In Grain Communications Limited v Shepherd Groundworks Ltd the Technology and Construction Court (TCC) decided that an employer’s decision to postpone works without providing a new commencement date was a valid exercise of its contractual right to instruct a variation and was not a breach of contract that entitled the contractor to damages.
Given the instruction was a variation, Grain Communications Limited (the “Employer”), was not liable to Shepherd Groundworks (the “Contractor”) for mobilisation/demobilisation costs or loss of profit that it had allegedly suffered (and that an adjudicator had previously decided it had a common law remedy to).
This decision is significant because it demonstrates the approach the TCC may take in relation to the interpretation of broadly drafted variation clauses in construction contracts.
Background
On 20 January 2022, the Employer and the Contractor entered into a framework agreement. The terms of that agreement permitted the Employer to instruct the Contractor to perform works and services within scope of that agreement through a work order. If the Contractor accepted a given work order, the works and services were to be performed in accordance with each work order.
Having entered into 68 work orders under the framework agreement on 7 September 2023, the parties entered into a new work order, number 11500. This work order included the right for the Employer to instruct variations. Variations were defined as:
“…any addition to, omission from or other change in the Works or the period or order in which they are to be carried out.”
The Contractor’s works were due to commence on 25 October 2023. The day before, on 24 October 2023, the Employer telephoned the Contractor to inform them that the works were to be postponed, later informing the Contractor by email that:
“…it currently does not look like we will be able to commence Works on Site in relation to the following Work Orders before the end of 2023...”
The work orders listed in the email included work order 11500.
Several months elapsed and, after an exchange of correspondence, on 10 April 2024 the Contractor issued its payment application. On 16 April 2024 it referred the dispute to adjudication. The adjudicator’s decision was issued on 29 May 2024.
The adjudicator decided in the Contractor’s favour on the basis that the Employer:
- had failed to make clear that the 24 October 2023 email was a variation (and a reasonable recipient would not understand that it was intended to be or constituted a variation); and
- in any event, the Employer could not omit or delay works by way of a variation.
The Employer did not accept the adjudicator’s decision and issued a Part 8 claim for a declaration from the TCC that:
- it is not and was not in breach of the terms of the work order, or the framework agreement, when it informed the Contractor of the postponement of the works under the work order; and
- to the extent it is in breach of either the work order or the framework agreement, it is not liable to the Contractor for the mobilisation and/or demobilisation costs or loss of profit allegedly suffered by the Contractor.
Decision
The TCC accepted the Employer’s position and issued both declarations.
In the decision Her Honour Judge Kelly considered issues in relation to the correct approach for the interpretation of variation provisions, as well as when a term may be implied into an agreement.
Although the decision arises from a particular set of facts, in relation to variation instructions the judgment confirms a number of principles. These are that:
- “The effect of a variation instruction depends on the substance of what is said in the instruction. Variation instructions are not to be read strictly or pedantically.
- The variation must be evident from the document said to constitute a variation instruction.
- An instruction need not contain the word postpone in postponing certain works.
- What is required is that any variation instruction complies with the requirements of the contractual clause for variations.”
While these principles are themselves unsurprising, how the court applied them to the terms of the work order is of note.
A variation instruction does not need to state it is a variation
The express terms of the work order entitled the Employer to make omissions from a work order and also vary the period in which such works were to be performed.
While the adjudicator had concentrated on the fact that the Employer was entitled to make “omissions…in the works” as part of a variation instruction, the court took a different approach, instead considering that the relevant right was that the Employer could vary “the period” in which the works were to be performed.
Where the Employer’s 24 October 2024 email to the Contractor had expressly noted that it would keep in touch with the Contractor concerning the programme for the works, the court held that the Employer’s variation instruction varied the period for the works under work order 11500 and had not “cancel[led] the commencement of the whole of the works” (as the adjudicator had held).
Further, while the adjudicator noted that the Employer’s 24 October 2024 email to the Contractor had not been marked as a “variation”, the court did not attach any significance to this point.
An implied term to restrict the variation power is not required to provide business efficacy
The court was also clear that it was not necessary to imply a term that the Employer would not postpone the start of the works to give the work order terms business efficacy.
The court’s reasoning was twofold: the parties could have agreed to an express term to restrict the Employer’s variation rights (but had not done so) and that such a term would have contradicted the express terms of the parties’ agreement.
Key takeaways
Key takeaways include:
- In contrast to the adjudicator, the court adopted a broad approach when interpreting the Employer’s variation rights. As stated, variation instructions are “not to be read strictly or pedantically”.
- In particular, the court decided that a right to vary the “period” of the works included a right to change the commencement date of those works even where the effect of exercising this right was to postpone the works for an undefined period.
Careful consideration should therefore be given to the drafting of variation clauses and parties should not assume that they can rely upon implied terms of business efficacy to restrict an express contractual right.
If you have any questions or would like to discuss how our specialist team can help you, please get in touch with David Anderson, Francis Reynolds, or your usual Shepherd and Wedderburn contact.