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Variations to the schedule prove costly

IT/Law Report; In identifying a variation, it is not only the contract that a court will consider, warns Frances Alderson

THE CASE of Demolition Services Limited v Castlevale Housing Action Trust, decided by Judge Thornton QC in the Technology and Construction Court in 1998, considered the identification ofadditional work as a variation.

The case concerned the removal of a certain type of asbestos, which the plaintiff, a demolition contractor, claimed was additional to the scope of works. The client (Castlevale HAT) claimed that the schedule of works already included asbestos removal.

The identification and valuation of a variation required the judge to construe what was intended by the terms of the contract.

The meaning of the document is discovered by looking at the wording of the contract in the light of the relevant background to analyse what the parties would reasonably have been understood to mean.

The more unreasonable the consequences of any particular interpretation, the less likely it is that the parties could have intended it. And if they did intend it, the more necessary it is that they should have made their intention abundantly clear.

In this case, the judge quickly found that the scope of the works did cover some asbestos removal and proceeded to makean in-depth analysis of the various contract documents to identify what types of asbestos removal the schedule of works referred to.

In construing the schedule of works, the judge relied on various health and safety documents that had been prepared at the time of the contract.

It was clear to the judge thatthe asbestos referred to in the health and safety reports was not of the same type that was the subject of the claim for additional works.

The judge then reviewed the use of the word 'asbestos' in the schedule of works in the context of the contract as a whole, and in the context of the Standard Method of Measurement, which was incorporated into the contract.

The judge also considered the factual background and analysed the two different interpretations submitted by the parties by reference to business common sense. He came to the conclusion that the removal of the particular type of asbestos at issue was additional to what was described in the schedule of works.

The principal lesson to be learned from this case is that, where the words of a contract may be considered ambiguous, one must always bear in mind other documents prepared at or around the time that the contract was entered into as providing the background to the interpretation of the contract.

Wherever possible, it is clearly advisable to ensure that there is no ambiguity in the documents, and as you will see from this case, this advice does not merely apply to the lawyers who draft the contract, but is also very important in respect of the drawing up of schedules of work and other contractual documents.

The 1999 decision of Henry Boot Construction v Alstom Combined Cycles considers the valuation of variations of work.

While this case is the subject of an appeal, it raises issues of such importance to the constructionindustry that it is worth discussing even at this stage.

Henry Boot in this case had, by mistake, overpriced a particular contractual item of work.

When variations were ordered requiring additional elements of this item of work in other areas, the issue arose as to whether or not the price of the additional work should be based on the original contract rate.

The JCT Standard Form of Contract and the ICE Conditions both lay down similar rules for the valuation of additional works. In essence, these are that work of a similar character should be valued at the contract rates and prices, whereas work not of a similar character, or not being executed under similar conditions, should be valued using the contract rates and prices as a basis for such valuation so far as may be reasonable. Failing this, a fair valuation shall be made.

In the event of either under-pricing or over-pricing by the contractor, one party is bound to be upset by these rules when variations are ordered.

In the Henry Boot case, the judge was attracted by the certainty created by applying the clear language of the contract. An employer ordering a variation will know, with reasonable certainty, what the effect of a proposed variation will be.

Whether the price applicable to the variation is too high or too low is immaterial.

The clear lesson from this is to be extremely careful with contract rates and prices. If you misjudge them, there is no scope for their replacement by rates more costly to the client, in order to extricate a contractor from the consequences of its own misjudgement.

Key points

All contractual documents should avoid ambiguity.

Where the contractual documents are ambiguous, other documents prepared on or around the time of the contract will be considered in construing the meaning of the contract.

Where the language of the contract is clear, it will be construed precisely.

Financial conditions will not be relevant considerations in valuing variations (unless specified). Accordingly contractors must be careful when pricing contractrates.