Variation instructions

The South Holland Centre in Spalding, Lincolnshire, is a theatre and arts centre that puts on more than 100 shows a year, ranging from dance and jazz to comedy and children's shows.
The centre has also been the back drop for a rather long running dispute between the owner, South Holland District Council, and the building contractor, Hallamshire Construction, which carried out refurbishment works to the centre in 1997.
The contract between South Holland and Hallamshire was based on a JCT 1980 Local Authorities version with Quantities. Hallamshire complained that its work had been delayed and disrupted. It submitted claims that were the subject of negotiation between Hallamshire and South Holland's architect and QS.
Meanwhile, South Holland was impatient to press ahead with phase two of the project for fit-out works, but was having difficulty negotiating the scope and price for those works with Hallamshire.
The parties decided to agree a way forward, such that the phase two work would be instructed by means of a variation issued under the existing contract. The relevant architect's instruction was duly issued, instructing Hallamshire to complete the phase two fit-out works in accordance with the bills of quantities, drawings and specifications with the proviso that all costs in connection with the variation were to be agreed as fair and reasonable costs by the QS.
The architect's instruction also confirmed a revised completion date to take account of these works, and, since negotiations had obviously been proceeding well, noted that a full and final settlement of the prolongation and disruption claims under phase one had been achieved.
The fit-out works progressed to completion but the negotiations concerning the price stalled. Eventually these disputes were referred to arbitration and, after the arbitrator had delivered his award, the case was referred on appeal to the High Court.
The statutory provisions that govern arbitration in the UK dictate that there can be no appeal upon any finding of fact by an arbitrator. Subject to the leave of the court or the agreement of the parties, appeals can only be raised if there is a question of law affecting the arbitrator's decision.
In bringing the arbitration, Hallamshire contended that the phase two work had been undertaken without any contract. To determine whether a contract had been formed for the phase two works, one had to look to the usual contractual formation mechanisms recognised by English law, namely an unqualified acceptance of an offer covering all of the terms necessary to create a contract. The architect's instruction was not an offer capable of acceptance because it was lacking essential terms, notably the price for the work. All the instruction really did was to identify the process for agreeing the price. In other words, it was an agreement to agree, which would not be recognised as contractually enforceable in English law.
The upshot of all of this, according to Hallamshire, was that the arbitrator should have ignored the various rates and prices in bills of quantities that had been exchanged between the parties in attempting to agree a price. Instead Hallamshire should be paid a reasonable cost plus profit for performing the work in the conditions actually encountered.
South Holland approached the matter from an entirely different stand point, arguing that no separate contract was ever necessary or intended in respect of the phase two works. The architect's instruction took effect as an instruction for a variation issued under the original contract, and thus the phase two works constituted extra or additional work to be performed under that original contract.
The remuneration to be paid was defined by the architect's instruction and to the extent that any rates or prices remained unagreed, the parties would need to fall back on the contractual machinery provided by the original contract with the architect having the right unilaterally to fix rates and, in the event of disagreement, the right of either party to have recourse to an arbitrator.
South Holland was not only confident that the contractual arrangements between the parties were to be interpreted this way, but that negotiations in respect of the additional costs deriving from the architect's instruction had indeed concluded in a settlement figure.
The arbitrator found in favour of South Holland on each step of its contention. He concluded that the architect's instruction had contractual effect and that in compliance with that instruction the parties had negotiated an agreement for both the scope of the works and the remuneration payable for the phase two works.
In reviewing all of these matters, His Honour Judge Thornton QC decided that the arbitrator was correct. He had correctly concluded that the architect's instruction in question had contractual effect. It was not necessary in the circumstances to look for offer and acceptance embracing the entire work scope and pricing, such as would be involved when a new contract was negotiated and finalised.
What occurred following the instruction issued under the original contract was a piecemeal agreement of individual work items and its cost. It was not necessary, therefore, for the entirety of the bills of quantities, specification and drawings first to be negotiated and then offered by one party as a composite package for acceptance by the other party. In consequence, Hallamshire's appeal was dismissed and the award of the arbitrator confirmed.