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Negative variations in Construction Contracts – What do you need to know about them?

Change is the only constant in life, and that’s certainly the case on construction projects.

Generally, under a construction contract the principal will have the ability to order a variation to the scope of works. However, variations aren’t limited to increasing or adjusting the scope of works.  In the event the principal wants to reduce the scope of works and  subsequently the value of the contract, this will amount to a negative variation of the contract.

Usually a principal will vary the contract to omit works when:

  1. Works are no longer required – this may be because of financing or a design change;
  2. A portion of the works is being omitted to engage a different contractor; or
  3. All works are being omitted as they project is not continuing.

Whether a scope of works can be negatively varied will depend on the contract.  In the absence of a clear right under the contract, a negative variation which materially changes the scope or nature of the work may be considered a repudiation of the contract and subsequently grant the contractor the right to terminate.

Omitting the works to engage a different contractor

In  the High Court case of Carr v JA Berriman Pty Ltd[1] it established that if works are omitted from a contract to allow the principal to engage another third party to complete the works, this will not be a valid variation unless the contract expressly contains a clear power to do so.

This case reinforced that a principal can not unilaterally decide to take work off the contractor. A variation clause will only be effective if the principal is exercising their power to vary the works.

Omitting all or almost all of the works

Despite the principal having the powers to vary the scope of works under the contract, they cannot use that power to omit all or a substantial part of the works that the contractor is engaged to complete. This was established in the case of Chadmax Plastic Pty Limited v Hansen and Yuncken (SA) Pty Ltd.[2]

The Court held that the variation clause did not allow for variations that would virtually remove all of the works under the subcontract and that a variation clause in a contract cannot be construed to effectively cancel the contract.

In this case, the head contractor had removed 98% of the works in the subcontract and the Court held that the variation showed an unwillingness from the head contractor to perform its obligations under the contact. This amounted to repudiation and the subcontractor was successful in suing for damages for a breach of contract.

Key Take Away

Parties to a construction contract should ensure that variation clauses are clearly defined and address the above issue relating to negative variations.  This should include a mechanism that allows the parties to agree to the valuation of any negative variations and to what extent works can be omitted from the scope of the project.

If you have any questions regarding negative variations or how to manage changes under a construction contract generally, please do not hesitate to contact Morrissey Law + Advisory.

[1] (1953) 89 CLR 327.

[2] (1984)1 BCL 52.

Disclaimer: This publication by Morrissey Law & Advisory is for general information and commentary only and should not be considered or relied upon as legal advice. Formal legal advice should be sought in relation to any matters or transactions that may arise in relation with communication.