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No excuse for contractors not doing their legal homework

legal matters

Contractors' claims are increasingly being brought on a 'total cost' basis. The argument goes something like this: 'We contracted to build a building (pipeline, steel pallets, whatever) for £1 million over a period of 50 weeks. No sooner were we on site than we were bombarded by variations, design problems, changes of mind, changes of heart and extra work. All this delayed us by another 50 weeks. The contract was then pushed into a period of the worst weather the world has ever known, which together with the general strike and a Europe-wide shortage of building materials meant that the project was not finished until year three. None of this was our fault. It should have cost us less than £1 million. It actually cost us £25 million. Can we have the difference please?' I exaggerate of course.

The contractor argues that the final job was so wildly different from that contracted for, that it is impossible to value all the extra works with reference to the original contract price. Instead the contract should be put in the bin and the contractor paid its total costs of doing the work.

The legal arguments used to support these claims include:

The contract was subject to so many variations of such significance that they totally altered what was required to be done and vitiated the contract - the 'vitiation by variation' argument.

The contract was subject to so many contractual events and breaches, with such a complex interaction that it is impossible to separate them out and consider their impact individually - the 'multiple interacting variations' argument.

Despite their frequency, it seems that legally, at least, these arguments are founded on optimism alone. Most of the standard forms expressly state that variations will not vitiate the contract (see for instance clause 13.2 of the Joint Contracts Tribunal standard form of building contract 1980).

Common sense suggests that this cannot be the case - if, for example, a contract for the construction of a house were varied beyond all recognition by an order for 20 more. Nevertheless the point has been considered on numerous occasions by the courts in America (where this idea first came from) and so far, despite the drastic and far-reaching changes to which some contracts have been subjected, a contractor has yet to succeed.

The 'multiple interacting variations' argument is usually put forward as part of a 'global claim' that the contractual provisions as to both time and money be put at large - opening up the possibility of claiming for extra time or money spent. The proliferation of these claims can easily be explained. A claim looks superficially more impressive if every instruction or drawing is relied upon, without exception, irrespective of its causative effect, and the need to spend time and money ascertaining which of these instructions actually caused delay or cost is avoided.

Repeatedly, however, the courts have treated such claims with derision. Not least because, although they are relatively easy to bring, they are very difficult to deal with. If it is said that all the events caused all the cost claimed, then, so far as the employer can establish that one event after another had no such effect, logically the contractor may be left with one item upon which to hang all the costs. In the ICI v Bovis case, the judge found it 'palpable nonsense' that £840,000 could be attributed to the repositioning of a fire bell.

When presented with a global claim, the employer has little alternative but to do what the contractor ought to have done in the first place and show which, if any, of the matters relied upon actually caused delay or additional cost. In the McAlpine Humberoak case, the defendants carried out an exercise described as 'a retrospective reconstruction of events almost day by day, drawing by drawing, technical query by technical query, designed to show that the spate of additional drawings which descended on McAlpine virtually from the start of the work really had little delaying or disruptive effect on its progress'. This, said the Court of Appeal, was 'just what the case required'. As the unsuccessful contractor ended up paying for this exercise in any event, it might as well have done it at the outset and discovered that it had no claim before it began. It would have saved a lot of money.

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