From time to time a variation will delay or disrupt a construction program and incur time related costs. On occasion, a relatively minor variation can delay the works for a considerable period. As a result, the direct cost of the variation may be low but the cost of the associated delay can be considerable.
An issue commonly arising in such circumstances whether the time related costs should be paid for as part of the variation price under a variation clause, or reckoned separately as a delay cost under extensions of time and delay related provisions. The issue can be further complicated by:
On 5 July 2019, the Federal Court of Australia delivered the decision of Lucas Earthmovers Pty Limited v Anglogold Ashanti Australia Limited [2019] FCA 1049. The case addresses the above issues.
The highlight of the case is that the Court accepted in principle that, subject to the terms of any given construction contract, it is legitimate to allow for the time-related costs of performing a variation as part of the price of the variation, even where the contract otherwise precluded recovery of delay costs. However, the contractor will need to be mindful of being able to demonstrate that the costs being claimed are specifically related to the relevant variation, as opposed to being a claim for generic project delay.
Lucas Earthmovers Pty Limited (Lucas) entered into a contract with Anglogold Ashanti Australia Limited and Independence Group NL (AGA) to construct an access road to a remote mine site located northeast of Kalgoorlie, Western Australia. The works was a lump sum contract for a total sum of $35,016,992.60 with a schedule of rates (Contract).
The Contract contemplated that the materials for the roadworks would be obtained from various sites/borrow pits along the road alignment but specifically allowed Lucas to claim a variation to the extent this did not occur. However, Lucas had to source those materials from distant sites due to the unsuitability of the materials.
Lucas issued variation claims for the additional work involved and there was no dispute as to the liability to pay for them. There was however a dispute as to their valuation with respect to additional time related costs (which were claimed by Lucas to be $3,170,871.87). Central to the dispute between the two parties was the clause 18.8 in the Contract which provided:
“Notwithstanding any other provision of this Contract, the Contractor will not be entitled to claim any Liabilities resulting from any delay or disruption (even if caused by an act, default or omission of the Company or the Company’s Personnel (not being employed by the Contractor)) and a claim for an extension of time under Clause 18.3 will be the Contractor’s sole remedy in respect of any delay or disruption and the Contractor will not be entitled to make any other claim.”
AGA relied on clause 18.8 of the Contract to assert that Lucas had no entitlement to recover losses, costs or expenses of any kind resulting from delay or disruption, even where AGA was responsible for the delay or disruption.
On the other hand, Lucas contended that its performance of the additional works constituted an increase in the quantity of the Works which in turn established a variation under clause 29.2 of the Contract. Lucas argued that its claim was not for delay or disruption, but simply the time related costs in carrying out the variation. Hence, it said, the exclusion clause had no application.
In the final result, while the Court in principle accepted that it was possible to claim time related costs as part of the costs of a given variation, most of Lucas’ claims failed on various grounds including that:
The Contract required variations to be valued by reference to the schedule of rates to the extent that the rates were relevant. This led to an examination by the Court of the rates in the Contract. The rates clauses provided that the rates for variations were “all inclusive” and covered all the costs of carrying out the variation works as well as “costs associated with any extended period of time to perform the variation work” (see [8], [246], [251], [258]).
Lucas argued that those rates would not be “relevant” where a variation resulted in delay to the critical path of the works. The Court disagreed and concluded that whenever specific rates were available, the rates included an allowance for the time required to perform that variation work (see [257] - [262]).
The Court was required to reconcile the prohibition in clause 18.8 on recovery for delay and disruption losses and the variation clause which required a price to be determined for each variation. In considering the operations of clause 18.8 (disallowing recovery for delay costs) the Court said at [301]:
“Considered objectively, it is not readily to be supposed that the parties intended, when making the Contract, that AGA should be able to direct a variation requiring additional work to be performed over an extended period involving necessarily Lucas incurring significant additional timerelated costs without it have any recourse to remuneration for those additional costs. Instead, on a proper construction of the Contract, the parties contemplated that, while Lucas would have no claim with respect to losses, costs or expenses resulting from delay or disruption, the pricing of variations pursuant to cl 29.3(a)(ii) and (iii) could take account of timerelated costs.”
In this way, the Court was able to give full effect to the variation clause, while still respecting the restrictions imposed by clause 18.8. The practical difficulty faced however by Lucas was that it sought to prove its variation costs by reference to the time taken to complete the works as a whole, as opposed to particularising the particular time-related cost involved in performing each variation. Accordingly, the Court found that those claims are properly characterised as in the nature of delay costs to which the exclusion clause applied (see [285], [292] - [300]).
Another difficulty Lucas faced in proving its claim for delay associated with the variations was that there were a number of other likely causes of delay in completion of the works for which AGA could not be responsible. Each of these factors was a cause of delay to the works which had not been separately accounted for.
Lucas had endeavoured to demonstrate its delays by reference to a re-created construction program developed after the project was completed. In this case, the Court did not consider that such re-created program was sufficiently reliable (see [161]).
