Arbitration Involving Unapproved Variation Orders
I. Introduction
In construction, infrastructure, EPC (Engineering, Procurement & Construction), and government contracts, a variation order refers to a change in:
- Scope of work
- Specifications
- Quantities
- Design
- Time for completion
- Contract price
A dispute arises when a contractor executes additional or altered work without formal written approval, and later seeks payment through arbitration.
These are known as disputes involving unapproved variation orders.
II. What Is an Unapproved Variation?
An unapproved variation typically involves:
- Oral instructions from engineer/employer
- Informal site directions
- Urgent additional work without written authorization
- Deviations due to technical necessity
- Work done beyond Bill of Quantities (BOQ)
Most contracts require:
- Written variation order
- Prior approval
- Rate fixation mechanism
Failure to comply often leads to disputes.
III. Core Legal Issues in Arbitration
1. Whether Written Approval Is Mandatory
Is written approval a condition precedent to payment?
2. Waiver and Estoppel
Did the employer waive formal requirement by conduct?
3. Quantum Meruit
Can contractor recover for work done and accepted?
4. Authority of Engineer
Did site engineer have authority to order variation?
5. Arbitrator’s Jurisdiction
Can tribunal award payment despite lack of formal approval?
IV. Legal Doctrines Commonly Invoked
- Doctrine of Waiver
- Promissory Estoppel
- Quantum Meruit
- Prevention Principle
- Unjust Enrichment
V. Important Case Laws (At Least 6)
1. State of Kerala v. M.A. Mathai
Principle:
If contract requires written approval for extra work, contractor must comply unless waiver is established.
Relevance:
In arbitration involving unapproved variations, tribunal must examine whether mandatory contractual procedure was followed.
2. Ramnath International Construction Pvt. Ltd. v. Union of India
Principle:
Extra items not sanctioned in accordance with contract may not be payable unless approved as per procedure.
Importance:
Arbitrators cannot ignore express contractual requirements for approval of variations.
3. McDermott International Inc. v. Burn Standard Co. Ltd.
Principle:
Arbitrator is bound by contract terms and cannot rewrite contract.
Application:
If contract mandates written variation order, tribunal must respect that framework.
4. Associate Builders v. Delhi Development Authority
Principle:
Arbitral award can be set aside if it ignores fundamental contractual terms.
Relevance:
If arbitrator awards payment for unapproved variation contrary to express contract prohibition, award may be challenged.
5. ONGC Ltd. v. Saw Pipes Ltd.
Principle:
Award contrary to contractual provisions may be set aside as patently illegal.
Importance:
Frequently invoked in infrastructure arbitration where variation clauses are strictly drafted.
6. Hindustan Construction Co. Ltd. v. State of Jammu & Kashmir
Principle:
Where extra work is executed at employer’s instance and accepted, contractor may recover reasonable compensation.
Significance:
Supports recovery under quantum meruit even where formal approval lacking.
7. P.M. Paul v. Union of India
Principle:
If delay or variation arises due to employer’s conduct, contractor may be entitled to compensation.
Application:
Where employer orally directs variation and benefits from it, refusal to pay may be inequitable.
VI. When Can Arbitrator Allow Claim for Unapproved Variation?
Tribunals typically examine:
1. Was Work Actually Executed?
Measurement books
Site records
Engineer certification
2. Was Work Beneficial to Employer?
If employer accepted and used the work.
3. Was There Implied Approval?
Repeated instructions
Course of dealing
No objection during execution
4. Was There Waiver?
If employer habitually accepted oral variations.
VII. When Will Claim Likely Fail?
- Contract explicitly prohibits payment without written approval
- Contractor acted unilaterally
- No proof of execution
- Engineer lacked authority
- Variation beyond contractual scope
VIII. Quantum Meruit in Variation Disputes
Under Section 70 of the Indian Contract Act:
If:
- A person lawfully does something for another
- Not intending it gratuitously
- Other person enjoys benefit
Then reasonable compensation is payable.
This doctrine often saves contractors in arbitration.
IX. Interaction with Public Policy and Government Contracts
Courts are stricter in government contracts:
- Public funds involved
- Tender discipline must be preserved
- Arbitrator cannot override statutory procedure
Judgments like Associate Builders and Saw Pipes emphasize adherence to contract.
X. Practical Illustration
Scenario:
Contract requires written approval before extra excavation.
Engineer orally directs additional excavation due to unexpected soil condition.
Contractor completes work.
No written variation order issued.
Dispute arises.
Tribunal Will Examine:
- Site instructions
- Technical necessity
- Measurement records
- Whether employer benefited
- Past conduct
- Contractual clause wording
Outcome depends on evidence and waiver.
XI. International Perspective
Under FIDIC contracts:
- Engineer’s written instruction usually mandatory
- However, conduct and certification may amount to approval
- Arbitrators often apply commercial practicality
International tribunals tend to be more flexible if:
- Work was necessary
- Employer knowingly accepted benefit
XII. Key Legal Principles Emerging
- Arbitrator cannot rewrite contract.
- Written approval clause may be mandatory or directory (depends on wording).
- Waiver can override procedural non-compliance.
- Quantum meruit may apply if benefit accepted.
- Public contracts receive stricter scrutiny.
- Award ignoring express prohibition risks being set aside.
XIII. Conclusion
Arbitration involving unapproved variation orders sits at the intersection of:
- Contractual discipline
- Commercial practicality
- Equity principles
Courts balance:
- Sanctity of contract
- Prevention of unjust enrichment
- Public policy concerns
Judicial precedents such as Ramnath International, McDermott International, Associate Builders, and Hindustan Construction Co. demonstrate that:
Recovery for unapproved variations is not automatic — it depends on contractual interpretation, evidence of waiver, and benefit derived.
Arbitrators must carefully navigate between enforcing contractual procedure and preventing unjust enrichment.
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