Thursday, December 19, 2013

Variations to Construction Contracts

Over the past few decades, Oman has seen significant developments in its infrastructure. As part of its modernisation initiative, the country has been transformed with the development of an extensive road network, the construction of sea ports and airports, utilities, the reconstruction of governmental buildings, various landmarks and tourist destinations.

As is to be expected, however, disputes relating to construction projects have increased. One common area where construction disputes arise is when variations occur to the original scope of the contract. We touch upon below some considerations which may arise and potential pitfalls to be avoided when dealing with variations to the original scope of works. Contract variations can give rise to a number of difficulties and wide-ranging complications. As such, the following should be treated as a cursory overview of only some of the many issues arising when dealing with variations in construction contracts.

The most common standard construction contract used in Oman is The Standard Documents for Building & Civil Engineering (“Standard Documents”). Article 51, entitled Alterations, Additions and Omissions, provides that variations to the original scope of works are permissible, as follows (as translated):

“The Engineer shall make any variation of the form, quality or quantity of the Works or any part thereof that may have been approved by the Employer and he shall have the power to order the Contractor to do and the Contractor shall do any of the following:

  1. Increase or decrease the quantity of any work included in the Contract
  2. Omit any such work
  3. Change the character or quality or kind of any such work
  4. Change the levels, lines position and dimensions of any part of the Works, and
  5. Execute additional work of any kind necessary for the completion of the Works.”

As provided, variations to the original scope of works are permissible in instances in which the employer (i.e., the customer for whom the project is for) instructs the engineer to amend the scope of works. Variations may either be an increase or decrease in the works to be completed, an omission of an entire part of the construction project, or a revision to the original construction plans. Thus, any permanent change or alteration to the original scope of works as instructed by the employer is, per se, acceptable.

However, removing part of the scope of works from one contractor, and subsequently re-assigning the same works to another contractor without justification, will likely not be classified as a “variation” as understood by Article 51 of the Standard Terms. A variation (either by omission or modification) means that any changes to the scope must be permanent and conclusive. If the employer subsequently decides to re-institute the deleted works, the employer will likely be contractually bound to consign the same works to the original contractor. Therefore, re-assigning deleted works to another contractor without proper justification will likely generate a viable cause of action for the aggrieved contractor.

We note that reassignment of works in certain instances may be justified due to a contractor’s non-performance or breach of contract. For example, if a contractor’s performance has been substandard, and thereby has considerably undermined the construction project, termination of the contract and reassignment may be a viable option. If such a scenario arises, it is best to first review the contract itself to verify if there are any pre-stipulated exceptions.

Additional issues will most certainly arise as a consequence of any variations to the original scope of works. Such issues will likely manifest in both lump-sum and cost-reimbursement contracts, and will need to be quickly redressed in order to circumvent any future disputes. Some prevalent issues that will likely arise include: reimbursement for supplies in which the contractor had previously purchased in anticipation for certain works; forthcoming modifications to monthly payment terms and interim certificates; time extensions as they relate to variation claims; the amount of retention money; and adjustments to the original contract value.

Perhaps the most problematic issue likely to arise is retrospective valuation of the amended scope of works. Quantifying the difference in value of the original and amended scope may prove difficult and costly. It is also likely that the contractor will incur delay charges as a result of a variation, such as the time required to mobilize necessary equipment and obtain additional supplies.

Another consideration is whether a variation effectively amounts to a rescission of the entire contract. In instances in which a variation has fundamentally transformed the contractor’s scope of works, or where a substantial part of the contractor’s scope has been eliminated, one may argue that the new terms amounted to a rescission of the previous contract and formulated a separate, new agreement.

Whatever the subsequent legal position, whenever variations are required, it is important to ensure that all modifications are well documented and are agreed upon in writing at the time in which they occur. Ensure that the agreement is accompanied by an authorized signature (pursuant to the terms of the contract), and is properly signed and dated. Maintaining accurate records of all variations will most certainly help prevent against potential disputes from manifesting in the future. Whether additional payment is subsequently made, or time granted, with regard to the variations undertaken will depend a great deal upon the agreement reached at the time the variation was required and the way in which such a variation can be proved. Irrespective as to whether any doubt exists or not at the time of the variation, the evidence upon which the required payments are subsequently based will be of vital importance.