KEYWORDS: HOW TO VALUE NEGATIVE VARIATIONS

KEY TAKEAWAY

Valuing negative variations or omissions in lump sum contracts is often fraught: should omitted works be valued on the basis of how much they would have cost the contractor to complete, or on the basis of the part of the lump sum price attributable to the works?

In this case, the English Court of Appeal considered this issue and held that:

  1. negative variations in lump sum contracts should be valued on the basis of the part of the lump sum price attributable to the omitted works; and
  2. to determine what part of the lump sum price was attributable to the omitted works it was permissible to examine the contractor's tender breakdown (even though the breakdown did not form part of the contract).

Facts

The case involved the installation of piles for an offshore wind farm. The barge being used by the contractor (Hojgaard) – the 'LISA' – kept breaking down and was ultimately withdrawn. A free issue barge was supplied by the employer (E.ON), and used by Hojgaard to install all but two of the sixty-two piles.

The contract price was a fixed lump sum. The issue was how to value omission of the works related to the supply of the barge. Hojgaard argued that the part of the contract price attributable to the original barge, the LISA, was the amount which should be deducted from the contract price. The 'original contribution' for the barge (£12.9 million) was indicated in Schedule of Rates of the Contract.

E.ON argued that the omission should be valued with reference to how long it would have taken Hojgaard to have performed the works if they had used the original barge. This would result in a deduction from the contract price of £34.65 million. E.ON argued that the reason behind the variation (i.e. lack of progress) was relevant in determining what value should be given to the deduction.

Decision

The English Court of Appeal found in favour of Hojgaard's valuation approach. The Court reasoned that:

  • Hojgaard had agreed to carry out the work for a fixed price and assumed the risk (the pricing risk) that such a price might not be enough to cover all the work. Although the contract provided for a single price, it was clear that part of that price related to the pile installation works. It was irrelevant how many days it would have taken the LISA to complete the works, as this would have relieved Hojgaard of the pricing risk.
  • Adopting E.ON's speculative approach would have meant that the variation would entail a deduction that was substantially larger than the amount considered for the installation works in the pricing schedule of the contract. Even a calculation by reference to the time taken by the replacement barge multiplied by an 'efficiency factor' to reflect the different efficiencies of the two vessels, would result in a sum greatly in excess of those outlined in the contract. It would also remove the pricing risk from Hojgaard.
  • When carrying out a valuation under the contract, one should consider the contract as a whole and, in particular, the pricing risk. Where it is difficult to quantify the amount of the omitted work as a proportion of the contract price (as in this case, where it was a lump sum contract) one should look at any potentially relevant material, including the way the contractor built up the price.
  • It was not necessary to consider the reason for the variation and account for that in the valuation, as this would involve valuing work the LISA, in fact, could not do.
  • E.ON was wrongly attempting to obtain a contractual remedy for Hojgaard's breach of contract, in seeking to account for delay through the variation mechanism.

Lord Justice Clarke summarised the Court's findings by saying:

"If the [whole of the] work was wholly omitted from the Contract the whole of the price properly attributable to such work would fall to be omitted; and if part was omitted, there should be omitted a proportion of the price that appropriately reflected the work omitted and which, but for the omission, would have been paid"

http://www.bailii.org/cgi-bin/markup. cgi?doc=ew/cases/EWCA/Civ/2014/710. html&query=&method=boolean

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