M T Højgaard A/S v E.ON Climate and Renewables UK Robin Rigg East Ltd

Where a contract permits variations to a fixed lump-sum price, omitted work should ordinarily be valued by approximating its contribution to the original Contract Price. The exercise is not a retrospective calculation of how long the contractor would have taken to perform the work, multiplied by a rate, where that would shift the contractor’s pricing risk or produce a disproportionate deduction. The contract must be read as a whole, including schedules showing how constituent work contributed to the price, while applying the contractual rates framework. A variation may properly be characterised as an omission and an addition even if described as a change in method. The valuation of an addition may require different considerations from an omission, and different limbs of the pricing clause may apply to different items.

The respondent contractor had contracted with the appellants to design and install foundations for a wind farm at Robin Rigg. The contract used a fixed lump-sum Contract Price and contained a three-limb mechanism in clause 31.3 for valuing variations.

After the contractor’s installation vessel proved inadequate, the appellants supplied a different vessel under Variation Orders 5, 9 and 10. The parties agreed that the Contract Price had to be adjusted, but disputed the valuation of the omitted work. The contractor relied on the original contribution of the omitted work to the price. The appellants sought a hypothetical valuation based on the time the original vessel would have taken.

On appeal from the Technology and Construction Court decision, the central issue was how clause 31.3 required the omission and related addition to be valued.

The appeal was dismissed unanimously. Lord Justice Christopher Clarke delivered the judgment, with Lord Justice Patten and Lord Justice Longmore agreeing.

1. Characterisation of the variation. The substitution of the Resolution for the LISA was properly treated as an omission and addition within the contractual definition of a Variation. Calling it a change in method did not determine its financial treatment.
2. Valuation of the omission. Clause 31.3 had to be read with the Contract as a whole. Although the Contract Price was a single lump sum, the schedules formalised the amounts attributed to constituent parts of the Works. The Engineer therefore had to seek an approximation to the contribution made by the omitted work to the original Contract Price. That principle applied under both limb 2, concerning suitable rates reflecting the Schedule of Rates, and limb 3, concerning an amount reasonable in all the circumstances.
3. The Engineer was not required to calculate the hypothetical duration of the installation using the LISA and apply a daily rate. That approach would undermine the contractor’s pricing risk, could produce a deduction unrelated to the price attributable to the omitted work, and might vary according to the date of the Variation. The fact that the allowance for installation or weather might have been exceeded was not a proper basis for reducing the Contract Price.
4. There was a fundamental difference between an omission and an addition. The omitted work was already embraced within the fixed price; an addition was not. The Engineer could use relevant material, including the price build-up and Part L1.1, when determining the contribution of omitted work. Different items could fall under different limbs.
5. The Engineer was not to take account of the listed hypothetical-duration and marginal-cost matters when valuing the omission. However, the precise attendant equipment supplied by the contractor had to be considered when valuing the addition referable to use of the Resolution. No ruling was made on the particular figures or on whether limb 2 or limb 3 applied overall.

• Court of Appeal (Civil Division): The appeal from the Technology and Construction Court was dismissed unanimously: [2014] EWCA Civ 710.
• High Court, Queen’s Bench Division, Technology and Construction Court: Stuart-Smith J determined preliminary issues concerning the valuation of Variation Orders 5, 9 and 10: [2013] EWHC 967 (TCC).