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10 April 2017
Employers typically have the power to vary works, including by making changes to the sequence or timing of their execution (eg, see Article 13.1(f) of the International Federation of Consulting Engineers (FIDIC) Red Book 1999). Sometimes, these variations do not entitle the contractor to additional remuneration. However, as confirmed by a recent Federal Supreme Court decision, even a change order that is permitted under a contract could result in a breach of the employer's ancillary obligations, for instance the duty to provide for site access, and therefore give rise to a right to compensation.
The case dealt with a general contractor that had entered into a lump-sum subcontract with a subcontractor for the construction of 12 residential buildings. Given that under Swiss contract law the general contractor is considered an employer and the subcontractor is considered a contractor, they are referred to below as the employer and contractor, respectively.
The contract included a detailed programme providing for sequential start dates for the works on each building. After the works on Buildings 1 and 2 had already started, the employer informed the contractor that the start dates for works on Buildings 3 and 4 would be postponed until the following spring. This led to savings for the employer, but increased the duration of the works and hence the contractor's mobilisation costs.
The contractor therefore requested compensation for those additional costs. The employer refused, asserting that changes to the sequence of the works were the employer's privilege and did not entitle the contractor to additional remuneration under the lump-sum contract. The employer further asserted that the contractor had consented to the change in the construction programme, and that in any event the contractor had not objected to the programme change or claimed damages in a timely manner and had therefore waived any right to compensation.
The Zurich Commercial Court rejected the employer's defences and ordered it to pay compensation. The court reasoned that the basis of the contractor's claim was not the changed sequence of the works – in other words, not the change order itself – but its impact on delaying the contractor's access to the site. While the employer had an undisputed right to make changes to the sequence of the works according to the applicable general conditions (the Swiss Society of Engineers and Architects SIA 118 standard contract), the employer nevertheless had certain duties to cooperate with the contractor in performing the works (ancillary contractual duties). A change order can result in a breach by the employer of those ancillary duties under the contract, including providing access to the site.
The court also rejected the employer's defence that the contractor had accepted the change by not raising a compensation claim earlier. Mere inaction does not constitute a waiver of a claim in the absence of special circumstances, of which there were none. Indeed, the employer was an experienced construction company and was therefore deemed to have known that the change in the programme would cause the contractor to incur additional mobilisation costs.
The employer appealed to the Federal Supreme Court, but the appeal was dismissed (4A_507/2015, February 19 2016). The Federal Supreme Court ruled that the lower court had not erred in law in considering that a valid change order may constitute a breach of contract, in this case a delay in providing access to the site. It also ruled that the lower court did not err in finding that the contractor had not waived its right to compensation, as the delay in bringing a claim for compensation could not reasonably have been construed as a waiver.
The court further noted that the contractor's additional mobilisation costs were far higher than the employer's savings resulting from the change in programme. In such cases, it is usually incumbent on the contractor to draw the employer's attention to such costs. However, the employer had not demonstrated that the contractor had been aware of the amount of its additional costs or of the employer's savings. Hence, there was no duty on the contractor to notify the employer.
Many construction contracts allow the employer to order changes in the construction programme unilaterally (eg, see Article 13.1(f) of the FIDIC Red Book 1999). This is necessary to preserve flexibility. Under many contracts such changes will entitle the contractor to additional remuneration and extension of time for the works. However, even in contracts under which a contractor cannot seek additional remuneration for such changes, a lawful change order might constitute a breach of the employer's ancillary duties, such as providing for site access, for which the contractor would be entitled to compensation.
In addition, contracts often provide for notice requirements for the contractor in case of a claim. While some such notice requirements might be formalities, others may preclude a contractor from bringing a claim if it does not raise it in time. For instance, Article 20.1 of the FIDIC Red Book 1999 provides that the contractor will be precluded from seeking additional payments if it fails to notify the claim within 28 days of becoming aware of the relevant event or circumstance. Many courts and arbitral tribunals have construed this as a difficult requirement rather than a mere formality. The contractor in the present case was lucky. Although it had waited for many months before making its claim, it was not deemed to have waived it. However, given the court's case-by-case approach on such issues, the outcome could have been different under a different contract or slightly different facts. In order to avoid being precluded from bringing a claim for compensation, contractors should comply with contractual notification provisions and would be well advised to reserve their rights even in the absence of a clear notification requirement.
For further information on this topic please contact Matthias Scherer or Samuel Moss at Lalive by telephone (+41 58 105 2000) or email (firstname.lastname@example.org or email@example.com). The Lalive website can be accessed at www.lalive.ch.
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