Variation claims in international arbitrations involving construction are common. Over the course of a construction project, it is not rare for a project to undergo changes. This might arise because the employer needs to change the original scope of work that can no longer be carried out after starting the project, or the contractor discovers something that necessitates a change to the scope of work. Whether or not a change constitutes a variation and, therefore, which party bears the risk of that change, primarily depends upon the terms of the contract.
What Is a Variation Claim?
Prior to answering this question, the term variation shall be defined. A variation is a change that modifies all or part of an existing order. It is generally requested by the employer, directly impacting the work described under the contract.
There are numerous valid circumstances that may affect the overall project costs and schedule. For instance, if the change increases costs, it can affect the employer by increasing the overall budget or schedule. A change can also require some type of design modification and affect the contractor by modifying the workplan, necessitating more time to complete the project.
When the employer issues an instruction in writing for variation work, the contractor may be eligible to claim for additional costs incurred for the extra work. The contractor typically needs to carry out the instructed work pending the valuation of the variation.
Once the contractor has completed the variation work, it shall submit its claim together with the progress claim. Such a claim for extra work carried out is referred to as a variation claim.
Variations are often provided for in lump sum contracts. These contracts are contracts where the total price is known before the work starts on site. The contractor agrees to undertake a defined amount of work for a specific amount.
There is no requirement to have the same pricing mechanism for a variation as for the original contract price, and it is not rare for the pricing mechanism of the contract to be different from the pricing mechanism for a variation. In reality, a variation is generally valued by reference to rates and prices, or reference to the cost of the variation work.
In Lucas Earthmovers Pty Limited v Anglogold Ashanti Australia Limited, the claims brought by the contractor included payment for variation under the contract. The contract, however, provided for a clause of “no damage for delay” drafted as follows:
Notwithstanding any other provision of this Contract, the Contractor will not be entitled to claim any Liabilities resulting from any delay or disruption (even if caused by an act, default or omission of the Company or the Company’s Personnel (not being employed by the Contractor)) and a claim for the extension of time under Clause 18.3 will be the Contractor’s sole remedy in respect of any delay or disruption and the Contractor will not be entitled to make any other claim.
The Federal Court of Australia had to decide whether a “no damage for delay” clause prevented the contractor from being awarded time-related costs when the delay was a result of a variation under the contract. The court considered that time-related costs were included in the applicable rates for variation in the contract. It added that if there were no applicable rates in the contract for variation work, then the valuation of the variation could include a reasonable amount for time-related costs.
Submission of a Variation Claim
Well-drafted contracts tend to contain a procedure for valuation of variations which can impact the contractor’s variation claim.
For instance, looking at the FIDIC Red Book, which is one of the most common standard forms of construction contract used by parties, Clause 13.3 of the FIDIC Red Book specifies the procedure under which variations may be initiated. A variation may be initiated either by instruction or by a request for proposal.
Regarding variations initiated by instruction, Clause 13.3.1 specifies that the employer must provide notice to the contractor when instructing a variation. The Contractor shall then submit to the employer a detailed program of the varied work to be performed. Afterwards, the employer can either accept or determine the extension of time (if any) and the adjustment of the contract price:
13.3.1 Variation by Instruction
The Engineer may instruct a Variation by giving a Notice (describing the required change and stating any requirements for the recording of Costs) to the Contractor in accordance with Sub-Clause 3.5 [Engineer’s Instructions].
The Contractor shall proceed with execution of the Variation and shall within 28 days (or other period proposed by the Contractor and agreed by the Engineer) of receiving the Engineer’s instruction, submit to the Engineer detailed particulars including:
(a) a description of the varied work performed or to be performed, including details of the resources and methods adopted or to be adopted by the Contractor;
(b) a programme for its execution and the Contractor’s proposal for any necessary modifications (if any) to the Programme according to Sub-Clause 8.3 [Programme] and to the Time for Completion; and
(c) the Contractor’s proposal for adjustment to the Contract Price by valuing the Variation in accordance with Clause 12 [Measurement and Valuation], with supporting particulars (which shall include identification of any estimated quantities and, if the Contractor incurs or will incur Cost as a result of any necessary modification to the Time for Completion, shall show the additional payment (if any) to which the Contractor considers that the Contractor is entitled). If the Parties have agreed to the omission of any work which is to be carried out by others, the Contractor’s proposal may also include the amount of any loss of profit and other losses and damages suffered (or to be suffered) by the Contractor as a result of the omission.
Thereafter, the Contractor shall submit any further particulars that the Engineer may reasonably require.
The Engineer shall then proceed under Sub-Clause 3.7 [Agreement or Determination] to agree or determine:
(i) EOT, if any; and/or
(ii) the adjustment to the Contract Price (including valuation of the Variation in accordance with Clause 12 [Measurement and Valuation] using measured quantities of the varied work)
(and, for the purpose of Sub-Clause 3.7.3 [Time limits], the date the Engineer receives the Contractor’s submission (including any requested further particulars) shall be the date of commencement of the time limit for agreement under Sub-Clause 3.7.3). The Contractor shall be entitled to such EOT and/or adjustment to the Contract Price, without any requirement to comply with Sub-Clause 20.2 [Claims For Payment and/or EOT].
In accordance with the terms of Clause 13.3.2 of the FIDIC Red Book, when there is an instruction issued in writing for variation work, the contractor is eligible to claim for additional costs incurred for the extra work. Accordingly, the contractor needs to carry out the instructed work pending its valuation of the variation.
Turning to a variation by request for proposal, pursuant to Clause 13.3.2 of the FIDIC Red Book, the employer may request a proposal from the contractor before instructing a variation. The contractor shall then submit its proposal or give the reasons why it cannot comply. If the employer approves the proposal, it should instruct the variation:
13.3.2 Variation by Request for Proposal
The Engineer may request a proposal, before instructing a Variation, by giving a Notice (describing the proposed change) to the Contractor.
The Contractor shall respond to this Notice as soon as practicable, by either:
(a) submitting a proposal, which shall include the matters as described in sub-paragraphs (a) to (c) of Sub-Clause 13.3.1 [Variation by Instruction]; or
(b) giving reasons why the Contractor cannot comply (if this is the case), by reference to the matters described in sub-paragraphs (a) to (c) of Sub-Clause 13.1 [Right to Vary].
If the Contractor submits a proposal, the Engineer shall, as soon as practicable after receiving it, respond by giving a Notice to the Contractor stating his/her consent or otherwise. The Contractor shall not delay any work whilst awaiting a response.
If the Engineer gives consent to the proposal, with or without comments, the Engineer shall then instruct the Variation. Thereafter, the Contractor shall submit any further particulars that the Engineer may reasonably require and the last paragraph of Sub-Clause 13.3.1 [Variation by Instruction] shall apply.
If the Engineer does not give consent to the proposal, with or without comments, and if the Contractor has incurred Cost as a result of submitting it, the Contractor shall be entitled subject to Sub-Clause 20.2 [Claims For Payment and/or EOT] to payment of such Cost.
In 2021, the High Court of Singapore had to decide on whether work instructed orally could be considered as a variation. It took a strict approach and considered that if the contract provided for a variation to be carried out only pursuant to a written instruction, then no claim for payment could be made when the variation had been instructed orally. The decision of the High Court of Singapore forces contractors receiving variation orders orally to request confirmation of instructions in writing.
What Happens If a Dispute on a Variation Arises?
As explained above, variations may be provided for in the contract, but they can also occur outside of the contract which will give rise to distinct claims.
A Claim for Debt or Damages
When the contract includes a variation provision, if the disputed variation is covered by the provision, then it will be a claim under the contract that qualifies as a claim for debt or a claim for damages. Once the contractor completes the variation work, it shall submit its claim together with the progress claim. Such a claim for extra work carried out is referred to as a variation claim. The contractor is entitled to payment of the undisputed element of a variation or award of an extension of time.
When there is a disputed element of any variation, the FIDIC Red Book, for instance, requires the contractor to treat it as a claim under Clause 20.1. This Clause lists the claims available to the employer and the contractor:
A Claim may arise:
(a) if the Employer considers that the Employer is entitled to any additional payment from the Contractor (or reduction in the Contract Price) and/ or to an extension of the DNP;
(b) if the Contractor considers that the Contractor is entitled to any additional payment from the Employer and/or to EOT; or
(c) if either Party considers that he/she is entitled to another entitlement or relief against the other Party. Such other entitlement or relief may be of any kind whatsoever (including in connection with any certificate, determination, instruction, Notice, opinion or valuation of the Engineer) except to the extent that it involves any entitlement referred to in sub-paragraphs (a) and/or (b) above.
Clause 20.2 specifies the procedure under which a claim for payment and/or extension of time must be made. In this regard, the claiming party (the contractor) shall give notice to the employer describing the circumstances giving rise to the cost, delay or extension of time for which the claim is made. This notice must be made within 28 days after the claiming party became aware of the events or circumstances.
This means that claims for payment or extension of time are subject to a time limit. If the contractor fails to give notice within 28 days, then it will not typically be entitled to any additional payment:
If the claiming Party fails to give a Notice of Claim within this period of 28 days, the claiming Party shall not be entitled to any additional payment, the Contract Price shall not be reduced (in the case of the Employer as the claiming Party), the Time for Completion (in the case of the Contractor as the claiming Party) or the DNP (in the case of the Employer as the claiming Party) shall not be extended, and the other Party shall be discharged from any liability in connection with the event or circumstance giving rise to the Claim.
The time bar provision found in the FIDIC Red Book is common in construction contracts. Under the NEC4 contracts, for instance, notification for compensation events must be made within 8 weeks of “becoming aware that the event has happened”. If the claiming party fails to do so, it may lose its entitlement to additional cost or time.
In Maeda v Bauer, the Hong Kong High Court overturned the arbitrator’s decision and considered that because the subcontractor failed to respect the notice provision of the contract, this resulted in it losing all entitlement to compensation.
A Claim for Restitution or Work Under a Separate Contract
Even if variations are usually regulated under variation clauses, contractors may perform extra works without receiving instructions from the employer, or based on invalid instructions. The contract may also not include any variation provision.
Accordingly, the variation claim will be outside of the contract. It may be restitution based. It may also be a claim that the work was carried out under a separate contract.
Most jurisdictions recognize the doctrine of unjust enrichment or enrichment without cause.
For instance, under Article 179 of the Egyptian Civil Code, “Every person, even irrational ones, who is enriched without just cause at the expense of another, shall, to the extent of his/her enrichment, indemnify the other for his loss, such obligation subsists even if the enrichment ceases afterwards.”
Similarly, under English law, the law of restitution is separate to any element of contract law. The law of restitution and its foundation in the principle of unjust enrichment are independent from the law of contract.
Finally, contractors should pay careful attention to the specific procedures for claiming a variation. Prior to claiming a variation under its contract, the contractor should prepare a detailed cost accounting and perform the work only after receiving authorization to proceed.
 The Second Edition of the Conditions of Contract for Construction, published by the Fédération Internationale des Ingénieurs-Conseils (“FIDIC”) as an update of the FIDIC 1999 Conditions of Contract for Construction (Red Book), First Edition.
 The Second Edition of the Conditions of Contract for Construction, published by the Fédération Internationale des Ingénieurs-Conseils (“FIDIC”) as an update of the FIDIC 1999 Conditions of Contract for Construction (Red Book), First Edition, Clause 13.3.
 The Second Edition of the Conditions of Contract for Construction, published by the Fédération Internationale des Ingénieurs-Conseils (“FIDIC”) as an update of the FIDIC 1999 Conditions of Contract for Construction (Red Book), First Edition, Clause 13.3.1.
 The Second Edition of the Conditions of Contract for Construction, published by the Fédération Internationale des Ingénieurs-Conseils (“FIDIC”) as an update of the FIDIC 1999 Conditions of Contract for Construction (Red Book), First Edition, Clause 13.3.2.
 The Second Edition of the Conditions of Contract for Construction, published by the Fédération Internationale des Ingénieurs-Conseils (“FIDIC”) as an update of the FIDIC 1999 Conditions of Contract for Construction (Red Book), First Edition, Clause 20.1.
 The Second Edition of the Conditions of Contract for Construction, published by the Fédération Internationale des Ingénieurs-Conseils (“FIDIC”) as an update of the FIDIC 1999 Conditions of Contract for Construction (Red Book), First Edition, Clause 20.2.
 The Second Edition of the Conditions of Contract for Construction, published by the Fédération Internationale des Ingénieurs-Conseils (“FIDIC”) as an update of the FIDIC 1999 Conditions of Contract for Construction (Red Book), First Edition, Clause 20.2.1 (emphases added).
 See, e.g., The NEC4 Engineering and Construction Contract, Clauses 61.1 to 61.7.
Reference Article: https://www.international-arbitration-attorney.com/variation-claims-in-international-arbitration/