Contractors beware: clauses requiring employer pre-approval of additional work costs

Introduction
Background
Supreme Court's enforcement of pre-approval clause
Comment

Introduction

Clauses that require the contractor to obtain the employer's pre-approval of the cost of any additional works are increasingly common in lump-sum construction contracts.

According to a recent Federal Supreme Court decision (4A_465/2017 of 2 May 2018), these pre-approval clauses will be applied strictly, subject to certain exceptions. In its decision, the court enforced such a clause to deny a contractor's claim to recover the cost of additional works performed by a subcontractor.

Background

An architecture firm had taken on the role of a total contractor for the construction of a hall. The lump-sum contract for the works contained a clause stating that the employer would pay only for additional works if their cost was agreed in advance in writing.

During the project, the architect ran into difficulties with its civil engineering subcontractor, which sought an additional Sfr120,000 for what it claimed to be additional works. After the architect rejected the claim, the subcontractor brought a claim before the courts. The architect ultimately was ordered to pay an additional Sfr55,000.

In the meantime, the architect and the employer agreed to several addenda to their contract for various additional works, including Sfr10,000 for additional civil engineering works. However, the architect informed the employer that the civil engineering subcontractor's claim for an additional Sfr120,000 was unjustified and the addenda therefore made no provision for it. It was only once the courts had granted the subcontractor's claim in part that the architect sought additional amounts for the works from the employer.

At first instance and on appeal, the courts rejected the architect's claim for additional remuneration on the grounds that it had failed to comply with the clause requiring the employer's pre-approval of the cost of any additional works.

The architect appealed to the Federal Supreme Court, arguing in particular that the parties had waived the clause.

Supreme Court's enforcement of pre-approval clause

The Supreme Court began its decision by restating the basics: in the context of a lump-sum contract, a contractor may be entitled to additional remuneration for a change in the scope of works. In the absence of any contrary provision, the price of the additional works will be calculated on the basis of the value of the works and the contractors' costs, in accordance with Article 374 of the Swiss Code of Obligations.

The court went on to note the emergence in practice of clauses requiring employers to approve the amount of any additional remuneration before contractors perform any additional works. It also highlighted two possible exceptions to such clauses:

• where the employer expressly or tacitly waives the clause for a specific change (eg, if the employer is aware that the additional works have begun, but does not seek an agreement on their price); and
• where the contractor implements an employer's instruction without realising, despite exercising due care, that it constituted a change in the scope of works.

However, the court found that neither of these exceptions were applicable. The architect had argued that the employer had been aware of the additional works because it was represented on a committee charged with steering the project. But the court found that the existence of the committee did not show that the employer had sufficiently detailed knowledge of the additional works paid for by the architect to infer that it had waived the pre-approval clause. In particular, the employer had not been provided with a copy of the subcontract. The architect was also unable to show that it was unaware at the time, due to the incomplete description of the project in the contract with the employer, that the works which the subcontractor had performed were in fact additional works.

The court also ruled that it could not be inferred from the fact that the employer had agreed in an addendum to pay additional fees to the architect that it had waived the pre-approval requirement for any additional amounts. It was unclear whether the additional Sfr10,000 fee for civil engineering works actually related to the works for which the subcontractor had requested additional payments. Even if the works were partially covered by the addendum, it would not have helped the architect's position. The court found that the architect had led the employer to believe that the payment was a full and final payment whatever the outcome of the dispute between the architect and the subcontractor.

Comment

The architect's failure to comply with the pre-approval requirement meant that it was unable to recover from the employer the additional amounts that it had to pay its civil engineering subcontractor.

The case serves as a clear message to contractors that a failure to heed a pre-approval requirement for the price of additional works may have costly consequences. In particular, a contractor faced with claims from subcontractors should tread carefully, even if it considers the claims to be unjustified, in order not to lose the right to resort to the employer for reimbursement. However, even a clear pre-approval requirement might not be enforced in certain circumstances, including when the employer knows that the works have been performed and does not on its own motion seek to set a price.

For further information on this topic please contact Matthias Scherer or Samuel Moss at LALIVE by telephone (+41 58 105 2000) or email (mscherer@lalive.ch or smoss@lalive.ch). The LALIVE website can be accessed at www.lalive.ch.