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Wed May 18 2022

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What does 'the total cost of works' mean?

2 Mar Many contractors no doubt think they have a good idea of what the term ‘costs’ means. They might not always be right, as Kieran Shields and Ben Couldrey from Irwin Mitchell LLP explain.

Designer Binkie Moorhead and Saudi client Mashael Alebrahim fell out over the cost of refurbishing a flat in this building on Marylebone Road
Designer Binkie Moorhead and Saudi client Mashael Alebrahim fell out over the cost of refurbishing a flat in this building on Marylebone Road

Under a number of standard forms of building contract, the contractor’s entitlement to payment is often based on the cost of the works with the word ‘cost’ invariably simply meaning ‘the cost incurred by the contractor’. However, the Court of Appeal’s interpretation of the term ‘cost’ in a contract for interior design services in the recent case of Alebrahim v BM Design London Ltd [2022] EWCA Civ 183 is a reminder that the meaning of ‘cost’ is not fixed and ultimately depends upon the proper construction of each contract on a case-by-case basis.

Background

Saudi citizen Mashael Alebrahim owned a substantial flat in a late Victorian mansion block known as Harley House, on Marylebone Road in London. By written contract dated 7th April 2017, Alebrahim engaged BM Design London Ltd (the company of interior designer Binkie Moorhead) for an extensive refurbishment of the flat. BM’s work scope included procuring furniture, fittings and equipment (FF&E) for the flat.

Alebrahim made various claims against BD including but not limited to overpayment, delay and damages for loss of use of the flat. The pleadings were confused and confusing and some of the real issues between the parties did not come to light until the trial. Ultimately, the court at first instance dismissed all of Alebrahim’s claims.

However, one of the issues decided by the court at first instance was a question of contractual interpretation relating to the FF&E element of the works. Clause 10 of the contract stipulated that BM was entitled to payment of ‘20% of the total cost of the works’ plus the cost of the works procured for Alebrahim.

Alebrahim argued that ‘total cost’ meant the cost of the relevant items to BM and therefore if BM obtained trade discounts for FF&E items, that lower price benefit should be passed on to Alebrahim. However, BM argued that ‘total cost’ referred to the cost to Alebrahim; being the amount of the estimates provided by BM to Alebrahim and which Alebrahim approved.

The court at first instance preferred BM’s interpretation but found that if Alebrahim’s interpretation had prevailed, Alebrahim would have been entitled to recover approximately £100,000 from BM. On this basis, Alebrahim was given permission to appeal on this issue.

Outcome & conclusion

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The Court of Appeal dismissed Alebrahim’s appeal. The court found that the cost estimates prepared by BM and approved by Alebrahim informed the contractual payment process: Alebrahim was presented with breakdowns of the relevant FF&E items each week and, once the figures were agreed, they became the amounts that BM would invoice (with the addition of the 20% fee) and which Alebrahim would pay. Thus, as estimates were agreed by Alebrahim, they became part of the ‘total cost of the works’.

The contract only required that BM’s estimates were approved by Alebrahim; the way the estimates were calculated, and whether they were based on retail prices or included discounts was not relevant. Alebrahim was not obliged to approve the estimate and was free to purchase FF&E items from third parties. BM did not order any items until Alebrahim had paid it in line with the approved estimates. BM would obviously not wish to reveal to Alebrahim the details of its trade discounts and this common sense reality stood at odds with Alebrahim’s interpretation which would allow Alebrahim to challenge previously-agreed costs on the basis that a trade discount had not been passed on. This did not make sense and so BM’s interpretation was preferred by the court.

Under some standard forms of building contract, references to ‘cost’ may properly mean ‘costs incurred’ by the contractor. However, this case demonstrates that is not always the case and much will depend on the contract terms on a case-by-case basis.

The court remarked that the contract in the case “may not have been as immediately transparent as it should have been” in relation to the basis of the weekly estimates.  Alebrahim had wrongly assumed that the weekly estimates from BM would be based on trade prices without a mark-up.

The lesson for the parties is to ensure that the basis of both pricing and payments in their contracts is expressed clearly and well understood in order to avoid the prospect of unnecessary disputes.

About the authors: Kieran Shields is a trainee solicitor and Ben Couldrey is a solicitor in Irwin Mitchell LLP’s construction & engineering team.

About the case: Alebrahim v BM Design London Ltd [2022] EWCA Civ 183

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