In MT Hojgaard A/S v E.ON Climate Renewables UK Robin Rigg East Ltd & Another, England’s Court of Appeal had to decide how to value work that was omitted from a fixed price contract.
MT Hojgaard A/S (“MTH”) contracted with E.ON as the employer, to design, manufacture, deliver, install and commission the foundations for 60 wind turbine generators and 2 substations that would together constitute the foundations for a wind farm. The contract stipulated that MTH would provide a jack-up barge called the “LISA” to install the foundations. However, the LISA proved inadequate for the job and the engineer under the contract therefore issued Variation Orders, requiring the substitution of a different vessel, the “Resolution”, to do most of the installation work which the LISA was to have done. MTH withdrew the LISA from the contract and installed all but 2 of the 62 foundations using the Resolution instead. Curiously, although MTH had been responsible for hiring and providing the LISA to carry out the works under the contract, E.ON hired the Resolution itself and provided it on a free-issue basis to MTH.
The parties agreed that the contract price should be varied to reflect the fact that the LISA and the foundation installation vessel spread works had been omitted from the contract, but they disagreed in relation to the amount that should be deducted from the original contract price.
Parties’ respective positions
MTH argued that the variation was an omission of part of the works and should be valued on the basis of the contribution of the omitted works to the contract price. E.ON argued that MTH would have taken a very long time to install all the foundations using the LISA and that there should therefore be a much greater reduction from the contract price, calculated by reference to the amount of time that the LISA would have taken to carry out the installation, as such approach actually took into account the circumstances surrounding the variation to the contract.
Court of First Instance Ruling
The Court of First Instance judge held that the effect of the Variation Orders was to omit part of the works associated with the LISA and to require MTH to carry out additional work in relation to the Resolution. The varied work was therefore to be valued as a variation in accordance with Clause 31 of the contract. Clause 31 provided that in the event of a disagreement between the parties on the adjustment of the contract price for a variation, the adjustment would be determined in accordance with the rates in Schedule L1.3, or if those rates were not applicable to the specific work in question, then by the rates determined by the engineer (as being broadly consistent with those in L1.3) or, if not in the Schedule, the amount that was in all the circumstances reasonable. The engineer should, the judge said, apply the criteria in Clause 31 to provide an approximation to the contract sum made by the works omitted under the Variation Orders.
The judge held that when seeking to interpret Clause 31 the particular circumstances in which the Variation Orders were made should not be taken into account because they were all issued post-contract, and such circumstances were not, therefore, a reliable guide to interpretation; rather it was the contract itself that should be considered.
The Judge said that the contract recognised that different parts of the works made discrete contributions to the contract price as there was a Schedule containing a breakdown of the total contract price. E.ON had agreed to the principle that if an entire item listed in the Schedule had not been done, then the amount allocated to that item should be omitted as an adjustment to the contract price. The judge considered that this also applied to a part of an item, where the value to be omitted for that part would be assessed by the engineer applying the provisions of the relevant clause in the contract. E.ON’s approach, the judge, said, ignored the fact that the sums which MTH would be entitled to be paid under the contract would be the same however long it took MTH to execute them: the contractual mechanism for dealing with delay was by way of liquidated damages, not an adjustment (downwards) of the contract price.
Court of Appeal Ruling
The Court of Appeal dismissed E.ON’s appeal, holding that:-
- Thesubstitution of the Resolution for the LISA relieved MTH of the obligation to continue to pay for the latter vessel and the risk that it might be exposed to a continuing claim for liquidated damages on account of the LISA’s inadequacy. MTH remained potentially liable for liquidated damages to the extent that the contract was not completed within the time stipulated, but was better able to avoid or reduce that consequence because the Resolution was a more efficient vessel. The transfer of risk that occurred was that which arose from E.ON’s decision to hire the Resolution without putting in place any mechanism which would transfer the cost of hire to MTH.
- The essential fallacy of E.ON’s case was that it ignored the fact that by the contract, MTH had agreed to carry out the work for a fixed price and had assumed the pricing risk i.e. the risk that the price would, in the event, be insufficient to cover the work it had agreed to do. Whilst the contract price was a single price for the whole of the work, it was obvious that some part of it related to installation works. If all or part of the installation work was omitted, the part of the price properly attributable to such work should be deducted from the contract price.
- It was neither necessary nor appropriate to work out how long the installation would have taken using the LISA and apply a daily rate, as such approach would relieve MTH of the pricing risk under the contract. To adopt E.ON’s approach would mean that the variation would entail a deduction of €62 milion for works that had been valued at about €25 million in the Schedule to the contract.
- In order to make a valuation of omitted work, the engineer had to consider the contract as a whole and, in particular, the pricing risk. It may, the court said, be a matter of some difficulty for the engineer to determine the precise contribution of the omitted work to the contract price and he might need to look at any potentially relevant material, such as the way in which the contractor built up the price. Any such difficulty did not, however, justify using a different exercise of working out how long the LISA would in fact have taken and applying to that period a rate so as to produce a sum. This, the court said, would involve valuing work which the LISA in fact could not do and would produce markedly different results, depending on the date when the variation was ordered and results which could not represent an appropriate proportion of the price to be attributed to the omitted works.
There has been little case law regarding the valuation of omitted works. In this case, the contract empowered the engineer to determine the amount that was in all the circumstances reasonable to be deducted from the contract price when a variation for omission of the works was ordered. However, it can be observed from this decision that the circumstances surrounding the issue of variation orders should not be taken into account and that the correct approach is to arrive at an approximation of the contract price, made by reference to the component for the omitted parts of the works.