Valuation of Variations
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KEYWORDS: |
Variations, fairness, global claims, total loss claims, Mr Justice Cooke. |
The term “Total Cost Claim” is a claim where a single sum is claimed which is the difference between the total actual cost and the contract price or valuation of the work. If the Total Claim is for more than one event, then it is a particular form of a Global Claim.
There are many decided cases which have developed the law on global claims. Generally the cases have related to claims for damages for multiple breaches of contract or multiple claims for loss and expense under the JCT Form.
In Petromec Inc v Petroleo Brasileiro SA [2007] EWHC 1589 the issue was the assessment under the contract of the amount due for alleged multiple changes in specification and the concept of the total loss global claim was examined.
The contract was in the form of a supervision agreement for the upgrade of an oil rig vessel specified for use on the South Marlim field, referred to as the Original Specification. The Original Specification was never finalised to the last detail, but was changed for vessel use on the Roncodor field, referred to as the Amended Specification. The Parties agreed the basis of compensation by clause 12 of the supervision agreement for the upgrade to the Amended Specification as the reasonable extra cost that might reasonably have been incurred in upgrading the Original Specification. The parties however had opposing methodologies for implementing the clause 12 assessment.
Petromec the contractor assessed the cost as the difference between the total actual cost incurred in building the rig to the Amended Specification and the estimated cost that would have been incurred in producing the rig to the Original Specification. This was a total loss global claim. The method assumed that the total difference was attributable to the change in specification, as opposed to any other factor such as overpricing, failure in implementing design, poor workmanship or rectification of other errors attributable to the contractor or sub-contractors. Petromec's estimate of the cost was based on contemporaneous estimates coupled with supporting expert evidence as to their accuracy.
Petrobas the employer argued that the proper approach under the contract was to identify the changes, the work done as a consequence and their cost with the aid of expert evidence. Petrobas argued that variation orders and the work were then to be analysed to see whether or not they fell within clause 12, whether as a change from the Original Specification to the Amended Specification or as a variation required by Petrobas. This method, as opposed to Petromec's "global" approach, required detailed analysis of each of the alleged changes.
Petrobas argued that Petromac had to identify the causal nexus between any work for which a claim was made for "extra cost" and a Change Order. Petrobas argued that the adoption of Petromec's method
Petromac argued that it was entitled to put its case in the way that it wished and that the court could not or should not compel it to do otherwise.
Mr Justice Cooke considered that the logic of Petromec's argument led to the conclusion that no sum was due and payable under clause 12 by way of additional costs until the amount equal to the reasonable extra cost of upgrading the vessel to the final Roncador specification, over and above the cost of building the Original Specification was quantifiable. He concluded that was a highly unlikely conclusion as a matter of commercial reality.
Although clause 12 referred to the global difference in cost, it was held as a matter of construction of the contract that the parties saw this in the context of Petrobas instruction to Petromec, which had already resulted in the amendment to the contract. There was a distinction to be made between the amendment which resulted in the Amended Specification and further alterations or changes.
Mr Justice Cooke held that it was necessary for Petromec to identify the work and the associated cost required to effect the changes from the Original Specification to the Amended Specification. For further alterations or changes Petromec also had to establish the instructions from Petrobras for the work as well as the work done. In both cases the reasonableness of the work and costs also had to be shown.
The issue then was whether Petromec could establish the elements required without the detail stated by Petrobras.
There was no difficulty in identifying the Original Specification and the Amended Specification which were essentially functional in nature. However, there was an issue as to what work had to be done to develop the functional design of the Original Specification. Also Petromec's methodology assumed that all the additional cost actually incurred related to work which fell within the variation clause 12 and assumed that instructions were given by Petrobras for further changes. Petrobras made no concession on any of these points and instead argued that there was considerable room for dispute about whether all the costed work done was necessary to achieve the contractual requirement of the Amended Specification and whether the cost involved was reasonable.
Petrobras argued that even if Petromec had no liability for poor performance of the work by its contractors, there was scope to argue that
Mr Justice Cooke observed that if there was such scope for argument, then the assessment of extra cost could not be made without an investigation as to whether the total costs were properly and reasonably incurred. The burden was on Petromec.
Mr Justice Cooke held that the essential problem with Petromec’s methodology was that it assumed that which had to be proved. The assessment based on the methodology would not be enough to entitle Petromec to judgment.
Mr Justice Cooke observed that the methodology attempted to reverse the burden of proof, since it placed upon Petrobras the onus of showing that some elements of cost did not follow from the amendments to the Original Specification and further instructed changes, and the unreasonableness of the course adopted or the costs incurred.
Petromec did not submit that it was impossible to enumerate the changes and the costs, but that there were difficulties which might not allow full recovery. Petrobras alleged that these were caused by keeping inadequate records. Mr Justice Cooke received evidence from experts on the time and costs for the rival methodologies and accepted if Petromec could establish that which was necessary to prove its case by a broader approach then it should be allowed to do so subject to safeguards as to costs.
Accordingly it was held that if Petromec's methodology had been sufficient to prove its case, it would not have been debarred from pleading and proving it by that method, but its methodology was not what the contract envisaged, was not what the law allowed and was not what the Rules of Court required for it to put and establish its case.
Mr Justice Cooke held that the causal nexus between each instruction and the extra cost had to be proved and there was no shortcut which the Court could approve.
It was held that it made no difference whether consideration was being given to multiple breaches or multiple variations. The overall principle remained the same. There was a need to show the consequences of complying with the instruction in terms of work done and cost reasonably incurred. The causal nexus was important and had to be spelt out in an intelligible form.
The line of authorities of Bernhard’s Rugby landscapes Ltd v Stockley Park Consortium Ltd [1997] 82BLR 39, Wharf Properties Ltd v Eric Cumine Associates (No 2) [1991] 52 BLR 1 and John Holland Construction & Engineering Pty Ltd v Kvaerner RJ Brown Pty Ltd [1996]82BLR83 were of direct application.
The decision in Petromec Inc v Petroleo Brasileiro SA [2007] EWHC 1589 is another case on Global Claims which shows how difficult it is for such claims to succeed. In the recent case in London Underground Limited v Citylink Telecommunications Ltd [2007] EWHC 1749 (TCC) the global claim was rejected by both the Adjudicator and Arbitrator, but the Court accepted that a Tribunal could decide a lesser claim but only if the surviving claim was implicit in the case and it was fair to do so without seeking further submissions.
That possibility was not available in Petromec Inc v Petroleo Brasileiro SA [2007] EWHC 1589 which was a total loss claim. The way the case had been presented simply did not allow the connection to be made between the events and the cost.
Total loss claims were considered some time ago in London Borough of Merton v Stanley Hugh Leach [1985] 32 BLR 51 which is still good law. In that case Vinelott J. rejected the total loss claim in emphatic terms.
The above cases show that a methodology such as a total loss claim which in fact shifts the burden of proof and makes no attempt to establish the causal connection between the events and the costs claimed will not succeed. Only in the very unusual situation where there are no other possible events which may be the responsibility of the claimant will such an approach be appropriate. That situation will be rare in practice.