Project manager's valuations: to bind or not to bind?

What happens when an employer disagrees with its own professional adviser's assessment of the amount certified to the contractor? Can the employer reopen this and if so, what will it need to demonstrate? These issues were recently looked at in Imperial Chemical Industries Ltd v Merit Merrell Technology Ltd [2018] EWHC 1577 (TCC) (21 June 2018).

What were the facts?

Merit carried out work for Imperial at a paint factory under an NEC3 form of contract. The original value of the contract work was £1.9 million. However, the contract sum increased staggeringly – on Imperial's case to £10 million but on Merit's case to a whopping £20.9 million. Imperial's parent company, AkzoNobel, became involved following the dramatic increase in spend. They sent personnel whose very task was to reduce MTT's entitlement. The judge held: "CapEx was what governed the AkzoNobel approach to MMT and its contract, and not MMT's contractual entitlement, nor the other contract terms".

Merit had been paid in full (following various arduous adjudications) and Imperial was effectively seeking to recover £10.9 million.

This was the 6th claim between the parties. Incidentally, in the first judgment it was held that Imperial had also repudiated the contract for "purporting to accept non-existent repudiatory breaches". A previous claim from Imperial had also related to the quality of the welds on the piping installed by Merit. The court found that the alleged defects barely existed and that Imperial was attempting to hold Merit to a higher standard than the contract would originally have envisaged.

Further, Imperial's original project manager had resigned for professional reasons and was replaced with someone the court deemed to be " eminently unsuitable to act as the project manager, and from all the evidence … did not remotely at any stage attempt to do anything other than fulfil [the client's] purpose, which was to reduce expenditure … the very opposite of independent.".

What is the status of existing valuations?

The court noted that the role of project manager under the NEC3 contract form, includes a large amount of detailed valuation work. This role is undertaken as an independent third party. The original project manager made interim assessments regarding amounts due to Merit and had reached certain agreements with Merit as to the value of the final account.

The court considered whether such valuations/agreements bound Imperial. The court also noted that in terms of common sense and logic it would be expected that the valuations, or at least agreements regarding quantities (or measures) and applicable rates made at the time by those most closely involved with the works themselves, would be used as a starting point.

The court considered the issue in two parts. The first from a contractual perspective and the second the status of particular agreements reached on a host of individual items (but particularly rates and measures) reached between Merit and the original project manager.

From a contractual perspective, it was held that interim valuations could be revisited by the court. Referring to Henry Boot Construction Limited v Alstom Combined Cycles Limited [2005] 1 WLR 3850, it was reaffirmed that "Henry Boot is authority for the proposition that the court can decide the 'true' value of any certificate, notice or application and that, as part of that process, it [the court] has an inherent power to open up, review and revise any existing certificates, notices or applications."

The court also noted that there is nothing in the NEC3 form that states that a project manager's assessment is conclusive as to the rights of the parties.

There was therefore no legal obstacle preventing Imperial from challenging, in law, the assessments reached by the project manager.

The burden of proof

The court looked at the question of which party has the burden of proof in respect of the final valuation. Merit submitted that it was for Imperial to show that Imperial had overpaid MMT. After a review of the authorities, the court agreed that it was for Imperial to demonstrate that Imperial had overpaid. Otherwise, it would lead to a rather strange procedural situation whereby Merit would have to explain why they could keep sums having already been paid.

The evidence

However, Imperial lacked evidence to show that the original project manager's assessments were wrong. The new project manager who was involved at a late stage and did not have any detailed knowledge of the works had approached valuation and payment in a way wholly contrary to the contract terms. He could not give direct or detailed (or any) evidence concerning the particular work scope. The court held that there has to be some evidential basis for the court deciding to depart from the assessments reached at the time. Accordingly, although the assessments reached at the time did not conclusively determine Imperial's rights they were of powerful evidential weight.

The experts

The court was critical of the joint statement produced by the experts which it described as "a most unhelpful document". There was also criticism of the fact there were two Scott Schedules as the experts had been unable to agree a single version. The quantum experts in the case approached the valuation of Merit's final account in different ways. What was the right way?

The court preferred Merit's approach. This valued the works according to the terms of the contract and took account of the various interim assessments and agreements reached in relation to the final account. However, Imperial's expert put forward a valuation on the basis of "actual cost" and without having regard to the original valuations and agreements. The failure to have proper regard to the contract (which contained agreed schedules of rates to be used) and the previous assessment and agreements was damaging. This was particularly the case as the court deemed that there was reliable and contemporaneous evidence of the true value of the works carried out by Merit.

Conclusion

This case demonstrates that although project manager's assessments under the NEC3 contract are not of themselves binding on the parties and can be revised, the court is likely to give them powerful evidential weight.