Weldon Plant v Commission for New Towns [2000] TCC BLR 496© Daniel Atkinson 2001 04 November 2001
In Weldon Plant v Commission for New Towns [2000] BLR 496 the main issue was the meaning of "fair valuation" in the valuation of variations under Clause 52(1) of the ICE 6th Edition. This has been referred to as the "third rule" in previous cases. In particular the issue was whether or not an allowance was required to be made for overheads and profit and if so whether the contractor was required to prove loss of opportunity as a result of the variation before being entitled to overhead and profit. In essence the issue was whether the valuation under the third rule was to be based on findings of fact in relation to overheads and profit or whether it was to be decided as a matter of law in the interpretation of the Contract based on the circumstances of the contract and in particular the rates in the contract. Weldon contracted with CNT for the construction of Dunston Mill Reservoir in a contract incorporating the ICE 6th Edition. Th material to be excavated consisted of clay and gravel. Weldon tendered a negative rate of £3.60 per cu. m. for the excavation of gravel, since it was able to sell the gravel. The rate for clay was £3.66 per cu. m. since that material had to be carted to an off-site tip. The contract allowed Weldon at its own risk to excavate below the design level for the bed of the reservoir and to obtain more gravel which it was also entitled to sell. The Engineer issued Site Instruction 17, which was an instruction to excavate all the gravel below the bed and backfill with clay to the design level. The Engineer valued the gravel excavation and clay backfill at bill rates. Weldon disputed the valuation and the issue was referred to arbitration. The Arbitrator decided that the instruction was a variation since it required the contractor to carry out the excavation work as an obligation, whereas the contract gave the contractor an option whether or not to do so, and he could stop at any time if excavation became uneconomical or if unforeseen conditions arose. The Arbitrator decided that the instruction was to be valued on the basis of a fair valuation under Clause 52(1) and that this meant that the contractor was to be paid an amount which would leave him in the same financial situation he would have been in if the instruction had not been issued. The Arbitrator decided that Weldon was entitled to its costs but not to overheads and profit. He had found that the work was not delayed so that there could be no claim for loss of opportunity to earn overheads. He found also that Weldon had not proved that it had been deprived of income to fund overheads. As to profit, the Arbitrator decided that to award profit would put Weldon in a better position than it would have been in had the instruction not been issued. In addition similar considerations applied as found for overheads. Weldon appealed and the issue was referred to the Courts as a question of law. It was stated that matters of valuation are primarily questions of fact, and the principles of and approaches to valuation generally stem from established or common practice an opinion within the industry and do not give rise to questions of law. The meaning of the contract was a question of law and the interpretation of rules may give rise to questions of law. Reference was made to the first instance and Court of Appeal decisions in Henry Boot Construction Ltd v Alstom Combined Cycles Ltd and the decision in Floods of Queensferry Limited v Shand Construction Limited [1999]BLR 319. It was held that Clause 52(1) contemplated that the contractor would be able to recover in a valuation in variations, those elements included in the contract rates or prices for overhead and profit. The contractor offers to carry out variations ordered under Clause 51 that may be required by the Engineer to meet the Employer’s needs, but that offer is not unqualified. First, the variation must be within the scope of the works. Secondly, the variation must be valued in accordance with Clause 52. Those provisions were clearly directed to seeing that the contractor would not have to bear the costs of the variation, except to the extent that, where Rules 1 and 2 apply, the contract rates or prices were inherently insufficient, or to the extent that the costs incurred were not reasonably or properly to be treated as forming part of the valuation. In this respect the definition of "costs" in Clause 1(5) was considered relevant. Fair valuation would therefore "ordinarily" be based on the reasonable cost of carrying out the work. It appears to have been recognised that in some cases the cost evaluated may have to be tempered to so as not to be too far out of line with the contract rates. It was held that a fair valuation has ordinarily to include elements for cost of labour, the cost of plant, cost of materials, the cost of overheads and profit, otherwise it would not be a fair valuation within the meaning of the contract. It was held that the arbitrator should have allowed an element of profit. The arbitrator had found that the work being done by Weldon at that time was profitable, so there was no reason why on those facts a fair valuation should exclude profit. It was held that a fair valuation must include profit except in special circumstances, none of which had been identified by the arbitrator. Those special circumstances were not described by His Honour Judge Humphrey Lloyd in his decision. On the matter of overheads, it was held that a distinction had to be made between different elements of overheads. Some overheads such as site overheads were constant and not normally related to base costs, unless brought into an assessment of the cost of prolongation by reference to the base costs. Other overheads were directly related to the value of the work. It was held that some overheads will only be recovered if there was proof that they were in fact incurred or increased, as they will have been recovered from valuations of the work executed. No exception was to be taken to the Arbitrator’s decision that time related overheads were required to be proved. The arbitrator did not deal with the addition that had to be made to ensure that the contractor obtains a contribution from the costs of the business it undertakes towards its fixed or running overheads. It would not be fair if the valuation did not include an element on account of such contribution. Unlike overheads such as time-related overheads, it was not necessary to prove that they were actually incurred for the purpose of a fair valuation. The approximate amount must be established for example by deriving a percentage from the accounts of the contractor including where appropriate associated companies that provide services or the like that qualify as overheads. Having so decided, the award was remitted to the arbitrator to include in his valuation an amount on account of overheads and profit on the costs and other elements of his valuation. The decision together with previous decisions now gives a full interpretation of the three rule for valuation of variations in Clause 52 of ICE 6th Edition, which it is suggested applies to the ICE 7th Edition. The third rule of fair valuation is clearly to be read as part of the structure of valuation in accordance with the Bill rates. It differs from the first two rules, since it is initially based on actual cost. Usually, the valuation will also include profit. In circumstances where it can be shown that the contractor would not have made any profit at the tendered rates, it is suggested in that case that there would be no entitlement to the addition of profit in a fair valuation. The decision is not clear on this point, but it is difficult to envisage other circumstances referred to. On the matter of overheads, it appears that an allowance for fixed overheads will always be recoverable without inquiry on the basis that this is part of valuation of any work. The fixed percentage to be added to the cost of the variation will derived from the contractor’s accounts. Other overheads such as site overheads and time related overheads will not be recoverable, but will need to be proved as having been incurred or lost. It is suggested that this must be correct, since that part of the valuation does not arise from the direct valuation of the work, but from the consequences of the variation on progress or the balance between site overheads and the cost of the works. The substantive issues had been decided, but Weldon had also applied to have the arbitrator’s award remitted to the arbitrator on the basis that there had been serious irregularities under Section 68 of the Arbitration Act 1996. It was not accepted that simply because the award contained an error which was unfair to a party, there must have been a failure to comply with Section 33 which requires the tribunal to act fairly and impartially, and thus a serious irregularity for the purposes of Section 68(2)(a). No form of dispute resolution was free from error. Section 68(2) was not concerned with the failure of the arbitral tribunal to arrive at the right answer to an issue, but a failure to deal properly with the issues so that substantial injustice is caused, such as
Judge Humphrey Lloyd then examined the three issues relied upon by Weldon to establish whether or not there had been a failure under Section 68(2). In each case he decided there had been no such failure. His comments on how arbitrations may be conducted are instructive. He observed that sometimes an arbitral tribunal will draw up a list of issues which are to be decided. This was a course that was profitably to be adopted particularly where a party is not legally represented. On the other hand when the traditional approach is adopted the issues have to be chiselled out of extensive pleadings and written submissions. In this type of arbitration it was not sufficient for a party simply to signal a potential area for the arbitrator to investigate and decide, but it must also present the case upon which the decision was required. In an arbitration in which the arbitrator was not expected by the parties to make his own enquiries, the arbitrator had to decide on the claims presented by the parties as set out in the written material and other evidence. It was for a party to put forward its case and if it did not do so it cannot complain that it was not treated fairly for the purposes of Section 68(2)(a). |