Valuing negative variations or omissions in lump sum contracts
is often fraught: should omitted works be valued on the basis of
how much they would have cost the contractor to complete, or on the
basis of the part of the lump sum price attributable to the
In this case, the English Court of Appeal considered this issue
and held that:
negative variations in lump sum contracts should be valued on
the basis of the part of the lump sum price attributable to the
omitted works; and
to determine what part of the lump sum price was attributable
to the omitted works it was permissible to examine the
contractor's tender breakdown (even though the breakdown did
not form part of the contract).
The case involved the installation of piles for an offshore wind
farm. The barge being used by the contractor (Hojgaard) – the
'LISA' – kept breaking down and was ultimately
withdrawn. A free issue barge was supplied by the employer (E.ON),
and used by Hojgaard to install all but two of the sixty-two
The contract price was a fixed lump sum. The issue was how to
value omission of the works related to the supply of the barge.
Hojgaard argued that the part of the contract price attributable to
the original barge, the LISA, was the amount which should be
deducted from the contract price. The 'original
contribution' for the barge (£12.9 million) was indicated
in Schedule of Rates of the Contract.
E.ON argued that the omission should be valued with reference to
how long it would have taken Hojgaard to have performed the works
if they had used the original barge. This would result in a
deduction from the contract price of £34.65 million. E.ON
argued that the reason behind the variation (i.e. lack of progress)
was relevant in determining what value should be given to the
The English Court of Appeal found in favour of Hojgaard's
valuation approach. The Court reasoned that:
Hojgaard had agreed to carry out the work for a fixed price and
assumed the risk (the pricing risk) that such a price might not be
enough to cover all the work. Although the contract provided for a
single price, it was clear that part of that price related to the
pile installation works. It was irrelevant how many days it would
have taken the LISA to complete the works, as this would have
relieved Hojgaard of the pricing risk.
Adopting E.ON's speculative approach would have meant that
the variation would entail a deduction that was substantially
larger than the amount considered for the installation works in the
pricing schedule of the contract. Even a calculation by reference
to the time taken by the replacement barge multiplied by an
'efficiency factor' to reflect the different efficiencies
of the two vessels, would result in a sum greatly in excess of
those outlined in the contract. It would also remove the pricing
risk from Hojgaard.
When carrying out a valuation under the contract, one should
consider the contract as a whole and, in particular, the pricing
risk. Where it is difficult to quantify the amount of the omitted
work as a proportion of the contract price (as in this case, where
it was a lump sum contract) one should look at any potentially
relevant material, including the way the contractor built up the
It was not necessary to consider the reason
for the variation and account for that in the valuation, as this
would involve valuing work the LISA, in fact, could not do.
E.ON was wrongly attempting to obtain a contractual remedy for
Hojgaard's breach of contract, in seeking to account for delay
through the variation mechanism.
Lord Justice Clarke summarised the Court's findings by
"If the [whole of the] work was wholly omitted
from the Contract the whole of the price properly attributable to
such work would fall to be omitted; and if part was omitted, there
should be omitted a proportion of the price that appropriately
reflected the work omitted and which, but for the omission,
would have been paid"
Warranties can be risk-shifting mechanisms when the party giving the warranty is not the party at fault for the defect.
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