Chapter 4 When is the variations power limited?

Even if the contract provides the principal with a variations power, the common law imposes limitations on the principal’s exercise of that power. These include the following:

Limitation No.1 – Principals cannot fundamentally alter the scope of the works

Although a principal may have the contractual power to vary the scope of works, use of the power which would result in a fundamental change to the works or their value is not a proper exercise of that power.

CASE STUDY

Chadmax Plastics Pty Limited v Hansen and Yuncken (SA) Pty Ltd (1984) 1 BCL 52

Facts
  • Hansen & Yuncken’s head contract with the principal required many of the wall surfaces of the office tower to be finished with a preparation known as ‘Wallflex’.
  • Hansen & Yuncken engaged Chadmax as specialist subcontractor to apply the Wallflex finishes.
  • The principal decided that it no longer wanted Wallflex, and directed Hansen & Yuncken to change the finish.
  • Although this was a relatively minor change to the head contract works, it meant that Hansen & Yuncken deleted 98% of the works from the Chadmax subcontract.
Result
  • The court awarded Chadmax damages for breach of the subcontract, as the extent of the variation directed under the subcontract amounted to a virtual cancellation of the subcontract and amounted to a repudiation.
  • The contract gave power to the principal to vary the sub-contract works, but not the power to virtually cancel them.

Limitation No. 2 – Principals cannot delete works and engage another person to perform those works

Although a principal may have the contractual power to vary the scope of works, any use of the power to have another contractor perform those works is not a proper exercise of that power. In order to perform or have another contractor perform the deleted works, the contract must clearly empower the principal to do so.

This limitation has been applied very strictly by the courts and is not subject to either:

  • a ‘degree test’ – it is irrelevant whether the principal deletes only a small portion of the contractor’s work and has another contractor perform, or performs the work itself; or
  • a ‘temporal test’ – a principal will breach the restriction if it deletes the work with the intention of engaging another contractor or performing the work itself at some point in the future.

The High Court applied this principle in Carr v JA Berriman Pty Ltd (1953) 89 CLR 327, which has been applied consistently by later cases.

CASE STUDY

Carr v JA Berriman Pty Ltd (1953) 89 CLR 327

Facts
  • Carr engaged Berriman to construct a building on Carr’s property.
  • The contract contained a variation clause which allowed the architect to use his absolute discretion to issue written directions in regard to the omission of any work.
  • During the course of the project, the principal deleted the steelwork from Berriman’s scope, and made an arrangement with a third party to fabricate and supply the steel.
Result
  • The court held that despite the power given to the architect to direct that particular items of work not be carried out, the architect was not authorised to delete the works so that they could then be carried out by another contractor.
  • The court stated that such a power would be unreasonable and could only be conferred with very clear words.

This restriction on the power to vary works is further confirmed in Commissioner for Main Roads v Reed & Stuart Pty Ltd (1974) 131 CLR 378. In this case the contract provided that the contractor could take topsoil from the site and lay it around embankments and if there was a shortage of topsoil, the contractor would be paid a good rate for each unit of topsoil. The principal’s contract manager realised that there was a shortage of topsoil and not wanting to incur the extra costs of paying the contractor engaged a third party to supply the topsoil. The contract manger’s decision to engage a third party contractor was a breach of contract as the contract did not give the principal the power to take away a portion of the contract work from the contractor and give it to another contractor to perform.

Usually the remedy for the contractor where the principal breaches the contract by deleting the works and getting another contractor to perform the works is the loss of profit that the contractor would have made on those works. However, if the breach is sufficiently extensive it could constitute a repudiation of the contract.

Limitation No. 3 – Principals cannot instruct a variation after practical completion

An instruction to vary the works under the contract is normally given before the date for practical completion. For example, clause 36.1 of AS4000-1997 Construct Only Contract provides that the superintendent, before the date of practical completion, may direct the contractor to vary the works under the contract.

If there is no express power given to the principal in the contract to instruct variations after the date of practical completion: J&M Jamieson Constructions Ltd v Christchurch City (1986) 3 NZCLC 99.

However, a contract may include a clause which expressly provides that a principal can instruct a variation after practical completion in which case the contractor is required to perform the variation work: SJ & MM Price v Milner [1968] 206 EG 313.