After an arbitration procedure that lasted for almost seven years, a final award was made in the summer in the case between the construction giant Peab and Unibail-Rodamco-Westfield regarding the Mall of Scandinavia contract. The award raises a number of questions and in this article, which is the first in a series of articles that will address different parts of the arbitration judgement, we deal with the contractor's demands for compensation for ÄTA (alterations and additions) works. The dispute is of interest as the arbitration panel has had to examine in part how ÄTA works are priced, in part which standard of proof shall apply. In the case it was undisputed that ordering of ÄTA works had taken place according to an order form with specification of the alternative ”agreement on fixed price based on detailed calculation”. However, the parties had not succeeded in agreeing on a fixed price for the disputed ÄTA works and the issue that arose was then the principle according to which compensation should be made for these ÄTA works.
The standard ABT 06 contract applies for the relevant contract and is therefore subject to assessment in the arbitration. The implication of ABT 06 is that the contractor is both entitled and obliged to execute the ÄTA works prescribed by the purchaser. The right means that the purchaser may not engage another party to execute the ÄTA works during the contract period. The obligation to execute the ÄTA works means that the contractor is obliged to execute the works that fall within ABT 06's definition of the ÄTA works if the purchaser wishes to have them done.
Questions surrounding the ÄTA works usually arise in connection with the calculation of the contractor's compensation for the works carried out, particularly when the conditions pertaining to the compensation differ between the contract works and the ÄTA works. Two commonly occurring forms of compensation for contracts are fixed price or current account according to the prime cost principle. It is also common in contracts that are compensated by means of fixed price that the ÄTA works are compensated on current account according to the prime cost principle when the parties have not agreed on specific charging standards.
In the arbitration, the contractor demanded compensation of over two billion kronor, including for the contract works, the ÄTA works and certain additional costs. The purchaser contested the demand and for its own part claimed compensation of around 900 million kronor, including for faults and fines. According to the arbitration judgement, the contractor was awarded approx. SEK 930 million and the purchaser approx. SEK 60 million.
The purchaser has criticised the arbitration judgement and Svea Court of Appeal has decided on inhibition, which means that the arbitration judgement may not be enforced.
COMPENSATION ACCORDING TO THE PRIME COST PRINCIPLE
Compensation according to the prime cost principle is regulated in ABT 06 chapter 6, sections 9–10, a regulation that in theory seems simple and economic in that the purchaser pays what it costs with a mark-up determined in advance. The practical application of the provision tends, however, to be complicated when theory meets reality. The prime cost principle in contract projects places major requirements on both the contractor and the purchaser. The contractor presents and verifies its costs and the purchaser reviews this account and takes a position on whether the costs presented are reimbursable.
When it comes to the right to compensation, the contractor has the burden of proof that the cost is attributable to the contract and that the contractor has put in the work that has been invoiced to the purchaser. It is regarded as reasonable that the contractor has the burden of proof as, in distinction to the purchaser, it works with journals, time sheets, booking of costs etc. and has unique insight into and control over administering the contract. It also means that the contractor is better able to ensure proof of costs and relevant circumstances than the purchaser is. For the burden of proof to be regarded as met requires that the contractor is able to verify its claims.
For this article, it is of interest that the arbitration panel delivered a specific judgement and as a matter of principle examined the issue of how the relevant construction contract should be interpreted concerning pricing of disputed ÄTA works.
Among other things, the construction contract sets out that the contractor shall in the first instance present a detailed calculation as the basis for an agreement on fixed price for ÄTA work. If no agreement on fixed price is concluded, the prime cost principle in ABT 06 shall instead be applied for compensation of the ÄTA work.
DISPUTED ÄTA WORKS
As previously stated, it was undisputed that ordering of ÄTA works had taken place according to an order form with specification of the alternative ”agreement on fixed price based on detailed calculation”. However, the parties had not succeeded in agreeing on a fixed price for the disputed ÄTA works and the issue that then arose was according to which principle compensation should be paid for these ÄTA works.
The contractor argued that the price should be fixed based on the calculations produced and considered that the arbitration panel, through an analogous application of section 45 of the Sales Act, should establish a reasonable price for the now disputed ÄTA works based on the contractor's calculations. In addition, the contractor claimed that the purchaser had foregone its right to invoke the prime cost principle as this pricing principle was only invoked prior to the arbitration panel and had not been invoked previously.
The purchaser's approach was that as no fixed price had been agreed, price should be determined based on current account and the prime cost principle according to ABT 06. In the purchaser's opinion, it was not possible to apply the Sales Act analogously as the construction contract regulates pricing of the ÄTA works.
In the specific arbitration judgement, the arbitration panel established that the prime cost principle should be applied when no agreement on fixed price had been concluded between the parties. The stance was motivated by the fact that the parties' ÄTA procedures had not constituted any change in the regulations in the contract documents. Neither was there any support in the parties' contract that the purchaser should be prevented from claiming application of the prime cost principle in the arbitration if the parties had not agreed a fixed price.
LOWER STANDARD OF PROOF
The specific arbitration judgement was followed up by a final judgement some two year later. In the final arbitration judgement, the panel began by observing in part that free evaluation of evidence pertains in assessment of which cost the contractor had for ÄTA work, in part that evaluation of evidence is not limited to a certain type of documentation, such as invoices, journals and time sheets. In addition, the arbitration panel established that a lower standard of proof than verified should apply for the contractor. The lower standard of proof was justified by the fact that the purchaser's action, of only invoking the prime cost principle for disputed ÄTA works in the arbitration, had meant that the contractor had not ensured proof if its prime costs.
As support for its ÄTA demands, among other things, the contractor reported how the demand was distributed over different calculation items. The purchaser contested the contractor's demands and objected, primarily, that the contractor had not presented and verified its prime costs. In addition, the purchaser claimed that the arbitration panel did not have the authority to determine through contractual supplements or cheapness testing a price other than that based on the prime cost principle.
The arbitration panel has summarised its assessment for respective ÄTA demands in its findings. Of interest in this context is that to a certain extent, the arbitration panel made the judgement that, despite alleviation of evidentiary burden, the contractor had not presented sufficient proof for the entire ÄTA demand. However, for a number of cost items the arbitration panel considered that the contractor's detailed calculations constituted sufficient proof for the cost that the contractor claimed to have had.
THE PRIME COST PRINCIPLE IS REELING
The arbitration judgement raises a number of questions. One of the questions concerns the prime cost principle's to be or not to be. Having read the specific arbitration judgement, in which the arbitration panel establishes that pricing of disputed ÄTA works shall take place according to the prime cost principle, there is no doubt. But it is when you read on in the final arbitration judgement that you sense that the arbitration panel's conclusions (at any rate if they stand) may have set the prime cost principle reeling. For in the final judgement the arbitration panel make a fairly substantial shift in what can be regarded as constituting a prime cost, which we will return to later in the article.
In the arbitration procedure currently under consideration, the parties have concluded an agreement that in simple terms means that unless the parties can agree on a fixed price for ÄTA works, the prime cost principle shall be applied. This type of regulation is commonly occurring in construction contracts and the contractor should thus be used to managing pricing and accounting of ÄTA works in this way. The regulation means that until there is an agreement on fixed price, the contractor should account for ÄTA works in accordance with the prime cost principle. A contractor that does not manage the accounting in this way is taking – given the clear contractual regulation that exists – an obvious risk of not receiving compensation for the ÄTA work. In our opinion, it is natural that it is the contractor that has to bear the risk in the event that the accounting is inadequate.
The majority on the arbitration panel have, however, expressed a different opinion. In the specific arbitration judgement, the arbitration panel observes that during the contract period both the parties have been of the opinion that fixed price based on agreed calculation shall be applied concerning the disputed ÄTA works. The arbitration panel has subsequently stated ”If it should no longer be fixed price on a calculation basis, because it transpired that the parties could not ultimately agree on fixed price despite the order being placed on that basis, one might expect that this should then be clearly articulated through [the purchaser] claiming that pricing should instead take place according to prime cost”. Further, the arbitration panel has observed that the purchaser's passivity (in not informing the contractor of the content in the parties' agreement) is not sufficient that the purchaser should have foregone the right to invoke the prime cost principle, but the panel has nevertheless considered that the conditions are such that they should entail a lower standard of proof for the contractor.
CONCLUDING REFLECTIONS
The arbitration panel's approach is very curious and implies – somewhat dramatically – that the purchaser has been assigned an obligation to inform the contractor of the content in the parties' agreement, on the basis that the contractor may otherwise benefit from a lower standard of proof. Why the arbitration panel considers that such a disclosure requirement is necessary is not set out. The point of departure is generally the opposite and each party is assumed to be acquainted with the content in the parties' agreement. We find it difficult to see what is so distinctive in this situation that there is reason to deviate from that basis.[1] We consequently also question why the purchaser's negligence to provide information on the content in the parties' agreement (i.e. that pricing should take place according to the contractor's prime cost) should mean that the contractor is granted alleviation of evidentiary burden. As we have already indicated, our opinion is that it is the contractor's risk-taking in not keeping accounts according to the prime cost principle that meant that the contractor could not present its prime costs. Such risk-taking does not make the contractor deserving of protection – rather the reverse – and there should not be any reason to apply any other standard of proof than verified concerning the prime costs.
The lower standard of proof that the arbitration panel subsequently applies to examine what constitutes a reimbursable prime cost, means that the contractor (in certain cases) may have been granted compensation on the basis of documentation that does not constitute any support for the prime cost. This includes the question of documentation in the form of calculations. A calculation is an estimate formulated in advance of what something will cost and, by definition, a calculation can therefore not constitute proof for a prime cost. Even with the pretext of free evaluation of evidence and a lower standard of proof, it should not, in our opinion, be possible to receive compensation for the prime cost with the support of a calculation. However, it should be emphasised that it is not possible to infer from the findings the extent to which calculations have constituted the basis for the purchaser's liability to pay compensation.
To sum up, the judgement leaves the reader with a number of questions and very little guidance concerning how parties should act in order to avoid ending up in this type of dispute in the future. An aim of the prime cost principle is that what constitutes a reimbursable cost should be predictable for the parties. The principle also implies that if the contractor can present documentation (e.g. an invoice) for its prime cost, then compensation should be paid. The arbitration panel's application of the prime cost principle is not predictable and it is not possible to assess what is regarded as constituting sufficient basis for the prime cost. The result of the alleviation of evidentiary burden applied by the arbitration panel has moreover meant that the prime cost principle has been eroded.
It should be emphasised in the context that the arbitration judgement is not a source of law and that furthermore it has been criticised, which means that it may not stand. It is therefore not possible to draw any far-reaching conclusions based on it. Arbitration is, however, a commonly occurring resolution mechanism for contractual disputes of this size and the arbitrators' opinion on how the prime cost principle should be applied may be significant for the arbitrators' judgements in other contractual disputes. It is moreover three distinguished and highly qualified arbitrators who have passed judgement in the case and it is of interest for parties and agents engaged within contract law to read and follow-up what happens with the arbitration judgement.
[1] The divergent arbitrator is also of this opinion.
