

A Cardinal Change is a change which is beyond the variation clause of a contract because it fundamentally alters the contractual undertaking of the contractor. The test that will be applied is whether or not the directed change is essentially the same work as the parties bargained for when the contract was awarded. In determining whether a change is within the general scope of the contract consideration will be given to both the character and magnitude of the change, as well as to its effect upon the project as a whole.

The Cumulative Impact Doctrine allows a contractor to argue that numerous instructed changes, which in and of themselves are within the scope of the contract, have a cumulative impact which results in a fundamental change to the contract and thereby constitutes a repudiatory breach.

A repudiatory breach occurs when a party intimates by words or conduct that it does not intend to honour its obligations under the contract. A repudiatory breach is one which goes to the very root of the contract and may be said to arise when the breach is so grave as to have the effect of substantially depriving the other party of the intended benefit of the contract. Such a breach can potentially give rise to circumstances similar to a Quantum Meruit position under English Law.

However, there does not appear to be an equivalent Cumulative Impact Doctrine in English Law. Indeed, the case of McAlpine Humberoak v MacDermott International provides the closest similarity but established two important distinctions. The first was that a series of variations will not in and of themselves constitute a repudiatory breach. The second was that English Law does not recognise the Cumulative Impact Doctrine or the concept of Cardinal Change.

As found in Humberoak, in order to establish a repudiatory breach a single variation must require the additional work instructed to be so far outside of the scope of the contract that the change goes to the very root of the contract itself. Although not precluded by the findings in Humberoak, the position that a number of variations could constitute a fundamental change has not been considered in any English case to date.

CONCLUSION

Variations are part of every construction contract and it is unlikely that any project will ever be without some form of change or revision. The extent and scope of any revision or variation will always be a matter of interpretation and the quantification of the scale of such changes may be more a matter of opinion rather than fact.

The terms of a variation clause provide for a wide interpretation of what constitutes a variation and allow significant latitude in what can be instructed by the relevant empowered authority. To date, the UK Courts have found that any changes or variations must go to the very core of a contract and fundamentally alter its nature before such changes will be considered to have gone beyond the contract.

In certain limited circumstances, a single variation may be considered to
 have constituted a repudiatory breach but, to date, the cumulative impact of a number of small variations has not been considered to have had the same effect. In this respect, the American ‘Cumulative Impact Doctrine’ is unlikely to be applied by the Courts in the UK.

The distinction appears to be that while many small changes and their cumulative impact are recognised as potentially giving rise to a new agreement in the USA, UK Courts have treated the matter as an extension of the same agreement. The difference, therefore, is one of scale of impact, with the United States being more willing to consider the excontractual argument that the UK.

Contractors subject to English law and wishing to rely upon significant changes to a contract as a means of obtaining payment on a Quantum Meruit basis, as well as a fair adjustment to time, must carefully consider the interpretation of variation clauses by the Courts and also the circumstances under which a contract will be treated as repudiated before they make the decision to pursue such a course of action.

Colm O’Suilleabhain is a Senior Consultant in Trett Consulting’s Abu Dhabi Office. He can be contacted atcolm@trett.com