It is fairly common for a construction contract to provide that the valuation of a variation is to be as agreed between the parties, or (if agreement cannot be reached) determined by the Principal’s Representative. Are negotiations between the parties regarding the valuation of variations subject to ‘without prejudice’ privilege, or can admissions or concessions made by a party be used against it in later legal proceedings? Are the parties under an obligation to negotiate the value of the variations in good faith?
In this article, Alex Ottaway (Special Counsel) and Raihan Hossain (Solicitor) discuss the decision of A&A Mechanical Contractors v Petroleum Company of Trinidad and Tobago,1 handed down on 3 November 2022, in which the UK Privy Council had some interesting insights on these questions.
What happened?
Petrotrin (a state-owned petroleum company) wished to strengthen its offshore platform in the ‘Soldado’ oilfield, located in the Caribbean Sea. It engaged A&A (an energy contractor) to provide steelworks as part of that project. A&A submitted a number of variation claims. Representatives of each party met to discuss those claims and a value was agreed for many (but not all) of them.
The project fell into delay. The amount that A&A claimed for variations increased significantly, and A&A also claimed time-related costs. In response, Petrotrin informed A&A that all previous offers and concessions made by Petrotrin were revoked. Petrotrin sought to reduce the (previously agreed) value of variation items by claiming that some of those items were original scope not variations, and that, as Petrotrin’s authorised representative had not given prior written approval to the variation work being carried out, A&A had no contractual entitlement to additional payment for those items.
The key question for consideration by the Court was whether evidence of the earlier discussions between the parties, in which values for certain variation items were agreed, was admissible. Petrotrin, who were trying to establish that the true value of the variation items was lower than the agreed amount, asserted the evidence was subject to ‘without prejudice’ privilege and inadmissible.
Were the valuation discussions subject to ‘without prejudice’ privilege?
Where parties communicate with one another in an attempt to negotiate a settlement of a dispute, those communications are subject to ‘without prejudice’ privilege and cannot ordinarily be adduced in subsequent legal proceedings.2 Whether a written document is ‘without prejudice’ depends upon the purpose of the communication and is not determined by whether or not the document contains the words ‘without prejudice’.3 Moreover, ‘when the issue is whether without prejudice communications have resulted in a concluded compromise agreement, those communications are admissible’.4
On the facts of this case, the Privy Council (referred to as ‘the Board’) had regard to the provisions of this construction contract (which are common) stating that variations were to be valued using the contract rates and prices if applicable, or otherwise, the value would be a reasonable sum. The contract also said that the value of variations was to be agreed between the parties.
The Board found that, when the parties had met to discuss the value of A&A’s variation claims, they were carrying out this ongoing contractual process, rather than seeking to resolve a dispute. Accordingly, evidence of those discussions was admissible.5 Moreover, the Board said that, even if the discussions had been ‘without prejudice’, they would have nonetheless been admissible to determine whether an agreement had been reached.6
In examining the evidence of the valuation discussions between the parties, the Board noted that evidence given by witnesses on both sides pointed in the same direction: the parties had reached agreement on the value of many of the variation claims.7 Accordingly, the Board entered judgment for A&A in the amount of the agreed values for those items.
Did the contract contain an implied obligation requiring the parties to negotiate the value of the variation in good faith?
A further point raised in this decision concerned a statement in the contract that the value of extras, alterations, additions or omissions shall in all cases be agreed between Petrotrin and A&A.
It is an established principle that ‘agreements to agree’ are unenforceable. In 1857, Lord Wensleydale said:8
“An agreement to enter into an agreement upon terms to be afterwards settled between the parties is a contradiction in terms. It is absurd to say that a man enters into an agreement till the terms of that agreement are settled.”
However, in Australia, the courts have drawn a distinction between agreements to agree, which are unenforceable, and agreements to negotiate, which in some cases can be enforceable.9
Whilst the provision above appears to be an agreement to agree, rather than finding it to be unenforceable, the Board inferred the contract contained an implied obligation requiring the parties to negotiate the value of variations in good faith, which was enforceable. It said that, if the parties were unable to agree a value, the courts could determine a reasonable value.10
However, the Board cautioned that the ability of the courts to determine a reasonable value did not relieve A&A from its obligation to seek to agree that there was a variation and the value of the variation. The Board considered that, unless Petrotrin issued a variation notice or approval, A&A fulfilling its obligation to seek to agree these matters was an ‘essential prerequisite’ to A&A being entitled to payment for that variation.11
In Australia, there is judicial guidance on what an obligation to negotiate in good faith requires. According to the decision of the Supreme Court of New South Wales in Aiton v Transfield12, it requires that the parties:13
- undertake to subject themselves to the process of negotiation;
- have an open mind, in the sense of a willingness:
(a) to put forward options; and
(b) to consider options proposed by the other party,
But it does not require a party:
- to act for or on behalf of or in the interests of the other party; or
- to act otherwise than in its own self-interest.
Key Takeaways
- It would be prudent to assume that discussions regarding the valuation of variations will be ‘open’ (unless the contract states otherwise) or to obtain the other party’s express agreement that the discussions will be treated as ‘without prejudice’.
- If the discussions are ‘open’, any admissions or concessions made during the course of discussions could be used by the other party in later legal proceedings to support its position.
- Where the contract envisages the parties agreeing the valuation of a variation, it would be prudent for a contractor to assume that it is obliged to seek to agree the valuation with the principal (even if this is not expressly stated in the contract), and that its entitlement to payment for the variation might depend upon compliance with this obligation.
This article was written by Alex Ottaway, Special Counsel and Raihan Hossain, Solicitor.
1[2022] UKPC 39 (A&A v Petrotrin).
2Rush & Tompkins Ltd v Greater London Council [1989] AC 1280 (Rush & Tompkins). This test appears in various Australian (State and Territory) evidence legislation.
3Rush & Tompkins; Pearson Education Ltd v Prentice Hall of India Private Ltd [2005] EWHC 636 (QB); Bankim Thanki QC, The Law of Privilege (Oxford University Press, 3rd ed., 2018) at paragraphs 7.13–7.14.
4Unilever plc v The Procter & Gamble Co [2000] 1 WLR 2436 at 2444D per Robert Walker LJ (Simon Brown LJ and Wilson J agreeing).
5A&A v Petrotrin at [69].
6Id at [71].
7Id at [25] and [74].
8Ridgway v Wharton (1857) 10 ER 1287 at 1313.
9Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 per Kirby P (Waddell AJA agreeing); Aiton v Transfield [1999] NSWSC 996; United Group Rail Services Ltd v Rail Corporation of New South Wales (2009) 74 NSWLR 618.
10A&A v Transfield at [15]–[19].
11Id at [20].
12[1999] NSWSC 996.
13Id at [156].
