Valuation of Variations
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KEYWORDS: |
Variations, fairness, global claims, total loss claims, Court of Appeal. |
In Petromec Inc v Petroleo Brasileiro SA [2007] EWCA Civ 1372 the Court of Appeal considered the judgment of Mr Justice Cooke at first instance in Petromec Inc v Petroleo Brasileiro SA [2007] EWHC 1589 which I have previously reported. The issue of substance was the interpretation of valuation clauses for additional works. The matter of particular interest is the unacceptability of a “Total Cost Claim” approach to quantification.
The valuation related to a semi-submersible oil production platform formerly called "Spirit of Columbus".
Petrobras wanted Petromec to procure the upgrade the Spirit of Columbus for use in the South Marlim Field off the coast of Brazil. The Original Specification for the upgrade was never finalised to the last detail but was functional in that it was more a performance specification than one which gave construction details of the works.
Petrobras then decided to use the vessel instead in a very large new oilfield in the Campos Basin, known as the Roncador Field. This required significantly different upgrading works and the Original specification was changed to the Amended Specification. As a result of various commercial pressures the design of the upgrading works was developed while the work of upgrading was in progress.
Petromec's case was that under the valuation terms of the contract for the further upgrading works from the Original Specification to the Amended Specification, they were not obliged to particularise the cost of differences between the two specifications and the further additional work instructed. Petromec argued that it only had to assert and not prove that its costs were reasonable because Petrobras had supervised the works intensively, everything that was done was to their instruction, it had been held in previous proceedings that Petromec were not liable for delay or defective work and the actual costs had been audited by Petrobras. The only deduction from their actual costs was the best estimate of the costs which might reasonably have been incurred in upgrading the vessel in accordance with the Original Specification.
Petrobras' case was that under the valuation terms of the contract for the further upgrading works, Petromec was entitled to the difference between the cost which Petromec might reasonably have incurred in upgrading the vessel in accordance with the Original Specification and the reasonable cost of upgrading the vessel in accordance with the Amended Specification. The difference between the specifications had to be identified and the reasonable extra cost determined. Petrobras argued that, for further instructed changes Petromec was not entitled to formulate its claim as a global claim which only relied on their actual costs. Petromec had to prove the differences and the difference in cost between the Original Specification and the Amended Specification. For further changes, Petromec had to prove they were instructed and then prove the reasonable extra costs of each. Petrobas argued that Petromec had to particularise the work content differences and the instructions which gave rise to them, and then particularise the reasonable extra costs of each.
Mr Justice Cooke in essence accepted Petrobras' construction of the valuation clauses for the further upgrade works.
The Court of Appeal held that the construction of the valuation clauses and the reasoning at first instance were correct, except for a small gloss which did not detract from the main effect of the conclusion.
The core of the dispute and the interesting aspect of the case is the the extent of detail Petromec was required to state in its case. The Court of Appeal held that this issue raised questions of fairness, practicality and the appropriate means of enabling the court to define and decide issues between the parties, as much as questions of construction of clauses of the contract. It held that whatever the construction of the relevant clause of the contract, it would not be fair to Petrobras, nor a practical way of the court proceeding, if Petromec were not required to give adequate details of its claim.
The Court of Appeal held that in broad terms it was fair and appropriate to require Petromec to give details of the work content which it was alleged gave rise to the costs claimed. On the other hand, the court should not devise its own straight jacket requirements if the effect was to refuse to allow Petromec to adopt a structure which, with proper particulars, the court would not strike out.
In relation to the upgrade works from the Original Specification to the Amended Specification, the Court of Appeal held that Petromec had to give details of (a) their case as to the costs they might reasonably have incurred in giving effect to the Original South Specification, and (b) the work content of achieving the Amended Specification and its costs. The reasonable extra cost was the difference between two global sums separately calculated, but each of the two global sums required adequate details with reference to work content.
In relation to the further instructed changes, Petromec was entitled to the reasonable extra cost resulting from the changes. The Court of Appeal held that conventionally Petromec was required to identify the change order instructions, and to give sufficient details of the work content and reasonable cost of each. The Court of Appeal recognised that Petromec was entitled to assert as their case that the Amended Specification was not a document which defined work content and that the design only emerged and became buildable as it went along. On that basis it was held that the court would not strike out a formulation of Petromec's claim which sought to deduct the costs that Petromec might reasonably have incurred in achieving the Original Specification (properly detailed) from the reasonable costs (properly detailed) of achieving the eventually instructed specification. The Court of Appeal held that there was therefore no need for a pointless separate costing of the works notionally required to achieve the Amended Specification, which was never executed in that form, even if that were possible. That did not however let Petromec off the hook of having to give proper details.
It was held that Petromec, not Petrobras, had to prove the amount of their reasonable costs. It was necessary to show that the costs claimed were additional costs which necessarily requiured analysis of work content. there was a procedural requirement of the Court for proper particulars.
The Court of Appeal held that the judge at first instance had correctly summarised the particulars needed, namely itemised work content, the authority under which Petromec did the work, and what they claimed to be its reasonable cost. The authority for the work was either the Amended Specification or an instructed alteration to that specification. In that case there had to be details of the instructions. If a paper instruction (or perhaps a provable oral instruction) could not be produced for some of the work, Petromec had to find a means of particularising sufficiently why they nevertheless alleged that they were obliged to carry out the work. They had to plead a causal nexus.
The Court of Appeal recognised that for much of the direct work, the causal nexus would be obvious and need not be spelt out, such as an instruction for additional steelwork and the direct cost of the additional steelwork. Other indirect work and its costs may need a better particularised causal link to the work content and instruction which caused the cost to be incurred.
"The alleged difficulties that give rise to the Global Claim do not absolve the claimant from proving the causal connect between the events and the extra cost. If the essential conditions for a Global Claim are proved, then the claimant is not required to prove the extra cost caused by each separate event. There is no need to prove the contribution of each event in the group to the overall extra cost, only that each event had some contribution."
para 6.54 Causation in Construction Law
The Court of Appeal accepted the reasoning of Mr Justice Cooke in relation to global claims. The emphasis in the Court of Appeal decision was on the need for details of the case and in particular work content and extra cost, if the proceedings were to be fair and allow a practical approach in the court proceedings.
The Court of Appeal decision confirms that a methodology such as a total loss claim which makes no attempt to establish the causal connection between the events and the costs claimed will not succeed.