The Court of Appeal has recently upheld a TCC decision last year in MT Hojgaard v E.ON providing an important reminder as to how to approach the exercise of valuing variations to contract works. This is particularly an issue when the variation is an omission of work. We are increasingly seeing variation clauses being used to omit works to give to others, particularly in long running frameworks or PFI contracts where there is a desire to obtain “better” prices mid-term.
The installation of monopiles by Hojgaard for an offshore wind farm was going slowly. The barge being used to install the piles kept breaking down. The barge was ultimately withdrawn from the contract and a free issue barge supplied by E.ON, the employer, installed all but two of the sixty two piles. The issue was how to value this variation or change to the contract works.
The introduction of the new barge had been done by three variation orders covering three separate periods of time when the new barge was described as being provided to “mitigate delays to the work”. Hojgaard argued that part of the contract price attributable to the original barge was the amount which should be deducted from the contract price (€12.9m).
E.ON argued that this omission should be valued with reference to how long it would have taken Hojgaard to have done the works if they had used the original barge. This calculation would have resulted in a deduction from the contract price of €34.65m. E.ON’s argument was that the reason behind the variation orders (i.e. lack of progress) was relevant in determining what value should be given to the deduction.
The Judge found in favour of Hojgaard’s valuation. He accepted that the proper basis of valuation was to deduct the component of the original price that related to the provision of the barge. He considered that E.ON had chosen to omit part of the works, although there would have been other remedies open to it for delay (e.g. application of liquidated damages, notice of default because of poor progress). He concluded that E.ON was attempting to obtain a contractual remedy for breach of contract through the variation mechanism.
It is worth noting that most variation clauses do not cover a situation where the employer wishes to omit works to give to others. Unless a contract actually spells out the entitlement of the employer to do so, the variation clause - no matter how wide - will not cover this. Omission in these circumstances will be considered to be a breach of contract.
Where work has been wrongfully omitted, the contractor’s loss will generally be the loss of profit on the omitted work. Wrongful omission of work may also be a repudiatory breach entitling the party on the receiving end of such an omission to treat the contract as at an end and claim damages. So employers attempt to do so at their peril.
Reference: MT Hojgaard v E.ON  EWCA Civ 710