During the course of construction projects, issues often arise involving additional work or substitute work. Contractors perceive even minor departures from the original plans as additional work and demand an increased fee, while investors not only expect all their instructions to be followed within the agreed price, but treat any opposition by the contractor as a breach of contract. This dynamic works similarly between the general contractor and subcontractors. But the realities of the real estate development process often require work to be done even when the parties take different views of the work and do not sign a separate contract covering it. Is an additional fee nonetheless owed for performing such work?
Flat fee does not solve the problem
This problem is obviously well-known in the development and construction industry, which is why employers will typically impose a flat fee if their negotiating position allows. Under Art. 632 §1 of the Polish Civil Code, “If the parties agreed to a flat fee, the party accepting the order cannot demand an increase in the fee unless at the time of conclusion of the contract the scale or costs of the work could not be foreseen ” Art. 632 §2 provides for a narrow exception to this rule, allowing a flat fee to be increased in the event of an unforeseeable change in the relations between the parties. These provisions apply directly to contracts to perform a specific work (umowa o dzieło), for example design works, but they also apply by analogy to construction works (resolution of seven-judge panel of the Supreme Court of Poland of 29 September 2009, Case III CZP 41/09).
Despite the apparently broad and decisive wording of Civil Code Art. 632, it does not foreclose the path to claims for additional or substitute works. Leaving aside the (rarely applied) exception in §2, it is not always noticed that the prohibition on raising a fixed fee applies only to the fee for performance of the work (construction of the building) defined in the contract. In other words, when Art. 632 refers to the unforeseeable scale or costs of the work, this refers to the work and costs necessary to build the structure in the form in which it was commissioned. It does not mean that the contractor is required to carry out every instruction by the investor within the agreed fee, even when in reality this would lead to a change in the project, or in effect would be a new project (e.g. Supreme Court judgment of 9 October 2014, Case I CSK 568/13). It is clear that if during the course of construction the investor instructs the contractor to build, for example, several extra floors on an office building, or a helicopter landing pad on the roof, this is not a case of unforeseeable scale of the work covered by a flat fee, but simply work outside the scope of the contract, resulting in an obligation to pay an additional fee—even if the parties originally agreed to a flat fee.
These examples are intentionally extreme, and in practice the line between work covered by the contract and additional work is often very thin.
Key scope of the contract
The point of departure is thus the scope of the task arising under the contract, which is usually affected by various types of documentation referred to in the contract.
In the case of construction works performed on the basis of a complete design provided by the investor (the model solution provided for in the Civil Code), where the contractor is hired exclusively to perform construction work, and no design work, the problem is somewhat smaller. As a rule, in that arrangement, anything not provided for in the design may be regarded as additional work (see Civil Code Art. 649).
But even in this case, doubts may arise, because by its nature a construction design is characterised by a certain degree of generality. It does not specify all of the features of the structure, particularly in terms of the technologies used, materials and architectural details, and moreover, the Construction Law permits “immaterial” departures from the design. The specific solutions and parameters may be stated in more detail for example in the technical designs or in the contract itself, but that need not be the case and often is not the case.
In such instances, to determine whether the particular work is “additional” in relation to the contract, the most important criterion will be whether, in light of the principles of the construction art, it is essential to perform the work to achieve the effect expressly provided for in the construction design. If the solution demanded by the investor would be advantageous, as well as reasonable, but not necessary, then typically it will be regarded as additional work.
Design and build
Much greater problems arise in projects carried out under the “design and build” approach, which is particularly popular in public procurement projects. In that case, the party entering into the contract with the investor plays a double role, as the construction contractor and the designer. As the structure is only now being designed, by necessity the description of the project in the contract (in public projects, this is included in the “functional and utility programme” (PFU)) is quite general and is limited to indicating the intended functions and basic parameters. And in such projects, the level of detail in the description often varies, which generates additional problems.
Despite the greater generality of the description of the contractor’s task, the rule for differentiating work covered by the contract from additional work is analogous to that in the construction-only example discussed above. Thus, the scope of the contract includes design and execution of the structures expressly mentioned in the contract, even when only a keyword is used (e.g. that a road bridge is to be built over such and such river), as well as, generally, all works, solutions and structures necessary to this purpose, even if not expressly listed. Meanwhile, an instruction to replace a planned structure with a different one (e.g. a tunnel instead of a bridge), or a change in the characteristics specified in the contract (e.g. a rail bridge instead of a road bridge), will be regarded as a substitution order, and adding a new structure, the need for which could not be deduced from the other provisions of the contract (e.g. a rail bridge alongside the road bridge), will be regarded as additional work.
The latter category will be the most difficult to assess, particularly when the contract imposes broad, unspecified duties, like “development of the space” or providing “appropriate” or “adequate” parameters for the structure. In such instances the designer (like any performer of a work) has discretion in selecting the specific solutions. As long as they fall within the parameters specified in the contract and comply with the rules of the art and professional standards of care, then as a rule no blame can be assigned to the designer—even if the investor is subjectively unsatisfied with the final effect.
Who pays for the investor’s instructions
The problems in distinguishing “basic” works from additional works and substitute works are deepened by the provisions frequently encountered in contracts—particularly in design and build schemes—requiring the contractor to comply with all of the investor’s instructions, or stating that certain features of the structure will be determined during the course of the project—all within the originally agreed fee. In extreme instances, the contract wording gives the impression that the contractor is obliged to do whatever the investor instructs from one day to the next. Such far-reaching effects would clearly be unlawful, for various reasons. Suffice it to point out that awarding one party the discretion to determine the consideration to be provided by the other party would be inconsistent with the nature of a contractual relationship and also violate principles of social coexistence (Civil Code Art. 3531) and as such would be invalid (Civil Code Art. 58 §1).
Assuming that such a reservation of rights could be binding at all in a contract to perform a specific work, the investor’s instructions not impacting the fee could involve at most clarification of details (e.g. materials, finishing, architectural features) of the works covered by the contract; they must not unilaterally expand the works by introducing an obligation to execute structures or solutions that cannot be deduced from the contractual description of the task. In such cases, there will be a instruction for additional work or substitute work.
Instructions submitted in design and build contracts involving tasks described in the contract very generally are the most problematic to evaluate. The determination in such cases will depend on the specific circumstances impacting the interpretation of the contractual description of the scope of work related to the instruction. In disputed situations, how the provision would be understood by an objective third party knowledgeable of the construction field and the circumstances of the specific project will be decisive (Civil Code Art. 65 §1)—and whether in that case the contractor should have expected the scope of the assigned work to include execution of the disputed task.
Basis for additional fee
If work is performed that was not covered by the contract, with the investor’s approval or at the investor’s express instruction, it results in unjust enrichment of the investor within the meaning of Civil Code Art. 405, which gives rise to an obligation to pay the investor the equivalent value.
In certain instances, particularly when the investor has not expressly reserved that it expects performance of additional work without additional costs, it may even be found that a contract has been concluded for execution of the additional works, even though not made in writing. The regulations do require written form for construction contracts, but failure to comply with this form does not invalidate the contract. If it can be determined in the given instance that the parties essentially agreed on performance of additional works but did not set the fee, the contractor can demand a fee in the average amount for work of the given type (Civil Code Art. 628), which however may prove to be less than the contractor’s expectations or actual costs.
There is an important exception for public procurement contracts, where written form is required under pain of invalidity, as well as situations where the parties provided in the contract that changes must be in writing or will be invalid—then, as a rule, the only basis for the claim will be the provisions on unjust enrichment (see Supreme Court judgment of 2 February 2011, Case II CSK 414/10).
A cautious investor is always secured
In short, the law allocates the risk so that the contractor is responsible for its own errors in calculating the costs and works necessary to execute the commissioned project, but the investor bears the consequences of planning the parameters for the project as indicated to the contractor. If at the stage of the contract description or preparation of the design the investor does not provide for certain features of the structure, or overlooks features that will later prove useful or important to the investor for whatever reason, the investor will have to pay extra for them, and they cannot be smuggled in even under cover of a flat fee in the contract. So at the end of the day, the best protection against claims by contractors is to prepare for the project carefully and describe it thoroughly in the contract.
Maciej Zych, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners