Can a Principal reverse approval or payment of progress claims and variations?
There is a very important difference between the nature of progress payments and variation payments that is not fully understood by some contractors.
Progress payments can usually be reversed
It is a well-known principle of building law that progress payments made under a building or construction contract are payments on account. They are not conclusive in favour of either party and are subject to re-adjustment at the conclusion of the contract.[1] This means that a Principal could approve and pay a progress claim then claim it back at the end of the job.
It would be possible to have a contract which changed this so that a Principal could never reverse an approved progress payment. However, it is difficult to imagine any Principal in the construction industry in Australia agreeing to surrender such a right. They never do.
Variations are usually different
Can a Principal also “reverse” variations which have been approved and paid?
This issue was discussed by the New South Wales Supreme Court in a recent decision[2], where the Principal got to the end of the contract and decided to reverse all the variations which had been approved on the basis that they were payments on account, like progress payments.
The court said the Principal could not, as variations are not in the same category as progress payments.
As the court noted, under the contract, the builder was obliged to carry out the variation work upon being directed to do so, including prior to the variation being priced under the contract.
This result should not be surprising. As long ago as 1876, the House of Lords considered a case in which a contractor who started work only to find that, because of the state of the ground, he could not construct the works in the manner originally planned.
He sued for damages on the basis that the provision of the plans and specifications led to an implied warranty that they were correct. The court rejected that argument and noted that the contract contained a variations clause.
Lord Cairns said of the contractor that, in the situation he faced, he was in a dilemma,
“either the additional and varied work which was thus occasioned is of the kind of additional and varied work contemplated by the contract, or it is not. If it is the kind of additional or varied work contemplated by the contract, he must be paid for it and will be paid for it according to the prices regulated by the contract. If, on the other hand, it was additional or varied work, so peculiar or unexpected and so different from what any person reckoned or calculated upon it is not within the contract at all.”
In other words, it was recognised that the contractor directed to carry out variation works of the type contemplated by the contract was obliged to do so[3] and was entitled to be paid in accordance with the contract for the varied works.
So, a Principal cannot usually later “reverse” their decision to pay a variation and claim the money back.
This of course assumes that the contract has a variation clause in the usual terms which obliges the contractor to perform work within the scope of the contract and requires that the contractor be paid for it in accordance with the contract.
Some contracts, such as those created by the Master Builders Association of Queensland, provide that the builder is not obliged to carry out variations. However, in our view, once the builder agrees to perform a variation, the same principles will apply. In other words, it will not be possible for the Principal to reverse an agreed variation.
However, if there is no variation clause[4] and the contractor is asked to undertake a variation, the contractor is entitled to refuse to perform the extra work unless the Principal enters into a new agreement to pay for that additional work[5].
Variations paid remain paid – but not always
Despite this being the position generally, there would be nothing to prevent a Principal from contracting their way out of the usual position that variations once paid remain paid, by presenting a contractor with a contract which provides that any approved and paid variations are only paid on account. With such a clause, the Principal could later “reverse” the decision to pay a variation and claim back the variation payment.
Why would any contractor sign a contract which included such a provision?
If they had not carefully read the contract and just signed it assuming it was like many other contracts they had signed, that could be exactly what happens. It wouldn’t be the first time a contractor was caught out because they did not read a contract properly or take legal advice about clauses that did not look right or that they did not fully understand.
Queries
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Disclaimer
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.
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[1] The usual authority cited in Queensland for this proposition is Sanders Constructions Pty Ltd, Re [1969] Qd R 29, where the Full Court cited a decision from 1849.
[2] Calibre Construction Group Pty Ltd v Kaloriziko Pty Ltd atf Ryde Combined Unit Trust; Kaloriziko Pty Ltd atf Ryde Combined Unit Trust v Calibre Construction Group Pty Ltd (No 2) [2025] NSWSC 593
[3] See also J& W Jamieson Construction Pty Ltd v City of Christchurch [1984] NZHC 1099.
[4] In certain other circumstances as recognised by Lord Cairns, a contractor can refuse to undertake extra work even though there is a variation clause on the basis that it is not a variation but beyond the scope of the contract works, requiring a new contract.
[5] Ettridge v Vermin Board of the District of Murat Bay [1928] SASR 124 at 130-1