Construction projects are frequently complex, risky and subject to change. It is often not possible to forecast such changes before starting work. Variations under or to a construction contract are therefore common.
Standard form construction contracts have detailed processes and mechanisms relating to variations. Relatively simple contracts can also be varied by the parties’ agreement. That agreement might encompass the price for the variation. Alternatively, the law implies that a “reasonable sum” may be charged.
Timberbrook Ltd v Grant Leisure Group Ltd [2021] EWHC 1905 (TCC) includes a fact pattern familiar to many in the construction industry. The court’s decision includes some key lessons on what to do when it comes to seeking to be paid for variations under or to a construction contract.
Facts
Timberbrook Ltd (“Timberbrook”) was a company that, among other things, installed and fitted out animal enclosures at zoos. Grant Leisure Group Ltd (“Grant”) owned and managed Blackpool Zoo (the “Zoo”). The parties had a history of dealing, in that Timberbrook had carried out up to 90% of the construction work at the Zoo up to 2012. In evidence, Timberbrook’s previous director discussed the arrangements between the parties on previous projects. Despite the contracts being fixed price, there had been a “degree of flexibility” should any “issues arise” where the parties could if necessary negotiate an uplift to the contract price.
In mid-2011, the parties began discussing the demolition of the orang-utan enclosure at the Zoo and the design and build of a new enclosure (the “Project”). Timberbrook initially priced the Project at £725,000.
In August 2012, Timberbrook entered into a company voluntary arrangement (“CVA”). (In summary, the purpose of a CVA is to restructure the company’s debts and allow it to continue to trade.)
In late 2012, the parties continued to discuss the Project. Due to “pressure” from Grant, Timberbrook eventually priced the Project at some £508,000. (This was partly due to the scheme being somewhat smaller than when Timberbrook had previously priced it in 2011.) In evidence, one of Timberbrook’s employees – who later went on to become a priest! - conceded that such a low price provided no “wiggle room” for unforeseen circumstances.
Around this time, Timberbrook was hopeful of securing a connected project to construct a new penguin enclosure at Bournemouth Zoo, worth around £1,000,000. This, combined with Timberbrook’s ongoing financial difficulties, contributed to its low price for the Project.
In January 2013, the parties entered into a contract (“the “Contract”) for the Project. The Contract included the following key terms:
- Timberbrook would complete the Project by 19 July 2013;
- Timberbrook would be paid in instalments, with each instalment being “conditional” on achieving a certain stage of the works by an agreed date. (Such mechanisms are often characterised as “milestone” payments.); and
- All variations should be agreed by the parties in signed writing.
The Project commenced around late January or early February 2013. Early in the Project, Timberbrook sought additional payment for some alleged variations. (The court was unable to see the particulars of this claim as since 2013 Grant had deleted its historic emails to free up storage space!) That claim was rejected by Grant. The project also became beset by delays, thus jeopardising the opening or the orang-utan enclosure for summer 2013.
In June 2013, Grant terminated the Contract, citing delays on Timberbrook’s part. Timberbrook went into liquidation in January 2014. In 2019, Timberbrook issued proceedings, seeking £38,000 for the value of work carried out up to the termination and £45,000 for variations and/or additional work (detailed in eight separate invoices). The focus of this article will be on the latter head of claim.
Decision
The judge firstly rejected Timberbrook’s claim for the value of work up to termination, as it had not reached the relevant payment milestone and therefore no further sums were due under the Contract. (You can read more about milestone payments here)
The judge then turned to variations. Before discussing the eight invoices, the judge sought to discuss some “points of general application”. At paragraph 59 of the judgment, HHJ Eyre QC said that:
“In order to establish an entitlement to payment for allegedly additional work the Claimant has to show that the work was performed; that it was additional to that which the Claimant was required to do under the Contract; and either that the Defendant agreed to the work being performed for a particular sum in addition to the payment due under the Contract or that the Defendant agreed to the work being performed knowing that it was additional to the Contract works and was not being undertaken gratuitously in which case the Claimant would be entitled to a reasonable sum for labour and materials in respect of the work. If the Claimant's entitlement is to a reasonable sum for labour and materials in relation to a particular item of work then the Claimant must establish what that reasonable sum is.”
The judge also noted that none of Timberbrook’s invoices for the alleged variations showed a breakdown of the sum sought or attached any substantiation such as daywork records or purchase invoices for materials. The judge also drew attention to the fact that none of the alleged variations were agreed in advance. (It is also notable that none of the alleged variations were agreed in writing as required by the Contract.)
The judge was also critical of Timberbrook’s practice of pricing the Project low and excluding risk items in the hope of later negotiating them. He referred to Timberbrook’s variation invoices as an invite to negotiate rather than the “assertion of a legal entitlement to the amounts invoiced”.
The judge went on to reject every one of Timberbrook’s variation claims.
Commentary
Timberbrook v Grant Leisure contains some important lessons for contractors (and likewise, sub-contractors) looking to be paid for variations under or to a construction contract.
Firstly, if a contract with variation provisions exists then a contractor should read, understand and follow those provisions. Contractors should be mindful of:
- The timing and content requirements of any notices;
- Any applicable valuation rules (including, for example, whether any associated loss and/or expense should be valued separately);
- What substantiation is required (if any); and
- Any requirement for variations to be agreed in writing (as in this case).
If in doubt, contractors should seek professional advice on these points.
Secondly, if the contract is one without variation provisions, the contractor should heed HHJ Eyre QC’s implicit advice at paragraph 59 of the judgment and seek to agree the entitlement to and value of a variation before carrying out the work in question. Note from paragraph 59 that the burden of showing an entitlement and a reasonable value is placed on the contractor, as the party looking to be paid. Good record keeping is therefore imperative, particularly in a situation where entitlement has been agreed but valuation has not. This will include correspondence, resource sheets and purchase invoices.
Also of note was the judge’s critique of submitting low tenders and excluding risk items in the hope that they could be later negotiated. This statement however does not account for context of the fast-paced tendering process, where often key information is not available. It is suggested that tendering contractors at least put forward a schedule of risk items or provisional sums for consideration before any contract is formed, to “set an agenda” for later discussions.
