Halfway through the completion of a building contract for Mr. and Mrs. Simpson,
ID: 423327 • Letter: H
Question
Halfway through the completion of a building contract for Mr. and Mrs. Simpson, the builder (a large proprietary company) realised that he had forgotten to include a 'price variation clause' in the agreement. Such a clause would have enabled the builder to pass on any significant increases in material costs during the course of the contract. The price of bricks increased during the course of the agreement due to the exit of two major competitors in the market, and the builder now wishes to pass on the costs to the Simpsons.
Knowing that he has no legal right to demand the money, the builder nevertheless calls the Simpsons and demands an extra $ 20,000 on top of the agreed purchase price and states that if the money is not forthcoming he 'can't guarantee that the house will be finished on time, if at all'.
The Simpsons were shocked by the request but signed an agreement to increase the purchase price by $20,000 because they felt they had no choice. The house was finished on time. The Simpsons have paid the originally agreed purchase price but the builder is demanding the extra $ 20,000 as agreed in writing by the Simpsons. The Simpsons seek your advice.
What is the law on the issue?
what is the application of the law?
Kindly provide references
Explanation / Answer
An escalation clause in a building contract refers to a clause that gives assurance to change in the contract price if there are major alterations in factors beyond the control of either party which in fact results in an increase or decrease in contractor’s costs. However conflict can arise when work is not mentioned in the bill of quantities.
Client is not bound to pay for things where a contractor reasonably failed to effectively recognize and acknowledge the potential variation factors and thus omitted it from bills of quantities. Variations are often sources of dispute furthermore it’s always wise to effectively eliminate uncertainties before awarding the contract.
A construction contract under law facilitates to define the works that the contractor must deliver and unless it contains provisions to the contrary neither party is entitled to independently change the scope. However due to multifaceted environment changes often will be obligatory or desirable thus a contract should characteristically facilitate an appropriate mechanism that can help the employer to order a variation.
Thus a significant variation mechanism offers the contractor with the right to additional payment the principal purpose of the procedure is to alter the contractor’s responsibility as to what it is required to build after all in the absence of such an instruction the contractor will not normally be allowed to implement a change.
This demonstrates that employer may give such permission prior or subsequent to the contractor to make the requisite changes. However once implemented the employer may take a view that while it is pleased with the changed work but however refuses to accept that it is an improvement that can place great value and thus does not feel obliged to pay extra.
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