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The costly business of ignoring interim assessments and agreed valuations: ICI v Merit Merrell Technology

Valuing a contractor’s work on a complex project is rarely an easy task. During the works, parties to a construction contract commonly devote significant resources to ensuring that the work is properly valued. These valuations are often carried out by people with close knowledge of the project, and under the NEC form of contract certified by an impartial project manager.

Given those efforts, can interim assessments and agreed valuations made during the course of the works be re-assessed and re-valued subsequently by the courts? If so, then what evidential weight should be given to these interim assessments and agreements when carrying out a subsequent valuation? Fraser J considered both of these questions in the quantum judgment in Imperial Chemical Industries Ltd v Merit Merrell Technology Ltd.

The background

To briefly recap the facts, ICI engaged MMT to provide piping works associated with the construction of a paint manufacturing facility pursuant to an amended NEC3 ECC. The parties had chosen Option A, which included an activity schedule identifying specific activities with a lump sum price. It was common ground that MMT’s scope of works had expanded significantly during the project. After a certain point on the project, staff of ICI’s parent company, AkzoNobel, became involved and, in an attempt to lower the project spend, interfered with the administration of the contract by the project manager. This lead to the resignation of the project manager and the (invalid) appointment of a member of AkzoNobel’s staff to replace him.

In the liability judgment, Fraser J held that ICI’s purported termination of the contract was a repudiatory breach. On the back of this finding, Fraser J was required to determine MMT’s final account, and the value of its counterclaim for damages flowing from the repudiatory breach.

The interim valuations and assessments

One of the key roles of the project manager under an NEC3 ECC is that of the independent third party certifier, in which it plays an impartial role in valuing the works. In this case, the project manager had:

  • Made interim assessments regarding amounts due to MMT under the contract, sometimes on the basis of agreements as to how compensation events would be valued.
  • Reached several agreements with ICI and MMT about the value of parts of MMT’s final account.

Both parties’ experts approached the valuation of MMT’s final account very differently. MMT’s expert valued the works according to the terms of the contract, taking account of the factual and legal context, including the various interim assessments and agreements reached in relation to the final account.

ICI’s quantum expert carried out a new valuation on the basis of actual cost, which largely ignored the interim assessments and agreements. As a result, there was no valuation put forward by ICI’s expert on the basis of those assessments and agreements that the court concluded were relevant.

Interim assessments: not determinative, but powerful evidence

MMT argued that because the project manager reached assessments of the value of work for the purposes of interim applications during the works, the court had no ability to revisit them. Fraser J disagreed. This was a legal issue determined by the terms of the contract.

Here, the wording of NEC3 Option W2.3(4) that the adjudicator “may review and revise any action or inaction of the Project Manager” expressly allowed the interim assessments to be revisited by the adjudicator. Fraser J commented that while an adjudicator’s jurisdiction does not determine the court’s powers, a court cannot have less power than an adjudicator.

He was “fortified in this conclusion” by the recent decision in Grove Developments Ltd v S&T (UK) Ltd (that my colleague blogged about) and which confirmed that an adjudicator’s decision on an interim application can be opened up at the next interim valuation stage. He also commented on the court’s inherent power to open up, review and revise certificates, notices or applications following Henry Boot Construction Ltd v Alstom Combined Cycles Ltd.

So, if interim assessments are not binding, what evidential weight can a court place on those assessments? Quite a lot, it turns out. Evidence of interim assessments carried out by people with in-depth knowledge of the project was of “powerful evidential weight”. As the party seeking to open up the valuations, it was up to ICI to show why the court should depart from them.

Agreed final account valuations

On the question of the parties’ agreements about the value of MMT’s final account, the evidence showed that these agreements were legally binding. Fraser J concluded that even he was wrong on this, their evidential value was as powerful as the project manager’s interim assessments.

Taking another look

ICI was seeking to revisit MMT’s final account in circumstances where there was reliable, contemporaneous evidence as to the proper valuation of MMT’s works.

Among the various criticisms of ICI’s quantum expert (of which there were many, and are an important reminder for both experts and lawyers), the failure to take account of the agreed valuations was noteworthy. The failure to consider the interim assessments or the contractual rates used by the parties (as opposed to actual cost), was also a critical omission.

Instead, the proper approach would have been to account for the contemporaneous facts and agreements, and to conduct alternative valuations on the basis that the court may accept them. Considering the project manager’s assessments during the works was integral to this exercise, even if done in the alternative.

Not only was this relevant to why the expert’s evidence was not accepted,  it also amounted to the expert reaching conclusions on issues of law and evidence. This drew sharp criticism from the court.

Practical takeaways

Given that interim assessments can be powerful evidence in determining the value of a final account (together with evidence of any relevant interim agreements), this case provides important guidance for parties seeking to challenge them. In particular:

  • Don’t underestimate the weight that a court, tribunal or adjudicator may give to this type of contemporaneous evidence. Evidence as to why interim assessments may be unreliable should be adduced from witnesses that are suitably placed to give such evidence.
  • Experts should consider all issues of fact relevant to their opinion, and not identify versions of those facts to be preferred over others. In final account disputes, that includes considering the interim assessments and any agreements reached between the parties during the works.

In this case, Fraser J preferred MMT’s expert evidence and figures “in practically every case”. There were several reasons for this, but one of them was ICI’s failure to have proper regard to evidence of interim assessments and agreements that reflected the parties’ respective positions during the works.

While the amount awarded to MMT after defending this marathon litigation almost pales into insignificance compared to the amount both parties have spent on legal fees and expenses, it still demonstrates that the failure to properly account for this type of evidence can be costly.

Bryan Cave Leighton Paisner LLP Simon Thompson

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