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Who pays when actual costs exceed the estimates in the contract?

The wording of a contract has prevented a property developer from getting a full rebate on a project where some of the costs exceeded the estimates.

The company had bought a site which needed remediation work before it could be used. The purchase price was based on the notional value of the site once that work had been carried out.

The contract called for the estimated costs of this work to be agreed between the developer and the site owners within six months. These costs would then be deducted from the notional value of the site to arrive at an actual purchase price.

A second clause in the contract stated that the owners would bear any costs that the developers incurred in getting approvals relating to water supplies and the construction of a link road. It was estimated that this would take about five months.

In the event, it took longer and so the cost of obtaining the approvals was higher than estimated. The developer tried to get a rebate arguing that the clause in the contract relating to approvals allowed for actual costs rather than estimated costs to apply.

However, the judge held that the clause dealt with estimated costs in the same way as the rest of the contract.

That decision has been upheld by the Court of Appeal. It held that the cost of the approvals only differed from other costs in that they depended on third parties. It was always possible, therefore, that issues might arise that had not been anticipated. However, there was nothing in the contract to suggest that the cost of obtaining approvals should be treated any differently to other costs.

If the developer had wanted them to be treated differently it should have said so using express language in the contract.

Please contact Sess Sigre if you would like more information about matters relating to contracts.