Abstract

The construction sector has a huge impact on the economy of a developing nation like India. But it is disrupted by construction disputes, a majority of which stem from “changes” in construction contracts relating to the scope, quantity, quality of work, timeline of project, etc. Variation is one relief that can be sought by the parties to contract. Without a variation clause in a construction contract, any changes implemented in the contract will attract huge financial burden and breach of contract. In this article, the authors talk about the need and importance of variation in construction contracts, their implications and the Indian jurisprudence on it. It is pertinent to note that contractors are dependent on the existence of variation to make a reasonable return for their contracts.

Introduction

The construction industry undoubtedly has and still is contributing significantly to the Indian GDP. A dynamic economy can be witnessed being built around the basis of this industry if the momentum of the development continues steadily. Construction industry being one of those industry which involves huge manpower, resources and time due to which the chances of disputes between the parties increased manifold. Resultantly, construction disputes in India have been one of the major hurdles in the timely completion of the projects. The said construction disputes arise due to various circumstances, but the majority of the disputes revolve around the issues of delays, an extension of time, change in quantity and/or quality of construction constituting variations. 

When a dispute arises on a particular issue, the parties to the contract while complying with their obligationunder the contract identify the issue in dispute, allocates the risk and thereafter, determine the remedy/reliefs that the parties can pursue as per the contractual provisions and under the concerned law

One of the reliefs that can be claimed by the parties in the limited circumstances is ‘Variation’. All the contracts are privy to changes by the parties, however, any change in construction contracts puts up a huge financial burden on the contractor. Therefore, in most construction contracts there is a provisionfor change to be instituted in a stipulated manner through variation. Variation in a contract is birthed by the existence of change or any alteration in the original scope of work of the contractor in the contract.The term ‘change’ usually covers the following:

  • any and all additions, substitutions or omissions to the original scope of work;
  • any increase or decrease in the quantity of work;
  • alteration in dimension, level or position of works that affect the construction cost;
  • alteration in construction quality;
  • removal or demolition of a part of the scope of work;
  • any shift in the scheduled completion of the entire project. 

Apart from the obvious unanticipated but unavoidable rise in market price of all materials and goods due to inflation or shift in market determinants like high demand, labour shortages, profit margins, new government legislation can lead to a direct or indirect increase/ decrease in the pricing of certain goods that is required to fulfil the change sought by the Employer by way of variation.  

It would not be wrong to state that the majorityconstruction projects differ from their original scope,design; no matter if the construction project is small or large. As the said deviation, could not be anticipated when the Project is at planning stage. It is only when the construction starts then the Employer find out about the need for change in the scope of work for fulfilling all the perquisite 

To put this in legal parlance, avariation is a part of anagreement which provides for cost to the contractor to alter some terms/scope of work of thecontract.It is to noted that in the absence of an express variation provision in the contract, the contractor can exercise his right of rejection for variation instruction without being legally obligated to do so.

The inherently dynamic nature of contracts for construction projects makes the concept of variation an important provision to the extent of necessity. The inability to anticipate the work process including the time and nature of project and the incessant need for changes in design or scope of work makes it inherently important to include a variation clause in the contract which would otherwise be breached if any changes were to be implemented.The FIDIC Yellow Book of 1999, defines ‘Variation’ as any ‘change’ in the employer’s requirement or any change in the scope of work in terms of the contract shall constitute variation. For the implementation of the variation clause in a contract, it is important for the said change to be approved by the process mentioned under Clause 13 of theFIDIC Yellow Book, 1999. Under Clause 13 of the FIDIC Yellow Book, 1999 the Employer/Engineer can initiate the Variation at any time before the issuance of the taking over certificate. The said variation can be initiated either by an instruction or by request for submission of the proposal to the Contractor.The Contractor is obliged to comply with the Employer/ Engineer’s instruction to implement the variation until:  

  • There is safety issue upon implementation of the Variation proposal on the overall Project; and/or
  • Goods to be used in Variation are not readily available; and/or
  • There would be impact on the complying with the Schedule of Guarantees. 

It must be noted that in the dearth of the existence of a variation clause in the construction contract, it would be impossible for the employer to suggest any changes in the project considering the huge financial implications and the implications of breaching the contract. 

A study was conducted on professionals involved in a myriad of construction projects in Ahmedabad to understand variation in construction projects.The data which was collected and analyzed showed that the most prominent causes of variation are poor planning, value engineering, project complexity, unavailability of equipment’s and tools and change of project scope by owner. 

The effects of these variations usually result in increase in project cost, overhead expenses, and decrease in quality of work and in labour productivity. The said survey also provided steps to control variation orders primarily by use of work breakdown structure, reviewing the contract documentsprior to construction and freezing the design after a certain stage of construction.

Elements of Variation

There are various causes that brings variations into existence out of which some may be foreseen while others cannot be predicted.  In order for a proposed change to be taken in as a change under the variation provision of a contract, there lies some essentials that require to be fulfilled as set out below:

  • Mutual Agreement: To modify/alter any contract, parties must mutually agree on the alteration or modification of the contract. However, there are Contracts that allow alterations in the contract for a limited purpose. What is permissible under the permissible limits are often the point of dispute between the parties. Therefore, without express authority, the contractor cannot work beyond the terms of the contract.

At this juncture, it is to be noted that any change in the requirement of the contract by theemployer cannot be denied by the contractor, as it may result in a breach of the contract. In such a scenario, despite complying with the employer’s requirement, the contractor initiate the variation procedure and if rejected by the employer then the contractor invoke the dispute resolution clause under the contract.

Is It a Variation or a Separate Contract?

The court historically had established in the case ofThorn v. Mayor and Commonalty of London, that if the variation in the requisite work was so different and unexpected from the prior calculation that it was not contemplated by the contract, it would need to be constituted as a separate contract. But it must be kept in mind that the variation should bear a certain relation to the contract at hand and accordingly, any directed variations must be“of character and extent contemplated by, and capable of being varied out under, the provisions of the contract”.

The major contention which arises to determine if a particular change constitutes a variation or a separate contract is whether what is claimed as variation is really just a part of what was originally intended as the scope of work in the original contract between the parties.

Ordering Variation and Failure to Order a Variation

It is noteworthy to mention the extent of what falls under the scope of permissible variation in construction contracts is a conflict between the parties to contract.There exists no power to instruct the contractor to carry out any form of extra work in the absence of an express authority.

An issue revolving around consideration arises when the employer proposed to pay for the extra work done by the contractor but the consideration is not reciprocated as the contractor is obligated to perform the said work. But this was resolved by the court of appeal in its view where it said that the employer too derives a genuine benefit from the work exercised by the contractor as his continued work prevents financial penalties to be levied on the employer. If no such consideration is considered then, the saidperformance of the contractor constitutes sufficient consideration for a new agreement as though a variation has been ordered. Further, a failure to order a variation by the employer might constitute a breach to the construction contract.

It is to be noted that if a party fails to intimate the employer with respect to a change in form of variation as per the prescribed time limit set out in the contract. In a general parlance, the contractor would not be able to claim variation post the failure to file for variation before the employer.

Value (Variation Valuation Clauses)

Implementation of any sort of variation to the contractual terms or nature or scope of work in a construction project usually is inclusive of additions or deductions from the total financial aid set aside for the contract. The said additions and/or deductions are also inclusive of any additional costs incurred as a result of the already mentioned variation like: 

  • Indirect costs due to prolongation of the contract period
  • Compensation for losses incurred due to head office overheads
  • Loss of profit
  • Loss of opportunity
  • Compensation for against the interest on working capital and profits blocked up during the prolonged Works of Project (inclusive of interest) 

Usually, these variation valuations are based upon the already established rates and prices (unless there is a change in the market rates or dynamics) by the contractor in the tender for the project due to the reason that the scope of additional work will be similarto the work already being done under the contract.A contractor’s prices cannot be termed as unreasonable just because of implementation of changes in the original plan

A fair valuation on contract rate and price, usually encompasses the consideration based on market rate basis keeping in mind the circumstances, the variation work was subjected to. In the valuation of variation, it must be noted that the process might not only include the instructed work order but along with it caters to other expenses that might result from the variation citing addition or deduction in the contract value

The valuation of variations is a very meticulous project, and the price determination process must be done keeping in mind the original agreement between the contractor and the client.

Indian Position

It is trite to assume that India has been left unscathed by the effects of change in construction contracts, constituting disputes. For the Indian economy, the construction sector carves the way for development but is hindered by the absence of a strict regulatory and remedial mechanism for the emergence of variations in project. In the case ofJSC Centrodorstroy v. National Highways Authority of India, in the appeal, it was held by the Hon’ble Supreme Court that all variations, no matter if the said variation(s) are a result of issuance of instructions or not, would be open to re-negotiation of rates and prices given that the other conditions set out in the contract are fulfilled. It is material to note that the claim of NHAI was for re-negotiation/determination of rates for the work that was executed on account of variation in the quantity of work which had increased by 300%. The claim made was not regarding compensation for work not executed by the contractor. 

In another important case ofNational Highways Authority of India v. Som Datt Builders-NCC-NEC (JV) and Ors., the Hon’ble Delhi High Court t held that in accordance to the FIDIC guide, there arises no requirement for the existence of variation if the quantities of work anticipated at the moment of tendering proof of measure varies from that entered in the bill of quantities. It is envisaged in international construction contracts that variation here constitutes to just instructed type of variation that stems from the engineer’s decision instead of change in quantity and that it is in conformity with basic primitive understanding of the provisions citing that once the contract price is set and quantities are held tentative, any sort of increase or decrease in the anticipated quantity must be governed by the same price and only for some sort of instructed variation born from engineer’s instruction owing to any additional work or decrease in work, there has to be an element of re-negotiation with regard to Clause 51 & 52 of General Conditions of Contract. 

It is noteworthy to mention that generally, in the shift of a commercial contract, both the parties to contract require to agree to this before the changes are applicable and start taking effect, preferably in writing. Unilateral variation (where only one party can make a change) is only valid under specific circumstances, if all of this has been agreed ahead of time.

Conclusion

Variation in a construction contract is almost inevitable. Given the extremely competitive environment that the construction industry subsists in, more than often,contractors are dependent on the existence of variation to make a reasonable return for their contracts. 

Under the construction contract usually, in Indian regime, variations are one of the major bones of contention in thousands of crores worth of disputes. However, there cannot be the established principals/essentials to determine the variation as the variation can only be determined based on the contractual deliverables/scope of work between the parties to contract. The extent of subjectivity in variation should be recognised and accepted in order for there to be more evolved jurisprudence to be established on the same. Once the courts understand the flexibility that exist in variations, they can thereafter prevent the mass applicability of a pre-requisite remedy of variation and bring in a wider scope to provide subjective remedy to every project according to its needs.

About the Authors

Mr. Siddharth Chechani, Associate at DSK Legal.

Swadha Sharma is a 3rd year law student at USLLS, GGSIPU and an Associate Editor at IJPIEL.

Editorial Team

Managing Editor: Naman Anand

Editors-in-Chief: Akanksha Goel and Jhalak Srivastav 

Senior Editor: Muskaan Singh

Associate Editor: Swadha Sharma 

Junior Editor: Harshita Tyagi

Preferred Method of Citation

Siddharth Chechani and Swadha Sharma “Variation: In the Realm of Construction Disputes” (1 December, 2021)

<https://ijpiel.com/index.php/2021/11/30/variation-in-the-realm-of-construction-disputes/>