By Dr. Chandana Jayalath

Whenever variations are ordered that omit work, and particularly if such omissions are substantial in nature, contractors often argue that they should be entitled to claim the loss of profit that they would have earned on such works.

If the variation omitting works is invalid then such is a breach of contract entitling the contractor to damages, and it is clearly established that loss of profit can form part of such a claim for damages. It is breach of contract and not a valid variation when the works have been omitted and given to others to carry out. This point has been confirmed in the case of Gallagher v. Hirsch NY App Division 467 (1899) where the American court held that the word “omission” meant only work not to be done at all, not work to be taken from the contractor and given to another to do.  Secondly, where the power to order variations set out in the contract has been exceeded. (Variations must be either necessary or desirable for the satisfactory completion or functioning of the works). Works can not be omitted for example, to save time for completing the works, or to save the employer’s money.

If, however the instruction omitting works is a valid variation order, then whether a contractor can claim loss of profit on such omitted works depends upon the wording of the conditions of contract. Many standard forms provide: “The prices in the Contract Bills shall determine the valuation of items omitted; save that if omissions substantially vary the conditions under which any remaining items of works are carried out.” This provision is not helpful to a claim for loss of profit, because it provides that the omitted works must be valued at the rate in the Contract Bill, i.e. omitting the full value, including profit, of the item in the Contract Bills. Nor is the proviso of any assistance in such a claim because the variation must substantially vary the conditions under which the remaining items are carried out before the remaining items can be re-valued.

Loss of profit on an omitted item will not in itself vary the conditions in which the remaining items are carried out. So the proviso does not appear applicable in this situation. However, contracts typically provide the Contractor with an entitlement to claim ‘direct loss and/or expense’ incurred by reason of a variation. In the case of Wraight Ltd v. P H and T Holdings (1968), a contract was wrongly determined with the work part completed. The determinations clause provided for the contractor to be paid “Any direct loss and/or damage caused to the contractor by the determination.” It was held by the court that this wording included loss of gross profit on the uncompleted work. Therefore, following the Wraight case it would appear arguable that a claim for loss of profit on works omitted by way of a variation can be claimed as direct loss and or expense.

Many standard forms provide for re-rating other items in the Bills of Quantities if a variation renders such rates inapplicable or unreasonable. However it is again not considered possible to argue that this power extends to re-rate other items in the Bills of Quantities on the basis that there has been a loss of profit on works omitted. A variation omitting works would not normally cause a disturbance to progress. In conclusion therefore, whilst a claim for loss of profit will always be successful where the works were omitted by way of an invalid variation order, where the variation is valid it seems clear that many contracts do not provide a means for a contractor to claim for loss of profit on works omitted. However such a claim is possible as a direct loss and expense claim on the basis of the decision in the Wraight case.

Generally, for contractors seeking to prove a claim of lost profit due to omitted scope, it is critical to demonstrate that his loss of profit by the omission of work is genuinely incurred because his inability to recover that loss elsewhere. It is not sufficient to simply argue that the lost profit is speculative on the basis of a profit allowance in tender, ie loss of profit = value of omitted work x 15% profit margin for instance. However, this is a cumbersome exercise to be dealt with far remote facts, both for justification and evaluation. On the other hand, importing case law from different jurisdictions will definitely have legal ramifications. It could also be argued that the parties have entered into contract clauses together with their repercussions taken to have already agreed unless the contract expressly forbids or provides for.

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