Where a variation obliges the contractor to cancel a materials supply order, can the supplier's resulting loss-of-profit claim be passed up to the employer?
A variation can force a contractor to cancel a supply order, leaving the supplier with a loss-of-profit claim. Whether the contractor can pass that claim to the employer turns on the fair-valuation provision in the contract.
Yes where the contract requires a fair valuation of the variation: a fair valuation must compensate the contractor for the adverse financial effect of the variation, and where an omission forces cancellation of a supply order the contractor is bound to meet, that includes a legitimate loss-of-profit claim from the supplier passed on to the contractor
Yes, where the contract requires a fair valuation of the variation. In Tinghamgrange Ltd (t/a Gryphonn Concrete Ltd) v Dew Group and North West Water a variation under the ICE 5th Edition forced the main contractor to cancel a large order for specially made concrete blocks, and the supplier claimed its loss of profit on the cancelled order. The Court of Appeal held that a fair valuation under clause 52(1) is intended to give the contractor fair compensation for any adverse financial effect of the variation. The employer knew, or should have known, that the blocks were bought under a subcontract and that cancellation would cause the supplier a loss of profit the contractor was bound to pass on, so the contractor could recover that sum from the employer. The principle is that a fair valuation of a variation that omits bought-in materials should compensate the contractor for the financial effect on it, including a legitimate supplier loss-of-profit claim. Whether the same reasoning extends to the JCT and GC/Works/1 conditions depends on the wording of their valuation clauses; it can apply where they require a fair valuation in comparable terms, but does not follow automatically.
| The problem | A variation forces cancellation of a supply order; the supplier claims lost profit |
| Fair valuation | Must compensate the contractor for the adverse financial effect of the variation |
| Employer's knowledge | It knew the blocks were subcontracted and cancellation would cause supplier loss |
| Tinghamgrange | The contractor recovered the supplier loss of profit from the employer |
| Wider reach | May extend to JCT and GC/Works/1 where the valuation clause is comparable |
The rest of this solution is for members
Fifty of the two hundred contractual solutions are free to read. This is one of the remaining hundred and fifty, which Premium and Pro carry.
See what Premium includesAlready a member? Sign in