Application of priced rates

In February of last year I reported the case of Henry Boot Construction -v- Alstom Combined Cycles which dealt with the application of priced rates in bills of quantities to extended or varied works.

The matter has now been decided by the Court of Appeal and by a majority of two to one (which in itself shows how difficult these matters can be), the Court has decided to affirm the earlier decision of Judge Humphrey Lloyd QC.

Boot was engaged by Alstom under an ICE 6th Edition form of contract to undertake main civil works including steelwork and cladding for the Connah's Quay Combined Cycle Power Plant to be located in Clwyd, Wales. Pre-contract negotiations included a requirement to lower the excavations by a further metre within two areas of the project around the turbine hall and in the location of the heat recovery steam generator. The work involved the addition of sheet piling to the excavations and Boot submitted a lump sum price of £250,880 which it erroneously described as relating to the work in the turbine hall only. This price had, however, been calculated with reference to the quantities of both areas of the building.

Subsequent to contract it was discovered that the sheet piling would be required in a more extensive area around the cooling towers. Whether a rate derived from the lump sum price for the turbine hall could be applied to the full extent of the sheet piling work became the subject of a dispute. The matter progressed to arbitration.

The arbitrator refused to apply a rate extracted from the lump sum price, firstly because of the difficulty of extraction and, secondly, because he regarded the lump sum price to be mistaken and he thought it unreasonable to enlarge the ambit of that mistake.

The dispute centred upon the well-recognised rules for the valuation of variations which are contained in many standard form construction contracts. In this case the ICE 6th Edition clause 52 (1) applied. For convenience the court broke that clause down into three so-called rules.

Rule 1 a) 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 2 b) 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 3 Failing which a fair valuation shall be made.



Accordingly the term "reasonable" in Clause 52 (1) (b) required examination. Judge Humphrey Lloyd QC had held in the Technology and Construction Court that the reasonableness of the rate for the purposes of Clause 52 (1) (b) was to be gauged strictly by reference to the work carried out. It was inappropriate to take into account extraneous considerations such as how a rate or price was arrived at and whether it was too high or too low.

Judge Lloyd held that the parties had agreed that such a rate or price was to be used to value variations. "The basic consideration is that the contractor has agreed to do all work within the contract, original and varied, on the basis of his bill rates".

Lord Lloyd (no relation to Judge Humphrey Lloyd) in the Court of Appeal agreed with this proposition. He considered that Rule 2 provides a half-way house between rule 1 and rule 3, and is mandatory. It applies when the work covered by the variation order is of a different character from work priced in the Bill of Quantities, or is executed under different conditions. If the differences are relatively small the engineer is obliged to use the rates set out in the Bill of Quantities as the basis for his valuation. Only if the differences are greater is the engineer entitled to take the view that it would not be reasonable to base his valuation on the rates contained in the Bill of Quantities. The engineer is then thrown back on rule 3 (fair valuation).

Lord Lloyd concluded that the words "so far as may be reasonable" in rule 2 call for a comparison between the work covered by the variation order and the work priced in the Bill of Quantities. They do not enable the engineer to open up or disregard the rates on the grounds that they were inserted by mistake.

Lord Justice Beldam agreed with Lord Lloyd. "It is the reasonableness of using the rates and prices, and not the reasonableness of the prices or rates, which has to be considered".

Lord Justice Ward, however, in a dissenting judgement, was clearly unhappy that such an analysis might lead to a substantial windfall for the contractor. He could not accept that in applying clause 52 (1) (b) the engineer is not entitled to take into account the end result of using the contract price, in judging whether or not that use was reasonable or unreasonable.

In his earlier decision Judge Lloyd had found no difficulty in the fact that the rates to be applied to the varied work were not individually itemised rates, but were instead to be derived from the intermediate step of extraction from within a lump sum for part of the work. The Court of Appeal agreed that such concerns did not affect the proper interpretation to be placed on clause 52 (1) (b) and the matter was therefore to be remitted back to the arbitrator to investigate in carrying out his valuation under rule 2.







BOXTEXT: INBRIEF



The Case: Henry Boot Construction Limited -v- Alstom Combined Cycles Limited, CA, 4 April 2000



The Issue: Application of under or over-priced rates in Bills of Quantities to extended or varied works.



The Implication: In assessing the reasonableness of a rate or price in contract bills for extended or varied work regard may be had to whether the work is similar in character or condition but not to the intrinsic profitability or otherwise of the rate or price.