Clarified better

You may remember Robert Akenhead's article on the case of Henry Boot Construction Ltd vs GEC Alstom Combined Cycles Ltd, which was decided last January (30 April 1999). Judge Humphrey Lloyd's decision in the case was appealed by Alstom, and the Court of Appeal has just delivered its judgment.¹

The contract between the parties was for civil engineering works for a power station. By way of a "post-tender exchange", a price of £250 880 was agreed for temporary sheet piling work in one area.

Variations were ordered requiring additional sheet piling. Issues arose in arbitration as to how this additional work was to be valued. Boot maintained that the pricing of the original piling work should form the basis for the variations. But the arbitrator took the view that the contract price contained accidental errors of Boot's making that served to benefit Boot. He therefore refused to use the original contract price to value the variations. Judge Lloyd disagreed with the arbitrator, deciding that a mistake in a rate of price binds both parties. So, it went to appeal.

This case once again illustrates difficulties of valuing variations to the contract and raises questions as to whether the conflict would have been avoided had there been a mechanism in place compelling agreement at an earlier stage.

Clause 52 of the ICE 6th Edition gives rise to three effective rules for the valuation of variations: "52(1) The value of all variations ordered by the engineer in accordance with clause 51, shall be ascertained by the engineer after consultation with the contractor in accordance with the following principles: "Where work is of similar character and executed under similar conditions to work priced in the bill of quantities, it shall be valued at such rates and prices contained therein as may be applicable" [rule 1].

"Where work is not of a similar character or is not executed under similar conditions or is ordered during the defects correction period, the rates and prices in the bill of quantities shall be used as the basis for valuation so far as may be reasonable [rule 2], failing which, a fair valuation shall be made [rule 3].

"Failing agreement between the engineer and the contractor as to any rate or price to be applied in the valuation of any variation, the engineer shall determine the rate or price in accordance with the foregoing principle and he shall notify the contractor accordingly." In dismissing the appeal against the decision of Judge Lloyd, their lordships stated that what the rules did not allow the engineer to do was disregard the rates on the ground that they were inserted by mistake. Lord Justice Beldam said that it was the use of the rates in the changed circumstances brought about by the variation order that had to be reasonable, not the rates themselves. Thus, the Court of Appeal concluded that Boot should have the benefit of being able to use its price of £250 880 for the original sheet piling work to form the basis of the variation, notwithstanding any errors.

The ICE 6th Edition has been superseded by the 7th Edition, published in September 1999, and it is worth considering how using this contract instead might have avoided this confrontation which, at least for Alstom, proved costly.

The three rules for the evaluation of variations (clause 52(1) ICE 6th Edition as above) have been retained and are included within the 7th Edition as clause 52(3). They apply only in the event of there being a failure between the engineer and the contractor to agree in the first instance.

Clause 52(1) of the ICE 7th Edition gives the engineer the option of requesting the contractor in the first instance to submit its quotation for any proposed variation, together with any estimate of any consequential delay. In this way, it was hoped that variations could be agreed at the outset. Clause 52(2) of the ICE 7th Edition applies where either a request is not made, or where a request is made but no agreement is reached.

Under clause 52(1), the engineer has the option of knowing before the variation is issued how much it is likely to cost. If it is too much, then it can desist from issuing an instruction.

Under clause 52(2), the emphasis is still on the contractor, albeit following a variation request, to submit its quotation for the performance of those extra works, together with its estimate of any delay and costs thereby to be incurred, with the engineer having the option of either accepting or negotiating an agreement.

It is only in circumstances where a variation has been instructed and no agreement reached that the rules under clause 52(3) (analogous with clause 52(1) of the ICE 6th Edition) apply.

Under ICE 7th Edition, Alstom would have been better off. It would in the first instance have had the opportunity of deciding whether or not to proceed on the basis of a pre-variation quotation from Boot (clause 52(1)). Alstom's position, however, would have been dependent on it knowing what was an open market value for the additional work it was seeking to introduce. If, on the other hand, Alstom believed that the variation had to be undertaken but that the price being sought by Boot was excessive, it had the option of requesting that this work, which did not form part of the contract until the variation instruction was issued, be done by a third party. On the facts, this would have given rise to a considerable saving.

Thus, on the whole, the changes to clause 52 introduced by the ICE 7th Edition must be welcomed. They seek to identify problems at the outset. The emphasis is on the contractor being prepared to commit itself to the right to receive a finite sum for the performance of the variations including prolongation costs.