Construction contracts often give the principal the ability to order a variation to the scope of works. Where a principal chooses to reduce the scope of works – and consequently its value for a contract – this is described as a ‘negative variation’ to the contract.
Below, we focus on when a party by their words or conduct shows that they are not willing to perform the agreement in accordance with its terms. More particularly, when negative variations will amount to a repudiation, and when a contractor will have the right to terminate the agreement. We do so by looking at two key cases: Carr v JA Berriman Pty Ltd (1953) 89 CLR 327 and Chadmax Plastics Pty Limited v Hansen and Yuncken (SA) Pty Ltd (1984) 1 BCL 52.
Omitting Works to Engage a Different Contractor
The High Court case of Carr v JA Berriman Pty Ltd (1953) 89 CLR 327 demonstrates that reducing the scope of works in a contract to then engage a third party to complete the works is not a valid variation unless the contract contains a clear power to do so.
Carr, the owner, engaged JA Berriman to build a factory in Sydney. Carr was obliged to level the land and order steel in preparation for the building works. Berriman was to fabricate the steel.
Carr did not complete the preparatory works, and Carr subsequently engaged a third party to fabricate the steel. The architect informed Berriman of this change.
The relevant variation clause in the contract (clause 1) gave the architect absolute discretion to provide written directions regarding the variation, modification, addition or omission of any work.
The Court had to determine if the engagement of another party to fabricate the steel was a valid variation under the contract and whether Carr had breached the contract.
What did the Court find?
The Court held that Carr had committed two breaches of the contract and that the second breach alone (engaging another party to fabricate the steel) justified ending the contract. It was found that the architect, H P Oser, had never been asked to exercise his power to direct variations. Rather Carr had acted arbitrarily, and Oser merely informed Berriman of the change.
Further, the Court held that the wording of the variation clause did not extend so far as to enable Oser to hand over at will certain works to another contractor. Such power would be unreasonable, and to confer such a power required very clear wording in the contract.
Omitting All or Almost All of the Works
Although a principal can vary the scope of works under a contract, they cannot use that power to omit all or a substantial part of the works the contractor is engaged to complete (Chadmax Plastics Pty Limited v Hansen and Yuncken (SA) Pty Ltd (1984) 1 BCL 52).
Hansen and Yuncken (H&Y) was the head contractor of a contract to build an eight-story building for nearly $8 million. The contract provided that some of the building’s walls would be finished with a preparation called ‘Wallflex’. H&Y engaged Chadmax as a subcontractor to apply the Wallflex finish.
When the principal subsequently changed its mind about the Wallflex finish, H&Y passed this variation on to Chadmax, removing approximately 98% of the works in its subcontract with Chadmax.
The Court had to decide whether H&Y’s actions in passing on the variation to Chadmax showed an unwillingness to perform its obligations under the contract (a repudiation). If it was a repudiation, Chadmax could elect to terminate the contract.
What did the Court say?
The variation clause in the contract required that variations be made ‘within the general scope’ of the contract. The variation in this instance was not within the general scope – it removed virtually all of the works under the subcontract. In any event, the variation clause could not be construed as a right to effectively cancel the contract.
The variation, therefore, amounted to a repudiation. Chadmax successfully sued H&Y and was awarded damages for breach of contract.
The above cases illustrate that principals should ensure their contracts include clear and express wording, and address the issues described above relating to negative variations.
If you are a principal, it is important to discuss your contract with a lawyer to ensure any variations you may wish to make are valid. A construction lawyer can also assist you with drafting variation clauses that give business efficacy to your contract.
Similarly, if you are a contractor, you should have your lawyer review your contract to make sure you are aware of your rights and obligations and the risks you may encounter with variation requests.
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