Who bears the final price risk in a lump sum contract?

The recent Court of Session decision in West Reg. Street (Property) Limited v Central Demolition Limited illustrates the risk of a lump sum price where the scope of works is widely drawn and its content uncertain. The court also examined the divergence between the contracted intent of the parties and interim assessments of the contractor’s entitlement to payment.

Background

This action related to a demolition contract which was part of the wider redevelopment of St Andrew Square, Edinburgh.

A pre-demolition package of soft strip and asbestos removal works had been carried out so that by the time the main demolition contractor started on site, all known asbestos had been removed from the buildings. However, further asbestos was encountered during demolition.

The contractor was formally instructed to proceed with removing the additional asbestos and the Contract Administrator certified additional sums for payment for this work in the interim valuations that followed. Two months later the Contract Administrator issued a pay less notice to recover the sums that had been paid for the asbestos removal on an interim basis, arguing that this work was actually included within the original contract scope.

Dispute

The issue in dispute was simple: who bore the risk under the contract for the costs of removing additional asbestos discovered during demolition?

The employer argued that this demolition contract was a lump sum fixed price for the “complete demolition” of the buildings, including all the work necessary to achieve that result. They also relied on clause 2.1D of the contract conditions which provided that any “contamination” encountered during demolition was the contractor’s sole responsibility.

The contractor, on the other hand, argued that the lump sum contract price was only for the defined work described in the contract specification and the contract drawings. As there was no specific item in the specification for the removal of toxic or other waste, the asbestos removal was not part of the original scope and should attract additional payment. The contractor also argued that clause 2.1D excluded asbestos and that there had been pre-contractual representations to that effect by the employer.

Decision

The court held that, on a reasonable and proper interpretation of the original scope of works and the terms of the contract, the removal of the additional asbestos was not properly construed as being additional work.

In reaching this conclusion, the judge examined the contract documentation and heard witness evidence in order to identify the actual agreement and the contractual intention of the parties at the point the contract was entered into.

What parties had subsequently come to believe had been agreed was not considered to be relevant. The judge considered it likely that the contractor’s witnesses’ recollections had “developed with the passage of time”. He preferred the employer’s evidence as to the common intention of the parties at the time the contract was formed, finding that, on the balance of probabilities, no assurances were given that asbestos would be treated as a variation.

The court then considered whether the original agreement and contractual intention of the parties had been superseded by the instructions issued to the contractor to carry out the asbestos removal and subsequent interim payment for it as additional work. It was held that where the payment was on an interim basis it was open to the employer to change its position on that payment having further considered the entitlement to payment against the actual contract terms.

Comment

The cost certainty for employers of lump sum prices should be balanced with certainty and/or a proper pricing of any risk in the scope for the contractor.

Contractors should make any exclusions of risk from their lump sum prices clear or if risks such as ground conditions or condition of an existing structure are assumed include an appropriate allowance in their price against those risks.

Contractors should also be wary of accepting instructions for “additional works” during the project where these may later be construed as on an interim non-final basis. It may be that for certain circumstances a documented amendment of the contract is required for the avoidance of doubt before such works are carried out to insure included in a final payment.

Get in touch

If you require advice and assistance on the interpretation or the terms of your contract documents or interim valuations please contact our Michael Conroy.