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Can variations to a lump sum contract create a measure and value contract?

In the recent case of Mascareignes Sterling Co Ltd v Chang Cheng Esquares Co Ltd (Mauritius) [2016] the courts sought to clarify the differences in characterisation between a lump sum building contract and a measure and value building contract.

Mascareignes Sterling Co Ltd ("MSC") was the Developer and Chang Cheng Esquares Co Ltd ("CCE") the Contractor, on a project for the design and construction of a 13 storey office building. The contract was the JCT Standard Form of Contract 1980 edition with Contractor’s Designed Portion Supplement, as amended by the parties.

Following completion of the works, the quantity surveyor submitted a final valuation account stating that MSC owed Rs 17,582,027.83 to CCE. MSC refused to pay the sum stated to be due. The dispute was taken to arbitration and the principal issue was the nature of the building contract and whether CCE was entitled to the sum specified in the final account statement. The arbitrator was asked to decide whether the contract was a 'lump sum' contract, as originally specified, or a 'measure and value' contract, which would entitle CCE to the final valuation amount.

The arbitrator held the following:

  • That the Contract properly construed was a measure and value contract; or
  • As a fall back option, that the contract had been varied by the parties so that payment became due on the basis of measurement and valuation.

In coming to these conclusions, the arbitrator accepted CCE’s evidence that MSC had fundamentally redesigned the building from top to bottom compared with that which it had proposed when the parties entered into the contract. For example, the height, the look, the structure, and the finish had all been changed. The arbitrator therefore concluded that the contract should be assessed as a measure and value contract and any payments should become due on this basis.

On appeal, Lord Hodge overturned the arbitrator's decision that the contract was to be interpreted as a measure and value contract. In his opinion, there was nothing in the clear terms of the contract that pointed against it being a lump sum contract. He commented that there was, “more scope for flexibility in valuing additional or substituted work in a lump sum contract than the parties [had] submitted." He also stated that additional or substituted work carried out within a lump sum contract may be measured and valued by use of the rates and prices set out in the contract bills if three conditions are met:

  • The work is of a similar character to the work set out in the bills.
  • The work is executed in similar conditions to those of the work in the bills.
  • The work does not significantly change the quantity of the work set out in the bills.

In this regard, the building contract was consistent with a lump sum contract, but in respect of the final account statement, the bulk of the contract components were properly valued by measure and value as a consequence of the changes which MSC made to the building and the allocation of work since the signing of the written contract.

The appeal by MSC therefore failed and CCE were entitled to receive the Rs 17,582,027.83 set out in the quantity surveyor's final account statement. The arbitrator's mischaracterisation of the nature of the parties' contract had no bearing on the efficacy of his second point - that the contract had been varied to allow payments on a measure and valuation basis.

The case has further defined the difference in characterisation between a lump sum building contract and a measure and value building contract.  It is clear that there is a degree of flexibility in valuing additional work as part of a lump sum contract and any such additional work will not necessarily transform the agreement into a measure and value contract. Nevertheless, there appears to be scope for variation and additional work which is performed as part of the lump sum contractual agreement which may be assessed on a measure and value basis.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Paul Barge

Partner

I am a Partner in DWF’s Manchester office and Head of the Construction & Infrastructure team in the North West.