How to deal with a practical situation when a verbal instruction to vary the Work is directly issued to the Subcontractor by the Employer?

As the construction projects involve massive works and include specialized works, the Contractors generally engage Subcontractors for the execution of part of the scope, or the contract itself insists on the engagement of Subcontractors for specialized works. In such situations, the standard Forms of contracts do not encourage direct instruction to the Subcontractor by Employer or by any other authorized party. But in practice, Engineer’s or Employer’s agents may directly deal with the Subcontractors to speed up the process, in fact, which is not a wise practice.

The FIDIC forms of contracts insist issuance of instruction to vary the permanent work in writing whenever practicable for effective post-contract administration and to avoid unnecessary disputes between parties. Further, these contracts do not encourage the Employer’s direct instruction and the Employer agent’s improper interference. Instead, insists that the authorized party shall issue the variation instruction, generally the Engineer, in compliance with the delegated protocol under the contract. 

The FIDIC 99 Red Book and the FIDIC Conditions of Subcontract for Construction 2011 Edition are used for the below discussion. The sub-clause 13.1 [Right to Vary] of the 99 RB articulates that “Variations may be initiated by the Engineer at any time prior to issuing the Taking-Over Certificate for the Works, either by an instruction or by a request for the Contractor to submit a proposal”.

Sub-clause 3.3 [Engineer’s Instruction] clearly emphasizes that “the Contractor shall only take instructions from the Engineer or from an assistant to whom the appropriate authority has been delegated under this Clause.” Moreover, this sub-clause stipulates that the Engineer’s instructions shall be given in writing whenever practicable.

Variation Procedure under FIDIC Conditions for Subcontract 2011 Ed

The sub-clause 3.1 [Contractor’s instruction] of Conditions of Subcontract insists that “the Subcontractor shall take instructions only from the Contractor’s Subcontract Representative who shall have the like authority in relation to the Subcontract Works to give instructions..…”

On the other hand, the sub-clause 2.3 [Instruction and Determination under Main Contract] of Conditions of Subcontract provides room for the Employer’s and/or Engineer’s direct instruction to the Subcontractor. This sub-clause articulates that “If the Subcontractor shall receive any direct instructions from the Employer or the Engineer:

(i)    he shall immediately inform the Contractor’s Subcontract Representative and shall supply him with a copy of direct instruction if given in writing; and

(ii) he shall have no obligation to comply with any such direct instruction unless and until has been confirmed in writing as a Contractor’s instruction.”

In view of the above-identified sub-clauses; there are few points to be noted;

1. Variation instruction shall be issued by Engineer.
2. Variation instruction shall be issued to the (main) Contractor.
3. The Contractor shall not vary the permanent works without the Engineer’s instruction.
4. The Engineer’s instructions shall be given in writing whenever practical.
5. The Subcontractor must comply with the main Contractor's instruction only.

The Subcontractor must implement the variation instruction if they received instruction from the main Contractor with whom they have a contractual relationship. Therefore, if such confirmation from the main Contractor is not available, then the Subcontractor should not execute the changes instructed by the Employer, which constitutes a breach of contract on the pure contractual platform.

Nevertheless, FIDIC 99 Red Book provides room under sub-clause 3.3 for verbal instruction, which is to be confirmed/rejected by the Engineer in writing within two working days upon the Contractor’s request for confirmation of verbal instruction.

However, as the Employer and the Contractor are parties to the Contract, they may vary the conditions as per their preference. If the Employer wants to give direct instruction, the Contract between the parties should allow this arrangement irrespective of provisions available under the Standard Conditions of Contract such as FIDIC, JCT, NEC, and etc. Otherwise, if the Employer directly issued instruction and the Contractor accepted, it is likely that a fresh contract has been formed between parties for this particular instructed scope of work. The Engineer shall not include the cost and time impact of this instructed works until the Engineer confirmed as Variation. As an alternative, the Employer shall directly pay the Contractor for the work instructed directly. However, if the instructed works have time impact, which ultimately affects the Time for Completion of the project, then the situation is more complicated as this instructed works impact on the sequence and timing of execution of the original scope. Further, in case the Employer contends that the instruction was never given, then the Contractor is in breach of the Contract situation and obligated to modify the Works in compliance with the original Contract documents and pay Delay damages if any.

What is the alternative?

In case, the Employer issued a direct verbal instruction to the Subcontractor, and he executed it without the written confirmation by the Engineer and subsequently by the main Contractor, what is the alternative solution rather than simply rejecting the Subcontractor’s and main Contractor’s claim just mentioning that such direct verbal instruction does not constitute a variation. 

Is Verbal Instruction sufficient to constitute a formal Variation?

Let’s discuss how the UK common law approaches this matter. 

In the Court of Appeal Case Ministry of Defense v Scott Wilson Kirkpatrick, the Court held that oral instruction is sufficient to construct as a variation. Ministry of Defense hired a Contractor for roof work at its dockyard. As per the contract specification, the roof tiles shall be fixed using 9-inch nails. During the construction, the Employer’s supervision consultant verbally agreed with the Contractor to use the four-inch nail to fix the roof tiles. Ultimately, parties found a defect in the roof, and the Employer argued that the Contractor failed to comply with contract specifications, and therefore the Contractor is liable for the damage. However, the Contractor argued that the work was carried out in accordance with the supervision officer’s variation instruction. The contract between the Ministry of Defense v Scott Wilson Kirkpatrick included the following clause. 

 “7(2) All supervision officer’s instructions shall be given in writing in the manner prescribed by the Authority. If any of the supervision officer’s instructions issued orally have not been confirmed in writing by him such confirmation shall be given upon reasonable request…”

The court decision was based on the second sentence of the above clause, which allows oral instruction. The court held that the contract allowed instructions to be given orally, such that the verbal direction to change the nails amounted to a valid contract variation.

It should be noted that the above sub-clause 7(2) carries identical interpretation as sub-clause 3.3 of FIDIC 99 Red Book. This sub-clause provides room for verbal instruction, which shall be confirmed and/or rejected by the Engineer in writing upon the Contractor’s request for confirmation of verbal instruction.  

Since sub-clause states that instructions shall be given in writing whenever practicable, it impliedly contemplates that they may also be given orally. Therefore, a verbal instruction for a project contracted under the FIDIC 99 Red Book is sufficient to construct as a variation. 

In the Redheugh Construction Ltd. v Coyne Contracting Ltd. and British Columbia Building Corporation (1997) case, the Employer instructed the Subcontractor’s project manager, at the site, to undertake changes to the contract scope. Even though the Subcontractor did not request for and/or receive written confirmation as insisted on the contract, the Subcontractor was entitled to payment for the extra work. The court of instance and appeal court held that, in this case, the condition precedent had been waived by the Employer’s conduct as the Employer issued verbal instruction.

On the other hand, there are cases in which the court refused to grant the entitlements because of the absence of Claims Notice by the Contractor. For example, in the City Inn v Shepherd Construction Limited (2003), the Contractor lost the right to an entitlement for extension of time because of the noncompliance with the condition precedent. The court held that the Contractor’s failure to comply with the notice requirement should be considered a breach of contract, and therefore, the Contractor was liable for liquidated damages. The court held the same strict position as regards to ‘Notice Requirement’ in the recent cases of Steria Ltd v. Sigma Wireless Communications Ltd (2007) and Ayrshire Ltd v. South Ayrshire Council (2009).

Even though the court has held a strict position as regards to ‘Notice Requirement’ in the above-mentioned cases, based on the court decision for Redheugh Construction Ltd. v Coyne Contracting Ltd. and British Columbia Building Corporation, we can say that, in case of direct verbal instruction, the claimant holds high chance to succeed in the case on the principle that “the condition precedent become void by the Employer’s conduct, i.e., direct verbal instruction to the subcontractor”. However, since the party who raises the claims bears the burden of proof, it is always advisable to receive instruction in writing to avoid last-minute hazels.

Contradictory, the Employer may put forward his argument that if Contractor had served Notice of Claim, the Employer would have canceled the instruction to vary the permanent work, which would eventually avoid the Cost and Time Claims. Therefore, in summary, a verbal instruction could be or could not be constructed as a formal instruction depends on the circumstances. The chain of causation plays a vital role in such determination.