| Date | 23 July 2003 |
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| Judgment | McAlpine Humberoak v McDermott International, CA 5 March 1992 |
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| The Issue | Whether variations and late instructions resulting in delay entitle a contractor to recalculate his lump sum price. |
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| Implication |
Even if time is 'at large' because of acts of hindrance or prevention by the employer, this does not mean that the contract mechanism for calculating elements of the contract price will cease to be applicable. |
printIn March 1992, in the case of McAlpine Humberoak v McDermott International, the Court of Appeal decided certain important principles relating to the interpretation of construction contracts which remain valid to this day. In the earlier judgment of the High Court it was held that, faced with a significant number of change orders, McAlpine's original lump sum contract had become frustrated, giving rise to a substituted contract under which the price to be paid should be calculated on a 'cost plus' basis. This decision was extremely good news for contractors. It meant that whenever they faced a lump sum contract in which a substantial number of change orders had been issued, they could by-pass the contract mechanisms for extension of time and valuation of change orders and instead argue for a recalculation of the contract amount in its entirety. In a fairly sweeping judgment the Court of Appeal overturned that approach. McDermott had engaged McAlpine to fabricate pallets to form the basic weather deck of a drilling rig to be built in the North Sea for Conoco and its consortium partners. McDermott were main contractors to Conoco and McAlpine were one of 18 subcontractors employed by them. The weather deck consisted of nine massive steel boxes or 'pallets' welded together to form a platform larger than a football field. In October 1981, McAlpine were invited to tender for construction of the pallets and in November of that year, they were awarded a contract for four of the pallets. Works proceeded despite that the contract was not signed by the parties until March 1982. The total contract price was £982,000. Two of the pallets were later withdrawn from the subcontract by McDermott and the remaining two were delivered late. Despite this, the costs actually incurred by McAlpine came to a staggering £2.5 million, and McAlpine put forward a claim in excess of £3.5 million. McAlpine's case in a nutshell was that the main cause of the delay and additional cost was the issue of a large number of revised 'approved for construction' drawings after the contract had been placed. There were 22 issues in all, the last being received in August 1982. These new drawings meant that McAlpine's shop drawings had to be revised, including cutting drawings and weld assembly drawings. McAlpine complained that this had created havoc in the drawing office and disrupted production, with a knock-on effect upon fabrication and assembly. McAlpine also complained that there had been a failure by McDermott to answer technical queries as promptly as they should have. There had been 45 technical queries in all, mostly during the design phase. Finally McAlpine complained about approximately 80 variation orders which had changed the scope of the works. McDermott responded by saying that the revised drawings and variations were of no greater number or complexity than was to be expected in the North Sea oil construction industry. To the extent that these had caused extra work McAlpine had been paid. McDermott argued that there had been no disruptive or delaying effect on production. The real cause of the delay and additional costs, according to McDermott, was McAlpine's failure to qualify their weld procedures which had been critical to the fabrication programme and the poor quality of welding where a failure rate was as high as 60%. The trial of these matters in the High Court was of marathon proportions. It lasted 92 working days and judgment was not given until a year later. The judge held that the contract had been frustrated. This came as a surprise to the parties since frustration had not been pleaded or argued. The judge stated that a lump sum contract was an equation between subject matter, time and price. The changes which McAlpine had faced had distorted each and every factor in that equation. The effect was to frustrate the original venture and McAlpine was allowed a revaluation of the contract works on a 'quantum meruit' basis, equal to their costs plus a ten percent profit. The Court of Appeal disagreed with this finding. The contract remained a contract for the construction of four pallets reduced to two. Lord Justice Lloyd noted that if he were to uphold the judge's finding of frustration, this would be the first contract to have been frustrated by reason of matters well known to the parties which had not only occurred before the contract was signed, but had also been expressly provided for in the contract itself. Even if McAlpine had been prevented from completing the work within the contract period as a consequence of the drawing revisions, variations and late replies to technical queries, this did not entitle them to recalculate their price based on the time actually taken. The contract contained elaborate machinery for adjusting the lump sum price in the event of any change in the scope of work as well as provisions to recompense McAlpine for disruption and delay. It was incorrect for the trial judge to have held that the agreed contractual machinery had been displaced and the appeal was allowed.
CJ-0328
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