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.