In Shanks & McEwan -v- Strathclyde Regional Council (1994) the contract involved the construction of an underground sewer in the form of a tunnel using compressed air. The sewer was constructed as a precast reinforced concrete bolted segmental ring tunnel, lined with in-situ concrete. The contract was ICE 5 Edition with amendments. Work commenced in July 1987 and was completed in March 1990.

The segments cracked and compressed air was lost from the tunnel and air pressure could not be maintained. The contractor therefore claimed extra payment due to the cracking and the consequences.

There was an issue whether the cracking was due to bad workmanship or design, but it was found that it was due to under-design by the Employer. The tunnel segments cracked due to a design failure in that the tunnel segments were not strong enough to withstand the external loads imposed upon them in-situ as tunnelling advanced. The structural loading which was at fault was the permanent loading and not the temporary loading which arose during the contractor's operations.

The central question was whether the contract had been varied in terms of Clause 51 and the interpretation of two letters from the Respondent's Engineer (the 1987 letter and the 1990 letter).

The Engineer was of the view that the structural failure of the tunnel segments was the fault of the contractor and accepted as a concession repaired cracked segments, provided they were made reasonably watertight in order to allow the construction of the in-situ lining.

The Engineer had power under Clause 39(1)(b) to order substitution of proper and suitable materials, if it appeared that unsuitable ones had been used in the course of construction. Under Clause 51(1) the Engineer was required to order any variation that might be necessary for the proper completion of the works and such variations expressly included changes in quality from that originally specified.

The Engineer was aware throughout the progress of tunnelling of the need for continuing repair of cracks which had appeared and the remedial work was therefore done with his consent. Such informal or oral instruction was required to be confirmed in writing under Clause 51(2).

It was argued that the 1990 letter was not acceptance that the contractor was entitled to receive additional payment.

Reference was made to Tharsis Sulphur and Copper Company -v- McElroy & Sons (1878) HL in which it was held that where a manufacturer under a lump sum contract was unable to produce goods to the original specification and the purchaser accepted goods of a different specification, the manufacturer was not entitled to recover the additional costs, because the purchaser was not responsible for the change in specification and his concession did not amount to a variation of the contract. However in the present case if the fault for the design was not the contractor's responsibility then the principle set out in Tharsis had no application.

It was held that whatever may have been subjectively in the mind of the Engineer when he wrote the 1990 letter, its effect was to change the quality of the specification for tunnel segments from segments which would withstand loads without cracking to segments which had cracked and were repaired to make them watertight. The Engineer's 1990 letter was therefore a variation order. He could have ordered the removal of the segments in terms of Clause 39(1) but instead he substituted cracked segments rendered watertight for segments which could withstand loads without cracking.

It was also held that if the conclusion was not correct that there was a plain variation in terms of Clause 51, then the 1990 letter could be construed as an instruction or direction by the Engineer which required a variation to part of the Works and accordingly there was a deemed variation by virtue of Clause 13(3).