A client can suspend a project in the hope of getting a better price, as long as the provision for price adjustment is wide enough, writes Finola McCarthy

In changing market conditions, some developers are looking at postponing completion of projects or scaling down the extent of the works. Others are looking at taking advantage of keener prices by removing elements of work from one contractor in the hope that the work will be subsequently carried out by another contractor for a better price.

Whether and how this might be done depends on the terms of the contract agreed.

Most standard form contracts contain provisions which allow the employer to omit work by way of variation with price adjustment. Some contracts allow the project to be suspended at the option of the developer for a fixed duration and others may contain termination for convenience clauses allowing the employer to terminate the contract for any reason at any time with limited right to additional payment.

Whether these clauses work for the particular circumstances in question will depend on the actual wording of the provisions. If the clauses are misused, grounds for breach of contract claims may arise.

This is one of the issues which arose in the UK case of Amec Building Limited v Cadmus Investments Company Limited (1996). The developer Cadmus sought to omit the fitting out of a food court which was originally included in the contract by provisional sums and have the work carried out by a third party.

Under the contract the architect had the power to remove work from the contractor if it considered that it was in the best interests of the employer.
Amec argued that the omission was a breach of the contract and claimed damages for loss of the profit it would have earned if it had carried out the fit-out work.

The court held in favour of the contractor because the power within the contract did not allow work to be omitted in order to give it to a third party as opposed to omitting it all together.

In a more recent case of Abbey Developments Limited v PP Brickwork Limited (2003), the question before the UK Technology and Construction court was whether Abbey Developments was entitled to take away the remainder of the work which PP Brickwork, (a labour only subcontractor carrying out block work and brickwork in a housing development) was appointed to carry out.

The contract contained a clause which allowed the developer to vary the number of units (construed as the variation clause) and also a clause which entitled the developer to renegotiate rates or re-tender the works without giving rise to a claim by the sub-contractor.

The judge considered this clause to be a termination for convenience clause in this particular contract where the sub-contractor was providing labour only and would not have entered into commitments for supplies.

The developer was not happy with PP Brickwork’s performance and argued that it was entitled under these clauses to remove the remaining units from the sub-contractor and have them completed by another contractor without being liable for loss of profit to PP Brickwork.

The judge said that variation clauses should be construed carefully so as not to deprive the contractor of its contractual right to the opportunity to complete the works and realise such profit as may then be made: “the basic bargain struck between the employer and the contractor has to be honoured and an employer who finds that it has entered into what he might regard as a bad bargain is not allowed to escape from it by the use of the omissions clause so as to enable it then to try and get a better bargain by having the work done by somebody else at a lower cost once the contractor is out of the way.”

Whether the developer can rely on the omissions clause to omit all outstanding work will depend on whether the provision in the contract is wide enough to permit this.

In this particular case the judge found that the developer had not acted lawfully under the contract because it had taken steps to terminate the contract under the determination provisions of the contract which did not comply with the requirements of those provisions and then sought to rely on the variation clause.

Employers who are contemplating omitting parts of the works from the scope of the existing contract should take care to decide which provision of the contract entitles it to exercise this power before it steps.

If the omitted work is subsequently carried out by another contractor, the original contractor may be entitled to seek compensation for breach of contract unless the contract clearly allows the employer the right to do this.

If the project will involve a number of sections or phases, a termination for convenience clause will allow some flexibility to rescope the project and minimise exposure to loss of profit claims. n

This article was written by Finola McCarthy, partner, Ronan Daly Jermyn Solicitors

This article appears in the November 2008 edition of Irish Construction Industry Magazine