The third and final part of this series considers further case law related to provisional sums.
Omitted Provisional Sums and Breach of Contract
Under JCT contracts, where provisional sums are incorporated, they form part of the scope of the Works whether or not the provisional sum is defined and irrespective of the level of detail to which it is scoped or specified.
As a result, an employer who subsequently decides to omit the provisional sum work and appoints another contractor to complete this item could in theory be faced with a breach of contract claim for the loss of profit suffered by the original contractor.
This scenario was considered in the case of AMEC Building Ltd v Cadmus Investment Company (1996) 51 Con. LR 105.
In the contract between the parties, certain fitting-out works were covered by provisional sums in the original contract sum. The architect instructed that the fitting-out work was to be omitted from the contract. Subsequently the work was let to another contractor.
AMEC claimed loss of profit. Cadmus argued that the contract entitled the architect to omit parts of the work covered by provisional sums, even if it is intended to give it to a third party. Cadmus also relied on alleged good reasons for its decision, although these reasons had been rejected as a matter of fact by the arbitrator.
On appeal from the arbitrator’s award, the Court held that without a finding that the architect was entitled to withdraw the work for the reasons advanced by Cadmus, the only conclusion that the Court could come to was that the withdrawal of work had been arbitrary and, in those circumstances, was something for which AMEC was entitled to be compensated.
By inference, this case suggests that if Cadmus had established valid reasons for the withdrawal of work, notwithstanding the fact it was then given to a third party, AMEC’s claim may have failed.
To remove this potential risk, employers may consider revising the standard provisions in JCT contracts to give a specific ability to omit a provisional sum and appoint another contractor to complete that item of work.
Procurement – Design Progress and Provisional Sums
The case of Plymouth and South West Co-operative Society v Architecture Structure & Management Ltd (2006) EWHC 5 (TCC) provides a cautionary tale for Contract Administrators.
The claimant (colloquially referred to as PlymCo) succeeded in their action against the defendant (ASM) for professional negligence in failing to advise of a suitable contract strategy and failing to advise on cost saving opportunities during the Works.
PlymCo retained ASM for all necessary Architectural and Quantity Surveying services including procurement, which was conducted through a two-stage process. The design progress was slow during the second stage such that circa 90% of the works remained subject to provisional sums. Nevertheless, ASM advised PlymCo to agree a JCT (with Approximate Quantities) form of contract, without advising of the decisions that PlymCo still needed to take to complete the design.
Critically, PlymCo had stipulated that the costs should not exceed £5.5m. There was ultimately an overspend of more than £2m and PlymCo sued ASM for professional negligence.
It was alleged on behalf of PlymCo that most of these additional costs could have been avoided had PlymCo been advised not to proceed without a sufficiently detailed design, rather than relying upon the advice of ASM that the project could be completed on time and to budget, notwithstanding the preliminary nature of much of the design work.
ASM were found liable for more than £1.3 million for having provided negligent advice. The Court noted that ASM had failed to appreciate the overriding importance of the second stage of the procurement process, resulting in a fully detailed building project.
A couple of key points arise for Contract Administrators in relation to this case:
Firstly, the Contract Administrator is required to show some initiative and advise the client of any potential cost-saving exercises, where it is apparent that such savings may be made. Failure to do so may result in the Contract Administrator having to make up the difference, and it will not necessarily be a bar to the recovery of damages where the claimant is prevented from demonstrating his loss in the absence of relevant documentation.
Secondly, unless the Contract Administrator can demonstrate that the client was advised as soon as it became obvious that a project has no real prospect of being completed at the estimated budget, he or she could find themselves financially exposed.