A costly change.

The Case

In the decision of the Court of Appeal in SWI Ltd v P&I Data Services Ltd [2007] EWCA Civ 663, SWI was a subcontractor to P&I for building works to two buildings 3 and 5 at Glaxo Smith Klein’s site in Stevenage. The subcontracts consisted of two tenders from SWI for the sum of Ł97,800 for building 3 and Ł239,443.29 for building 5 and P&I’s acceptance. The tenders contained no details of the work to be performed other than by reference to general headings, but the detail of the work was in the drawings. The tenders did not contain rates for individual units of work.

In the proceedings at first instance, the joint expert compared the work actually done with the work on the drawings and found that overall substantially less than tendered had been done with a value of Ł40,000. SWI had done less work because P&I had asked SWI to do less. SWI had done what they were asked. The District Judge made no reduction reflecting that figure and the Court of Appeal was required to decide whether SWI was entitled to payment of that amount.

P&I argued that the subcontract was not a fixed price contract, but that was in reality a unit priced contract so that the price for the work performed was assessed at the conclusion of the contract by applying a unit rate to the work carried out. That argument was rejected as there were no unit rates in the subcontract.

P&I then argued that it was entitled to vary the works and that there was an implied term that if the works were so varied and reduced then the price quoted would be varied downwards to take account of that variation. That argument was also rejected. It was held that it did not follow that it was necessary to imply a term under which the fixed price was to be altered with any variation. The situation might be different if the variation rendered the contract substantially different from the one the subject of the fixed price, but that was not the situation in this case. Accordingly the appeal was dismissed.

What This Means

Normally without some term allowing for variations under a fixed price contract, the paying party is not entitled to vary the contract by reducing the work to be done. The builder would have a right to say that he had quoted a fixed price to do certain work and he was prepared to carry out all that work in order to receive his payment. If the paying party simply waives his right to have the complete works performed the builder will be entitled to his full price for what he has done. He would not be in breach of contract for not performing. The “norm” can of course be varied by agreement.

It follows that in preparing the terms of any contract, a purchaser should include provision for instructed variations to the works including omissions and importantly the valuation of the varied works. The best approach is to obtain unit rates from tenderers in competition. To avoid inflated rates making costly any variation, the analysis of tenders should include a price sensitivity analysis for different variation scenarios. Alternatively the valuation of variations could be stated in terms of the change in costs reasonably incurred, substantiated by records or otherwise subject to agreement.