Mauritian Marathon

The international reach of English construction contracts and law never fails to surprise. We lead the world in international arbitration and UK standard form contracts are the basis for construction agreements worldwide. But even those familiar with this global picture will find the case of Mascareignes Sterling Co Ltd vs Chang Cheng Esquares Co Ltd, last year, quite surprising.

The Judicial Committee of the Privy Council was originally set up 200 years ago and heard appeals from the courts across the British Empire. Not surprisingly, its workload has rather fallen off over the years, but it is still the final court of appeal for a collection of Commonwealth countries, Crown Dependencies and British Overseas Territories. This is why, in May last year, a final account dispute for a building project in Mauritius was assessed by five of England’s most senior judges sitting in a court in Parliament Square, 6,000 miles away from the tropical island where the work was undertaken.

But the journey of this case from Mauritius to the UK was long and complex. The agreement for the project was signed in 1993 and incorporated the JCT 1980 Standard Form Contract. The project was completed in 1996, following which the QS drew up a final account. The employer did not like the QS’s assessment and would not pay up and so the contractor started an arbitration which rumbled on for a number of years. The arbitrator finally gave his award in 2005 but the employer was again unhappy and effectively appealed the matter to the Mauritian courts. By 2012, the parties had run the case through the various stages of the judicial system in Mauritius, all the way up to their Supreme Court. But the employer was still unhappy and so it instigated the final stage of appeal – to the Privy Council in London.

You may have thought that to justify running a case for 20 years an unusual point of law would be at stake but in fact the dispute involved a very common issue – the valuation of works when there are very extensive design changes.

The work was undertaken under a lump sum contract with a bill of quantities but the employer instructed very significant changes to the whole structure of the building, including floor heights and sizes. When the QS produced interim valuations and, at a later stage the final account, he effectively omitted large elements of the lump sum and re-calculated the price on a measure and value basis, using rates from the bill.

You may think that to justify running a case for 20 years an unusual point of law would be at stake

The arbitrator decided that the parties had agreed to change the terms of their contract from a lump sum to remeasurement because this was the basis on which the QS had undertaken the interim valuations. The Privy Council concluded the arbitrator had got this point wrong. Just because the interim valuations were carried out in this way did not mean that the employer was agreeing to change the whole financial basis on which the works should be priced.

Despite this, the Privy Council upheld the QS’ valuation. Its reasoning was that the contract required variations to be priced using the bill rates and so the QS could value change by omitting large elements of the sum and re-measuring from scratch. In theory, variations to a lump sum scope should be priced on an add and omit basis. But, in practice, where the changes are wholesale it can be extremely difficult to determine what element of the lump sum should remain or how it can reasonably be adjusted to reflect the changes. Wholesale omission and remeasurement of the as-built scope, and pricing by reference to the bill rates, may be the only practical option.

Therefore, while the Privy Council upheld the employer’s objection to the arbitrator’s decision that the parties’ contract had changed from lump sum to remeasurement, in practice, the result was the same.

After a 20-year string of appeals through arbitration and the courts of two countries, the decision was presumably something of a disappointment for the employer.

But the issue is hardly new. The 1791 case, Pepper vs Burland, involved a project where the work was very extensively changed and the contractor claimed on a remeasure basis.

Lord Kenyon concluded that where the original scope is “so entirely abandoned that it is impossible to trace the contract” then the contractor can charge on a measure and value basis “as if no contract at all had ever been made”.

And this is why so many countries still ask English judges to act as their final stage appeal court – they have a fair amount of accumulated wisdom.

Michael Sergeant is a partner in the construction team at Holman Fenwick Willan and co-author of the book Construction Contract Variations