In the recent case of
Petromec, the Commercial Court
refused to permit the claimant to proceed with its “total
cost” claim.
What is a “total cost”
claim?
It is a claim for additional payment, where the amount claimed
represents the difference between the contractor’s actual
cost (plus profit margin) and the contract price for the work in
question. “Total cost” claims involve rolling up
a number of heads of claim into a single claim. E.g. if a
contractor is given 120 variation instructions, which have the
effect of increasing its overall volume of work, the contractor may
attempt to make a single claim for its increased cost arising from
the variations, rather than making 120 individual variation
claims. Claims are often expressed as “total
cost” claims because it is difficult (or perhaps impossible)
to demonstrate how each individual matter (e.g. each individual
variation instruction) caused a contractor’s costs to
increase.
What is the potential problem with this approach?
In a word - causation. “Total
cost” claims don’t attempt to demonstrate how each
individual event (e.g. each variation instruction) caused its costs
to increase. “Total cost” claims assume that a
number of events had the aggregate effect of increasing the
contractor’s costs. But what if there were other causes
of the contractor’s costs increasing, for which the owner is
not responsible? Did the contractor’s additional costs
occur because the contractor poorly managed the project? Or
were other factors at play, e.g. labour shortages or bad
weather?
“Total cost” claims often suffer from the same weakness
as “global” delay claims, i.e. they fail to demonstrate
persuasively how a number of events caused a particular
result. This can lead to them being struck out by a court at
an early stage, or failing even if they proceed to
trial.
Petromec
The claimant was engaged to build an oil
rig. Part way through the project the owner made numerous
changes to the specification for the rig. The claimant
claimed for its additional costs i.e. the total cost incurred in
building the rig to the new specification, less the cost that would
have been incurred in building the rig to the original
specification. The claimant did not identify specific costs
incurred due to individual changes.
The court rejected the claimant’s “total cost”
approach. The judge noted that the “total cost”
method assumes that which it is necessary to prove, i.e. in this
case, that the additional costs were incurred by the contractor
related to work which was required for the new specification, and
that instructions for the additional work were given. In
order to succeed the claimant must identify the work, and the cost
attributable to that work, together with the instructions from the
defendant to carry out the work.
Relevance
Petromec highlights the difficulties that “total
cost” claims face in court and arbitration proceedings.
The case does not alter the position that courts are generally
reluctant to accept claims on this basis because they are not
pleaded with sufficient particularity. The ultimate test of
such claims is whether they demonstrate persuasively that a number
of matters for which the owner is responsible led to a claimed
increase in cost. Sometimes they will be persuasive, but
often they are not. The better approach - which should be possible
if proper site records are kept - is for costs to be attributed to
individual items, rather than roll them up into a single
claim.
Case:
Petromec Inc v Petroleo Brasileiro SA [2007] EWHC
1589 (Comm)
If you would like further information about this case please
contact Billie Bingham at
[email protected]
or 020 7367 2766.