Privy Council Defines Extra Work Under A Fixed Price Building Contract

In Mascareignes Sterling Co Ltd v Chang Cheng Esquares Co Ltd (Mauritius), the Privy Council of the United Kingdom recently set out some helpful principles to define the entitlement of a contractor to extra payment under a fixed price contract. The Privy Council held that the power to award extra payments under a fixed price contract is wider than the parties assumed, and upheld the entitlement of the contractor to extra payment.

Background

Mascareignes (MSC) was the owner and Chang Cheung Esquares (CCE) was the contractor under a contract to build a 13 storey office building. An architect was named in the contract but that architect did not take part in the administration of the contract and MSC terminated his appointment. A quantity surveyor was named in the contract. MSC engaged another architect to assist it in relation to technical matters, but that architect was not appointed under the contract and did not carry out the functions of the architect under the contract.

During the performance of the contract the quantity surveyor produced interim valuations of the work which CCE had carried out. MSC paid the amounts due under those valuations. At the completion of the contract works, the quantity surveyor prepared a final account showing the amount due to CCE by MSC. MSC then informed CCE that it had terminated the quantity surveyor. The arbitrator later found the removal of the quantity surveyor unlawful. MSC refused to pay the sum which the quantity surveyor stated was due in the final valuation.

CCE commenced arbitration and claimed the amount certified in the final account. The arbitrator awarded CCE, among other amounts, the amount which the quantity surveyor had certified as due in the final account. MSC appealed to the Mauritius Supreme Court which dismissed the appeal, and MSC then appealed to the Privy Council.

Decision of the Privy Council

The Privy Council dismissed the appeal. Its decision contains a number of elements which are of interest generally to the law of building contracts:

  1. Fixed Price contract not changed into a Measure and Value contract

The contractor originally alleged, and the arbitrator found, that by reasons of the conduct of the parties after the contract was entered into, the contract should be interpreted to be a measure and value contract.

The Privy Council rejected this approach, and indeed the contractor’s counsel accepted that it was wrong. The contract stated that:

“This contract shall be a fixed price contract and no increase whatsoever will be allowed for material or labour … The Contractor must allow in his prices for any possible increases that may affect their tender during the execution of the Works.”

The Privy Council held that there was nothing in the facts that contradicted the clear terms of the contract stating that it was a lump sum contract and that the arbitrator erred in relying on the subsequent conduct of the parties to construe the contract to be a measure and value contract.

  1. Contractor entitled to extra payment

The Privy Council nevertheless affirmed the decision of the arbitrator on the basis that the payments certified by the quantity surveyor were properly due on the basis of extras due to the contractor under a fixed price contract. The Privy Council made the following points:

a. The building as built was radically different than the building which CCE had agreed to build:

“MSC had radically redesigned the building from that which it proposed when the parties entered into the Contract. [The arbitrator] recorded CCE’s evidence that ‘the building has been completely changed from the initial project as per the contract, and this inside and outside, from the bottom to the top, the height, the look, the structure, the finish.’ ”

b.  The certificates issued by the quantity surveyor during and at the end of the project were due to two factors: the        radical changes to the building and the owner’s failure to appoint an architect to supervise the construction:

“What [the quantity surveyor] did in preparing the interim valuations resulted in part from the absence of an architect to operate the process of interim certification under the contract and in part from the changes that MSC was making at the time to both the design of the building and the allocation of work. What [the quantity surveyor] did in creating the final account statement was consistent with the building contract remaining a lump sum contract but being adapted, in accordance with clause 13.5 of the Contract, to the wholesale changes to the building works and the allocation of work.”

c.  The authority to grant extras to a contractor under a fixed price contract was larger than the parties had assumed:

“In the Board’s view there is more scope for flexibility in valuing additional or substituted work in a lump sum contract than the parties have submitted. Work which is not expressly or impliedly included in the work for which the contracted lump sum is payable is extra work. An early example of this in a much less formal building contract which commissioned work set out in a bill of quantities is Kemp v Rose (1858) 65 ER 910; 1 Giff 258, 268-269 per Vice Chancellor Sir John Stuart. In the present case the lump sum was made up of elements set out in the fully priced bills of quantities which the arbitrator held were part of the contract. There was thus a definition of the works which were the subject of the lump sum, from which the existence of additional or substituted work could be identified.” (underlining added)

d.  The Privy Council set forth a step-by step process for determining whether elements from the contract may be used to value the extra work. If some of those steps do not apply, the Privy council then identified when and to what elements the contract rates and pries, or an unjust enrichment analysis, should be applied:

“Under the [contract…..] additional or substituted work carried out within a lump sum contract may be measured and valued by use of the rates and prices set out in the contract bills if three conditions are met. First, the work must be of a similar character to the work set out in the bills; secondly, the work must be executed in similar conditions to those of the work in the bills; and, thirdly, the work must not significantly change the quantity of the work set out in the bills. If either or both of the second and third conditions are not fulfilled, the valuation can be based on the rates and prices on the bills but a fair allowance must be made for differences in conditions or quantity. If the work is not of a similar character to the work set out in the bills (ie the first condition is not fulfilled) the valuer must use fair rates and prices.” (underling added)

e.  Finally, the valuation of the extras in this fashion was not a contradiction to the contract being a fixed price contract:

“The use of measurement and value to ascertain the value of additional or substituted work is thus not inconsistent with a lump sum contract. In this case, [the quantity surveyor] treated the contract as a lump sum contract by preserving the preliminaries unchanged, but the sums attributed to each of the other components of the contract were significantly altered. Most of the significant works were measured and valued although some items (site works, professional fees and attendance and profit) were valued at figures which the parties had agreed as appropriate in view of the changes to the building and the allocation of work. While it is not correct to say, as the arbitrator did, that the contract was varied to become a measure and value contract, the bulk of the components of the contract were properly valued by measurement and valued in [the quantity surveyor’s] preparation of the final account statement as a consequence of the changes which MSC made to the building and the allocation of work since the signing of the written contract. Accordingly, in the Board’s view, the arbitrator’s mischaracterisation of the nature of the parties’ contract had no bearing on his decision that CCE was entitled to receive the [amount which the quantity surveyor] stated in his final account statement.” (underlining added)

Discussion

This decision contains a useful checklist of the issues which arise when a project is changed by the owner and the contractor incurs further costs. These events will not, without more, change a fixed price contract into a cost plus contract.

But they may entitle the contractor to extras, provided that the contractor has properly asserted and preserved its rights to extra payments. Unless the contract provides otherwise, the contractor is entitled to extra payment for work which does not fall within the express or implied work for which the lump sum is payable.

The Privy Council stated a process by which the extra work may be valued according to the contract values (if there are such values in the contract), or according to unjust enrichment.

-If the extra work is of similar character, conditions and quantity, the contract values may be used.

-If conditions and quantity are different than, but the character is the same as, contemplated in the contract, then the contract rates and prices may be used, but a fair allowance must be made for differences in conditions or quantity.

-If the character of the extra work is different than the contract work, then unjust enrichment principles must be use.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. chapter 6, parts 1(b) and 7.

Mascareignes Sterling Co Ltd v Chang Cheng Esquares Co Ltd (Mauritius), [2016] UKPC 21

Building contracts – fixed price contract – cost plus contract – extras

Thomas G. Heintzman O.C., Q.C., FCIArb                                                  January 8, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

 

This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.

 

 

Contractor’s Claim For Extras And Changed Circumstances Held To Be Ineffective Due To Lack Of Particulars

In Ross-Clair v. Canada (Attorney General), the Ontario Court of Appeal has recently held that a contractor’s claim for extras and changed circumstances was ineffective because it contained inadequate particulars of the claim.

The Extras/Changed Circumstances clause

The changed circumstances clause in the construction contract stated in part as follows:

35.4 A written claim referred to in GC 35.3 shall contain a sufficient description of the facts and circumstances of the occurrence that is the subject of the claim to enable the Engineer to determine whether or not the claim is justified and the contractor shall supply such further and other information for that purpose as the Engineer requires from time to time.

The contractor’s dealings with the engineer:

The correspondence leading up to the court proceedings started with a letter from the contractor in December 2008 making a claim for extra time and extra compensation in the amount of about $1.5 million.  The owner replied stating that the contractor had provided inadequate particulars of its claim.

The parties met and then during 2009, the parties engaged in correspondence in which the contractor re-iterated its claim for extra time and compensation and the owner stated that insufficient particulars had been provided.  The contractor provided a description of the circumstances that, according to it, caused delay in completion of the construction and attached “Additional Costs Summary” listing subcontractors and the costs attributed to their work, but contained no other supporting documentation. The owner responded, saying that “once we have received additional information from you relating to the assumptions and factual background to your claim, we would suggest that we meet to discuss it, after which the Engineer will determine whether any portion of the claim is justified. Once the Engineer makes that determination, [the contractor] can consider the processes available under the [C]ontract for resolving disputes.”  The owner extended the time to complete the project to September 14, 2009, but without compensation and without prejudice to the owner’s right to contest the contractor’s entitlement to any time extension or compensation.

The correspondence continued into 2011 with the contractor now submitting a claim of about $2.2 million but providing no breakdown of the costs being claimed and the owner replying that the contractor’s letter “did not contain a sufficient level of detail.”  The owner asked for “documentation to substantiate each of your costs on the original [Claim] and the additional Claim] that you have referenced in your letter of April 2, 2011, with proof that the delays responsible for these additional costs were caused by [the owner]. Until this is received [the owner] will not be able to assess your entitlement to any additional compensation.”

The contractor’s work was certified by the engineer as complete in February 2012 and the contractor was not granted any further extension to the Contract.

In May 2013, the contractor provided the engineer with an expert report called “Analysis of Delays and Additional Costs”.

The contractor commenced an application for an order compelling the engineer to consider its claim for extra payment.  The Superior Court judge granted that order. The owner appealed and the Court of Appeal set aside that order and declared that the contractor’s claim for extra payment was barred by operation of the contract.

Reasons of the Ontario Court of Appeal

The Court of Appeal found that the contractor had not complied with the requirements relating to a claim for changed condition or extras for the following reasons:

  1. The General Conditions contained both a form requirement and a timing requirement. The form requirement meant that the claim must be in writing and “must contain a sufficient description of the facts and circumstances to enable the Engineer to make a decision as to whether the claim is justified.”
  2. If the contractor’s claim is for extras, the contractor must give written notice within 10 days of the occurrence giving rise to that claim.  Then, the contractor must submit a claim within 30 days of the date that a Final Certificate of Completion is issued.  GC 35.4 “provides an opportunity for the Engineer to request further information in support of the Claim and the contractor to respond to any such request”, and “expressly allows this process to continue beyond the date when the work is certified as being complete.”
  3. “The nature of the information required by [other portions of the General Conditions] provides additional context for the interpretation of GC 35.4”.  Those portions deal with how costs are determined prior to work being undertaken and state that, “in order to facilitate approval of a change, the contractor must submit a cost breakdown identifying, at a minimum, the costs of labour, plant, and material; each subcontract amount; and the amount of the percentage mark-up”.
  4. Both the Superior Court Judge and the Court of Appeal held that the contract established a “Code” under which, in the Court of Appeal’s words, “[the contractor] could seek payment for extras relating to changes in soil conditions, or neglect or delay by [the owner]”.  The Court of Appeal held that the Code “contemplates a process for dealing with a contractor’s claim for extras in which the Engineer has control sufficient that it can fulfill its obligation to determine whether a claim is justified. The Engineer receives the claim. The Engineer decides whether the information provided within the prescribed time frame is sufficient to determine if the claim is justified. If so, the Engineer decides the amount, if any, to be paid to the contractor — again, subject to arbitration. The Engineer fulfills this important role in the context of a Code that, in my view, depends on a highly specific informational component.” (underlining added)
  5. The Court of Appeal held that the contractor’s claim did not satisfy the requirements of the “Code” for the following reasons:a.    While the contractor must give notice of its claim within 10 days of the events giving rise to it, the extended time during which the contractor must submit its written claim contemplates that the claim will be a substantive claim, not just further notice of the claim.b.    In addition, the contractor was required to submit a cost breakdown identifying, at a minimum, the costs of labour, plant, and material; each subcontract amount; and the amount of the percentage mark-up, and the submission of detailed information if it was not possible to predetermine the price of a change.

    c.    The combined effect of these requirements was that, even though GC 35.4 did not state that a “detailed” claim must be submitted, that word must be read into that provision. The Court of Appeal said:

    “The language used in GC 35.4, interpreted in the context of the rest of the Code, leads me to conclude that even though the word “detailed” is not included in GC 35.4, the requirement that a contractor submit a claim in writing sufficient to enable the Engineer to determine whether the claim is justified cannot be interpreted in a manner other than that it must be supported by detailed information. Without detailed information, it is difficult to see how the Engineer would be able to make a decision as to the validity of a claim. In my view, such a decision requires “proof” that the claim is justified.”

    d.    The contractor’s letters “provided little if any support for the [$1.5 million] Claim. Among other things, the letters failed to include information relating to the nature and extent of [the owner’s] responsibility for the delay, to address whether compensation had already been paid on account of the extra expense or to explain whether the extra expense contained in the [$1.5 million] Claim fell within the classes of expenses compensable under GC 35.5 and GC 49 or GC 50, and, if so, in what amount.”

    e.    In addition, the contractor’s letters “were inconsistent and therefore confusing” in terms of the location where the extra work was said to be required.  Furthermore, the contractor’s cost summary “provided skeletal information listing the amounts attributed to various sub-contractors but no breakdown identifying, for example, the costs of labour, plant, and material or the amount of the percentage mark-up.”

    f.    Accordingly, the contractor’s claim lacked specificity, was confusing in terms of identifying the parts of the project affected by the delay, was accompanied by virtually no information in support of the extra work done and the costs associated with any such work, and therefore did not meet the requirements of GC 35.4

Discussion

This decision is of vital importance to contractors submitting claims for extras or changed circumstances under building contracts.  If the language of the contract could potentially be read as requiring the contractor to provide details of the claim, then the Court of Appeal has set a very high bar so far as those details are concerned.  Indeed, the contractor must determine if the word “detailed” may be read into the contract, as occurred in this case.  If that is a possibility, then those details must be provided.  This decision provides a virtual roadmap or check list to consult when developing the details for such a claim.

Those details are higher than are normally required for the commencement of a legal claim in court.  The rationale for that higher bar is both the wording of the building contract and the role of the engineer in scrutinizing the claim and rendering a decision about its validity.  The Court of Appeal considered that the engineer could only perform its function in a timely manner if those details were provided.

One can wonder whether the bar has been raised too high in this decision.  The Court of Appeal has set a very high standard relating to the materials to be submitted for the consultant’s review, by reading the word “detailed” into the requirements of a claim, and by holding that the claim procedure entailed a “highly specific informational component” involving “proof” that the claim is justified.  Is this standard of proof suitable at that stage of the claim, or more suitable for the later arbitration of the dispute?

In the alternative, should the contractor be allowed to amend the claim to provide details after the time limit for delivering the claim has expired, as long as no prejudice has been suffered?  That is the normal course in court proceedings. It would be extremely rare for a court action to be dismissed for lack of particulars.  The plaintiff would almost always be given the right to amend the claim to provide further particulars.

This decision goes in the drawer of important decisions, to be pulled out when a claim for extras or changed circumstances is being considered.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 6, part 9(d)

Ross-Clair v. Canada (Attorney General), 2016 CarswellOnt 3854, 2016 ONCA 205, 265 A.C.W.S. (3d) 289
Extras and changed circumstances –particulars of claims for extra payment under building contracts –

Thomas G. Heintzman O.C., Q.C.,FCIArb
July 10, 2016
www.heintzmanadr.com
www.constructionlawcanada.com

This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.