Although cost overruns in construction and engineering projects are commonplace, a recent case in the TCC highlights a potential risk that most company directors in the sector may not be aware of – personal liability for such overruns.
In Whessoe Oil and Gas Limited and Cleveland Bridge Limited v. William Dale  EWHC 1788 we learned that Whessoe and its joint venture partner entered into a fixed price contract with Dragon LNG Limited to design and construct a liquefied natural gas import terminal at Milford Haven for the sum of approximately £184.7 million. Whessoe (which is part of the Saudi Al-Rushaid group of companies) claimed that, at this price, it was budgeted to make a profit on the project of £19.3 million. As it transpired, the actual costs of design and construction were approximately £364.9 million and Whessoe claimed that it was liable to pay £36.7 million of the cost overruns. Whessoe alleged that, but for the intervention of its shareholders with additional funding, the “commercial disaster” that was the Dragon LNG project would have resulted in its insolvency.
Interestingly, and presumably having exhausted its remedies against Dragon LNG Limited, Whessoe decided to bring a claim against its former managing director, Mr Dale. The question is whether such a claim is the beginning of a worrying new trend in the industry or simply a rare case which turns on its own facts.
Whessoe claims Mr Dale breached the duties he owed Whessoe under the Companies Act 2006, namely a duty to act in good faith and to exercise the reasonable care, skill and diligence that would be exercised by a reasonably diligent person. In addition, Whessoe alleges Mr Dale breached his contract of employment in that his conduct fell short of the general knowledge, skill and experience that may be expected of a person carrying out the functions that Mr Dale carried out. Whessoe claims the sum of £50.6 million from Mr Dale representing its contribution to the cost overruns (£36.7 million) together with the profit it claims it lost as a result of Mr Dale’s breaches of contract and/or duty (£19.3 million).
Whessoe’s claims centre on Mr Dale’s management of the Dragon LNG project, the project and commercial management of which, Whessoe alleges, was in his sole remit. Whessoe alleges the principal reason for the cost overruns was the cost of sub-contractors on the project and that Mr Dale failed to put in place the necessary checks and balances to adequately control those costs. The claim includes allegations that Mr Dale failed to supervise (or procure the supervision of) those sub-contractors and that he failed to take any appropriate remedial measures to bring the costs on the project under control. A specific allegation made against Mr Dale is that he sanctioned the engagement of sub-contractors on cost reimbursable forms of sub-contract when Whessoe itself was committed to a fixed price contract.
Mr Dale vehemently denies the claim against him and the proceedings are ongoing. This case actually relates to Mr Dale’s application for summary judgment and/or strike-out of the claim against him on the grounds that it is vague, incoherent and embarrassing. The court said it was minded to agree with Mr Dale and stated that the case against him was so poorly pleaded that it did not enable him to understand the case against him. For example, Mr Dale was entitled to know what control or supervision he should have exercised, when he should have exercised it and in relation to which sub-contractors. The court however refused to strike out the claim against him, instead giving Whessoe further time to particularise its case and adjourning the application until 1 August 2012.
Whether or not the claim against Mr Dale is struck out, these proceedings highlight a potential risk that directors in the construction sector potentially face. That said, claims such as the one against Mr Dale are likely to remain extremely rare. Not only are they difficult to bring in that they would require a significant amount of evidence to make good the allegations, most company directors are simply unlikely to have the funds to satisfy any substantial claim. It is not known if Mr Dale has the funds to be able to satisfy a £50.6 million judgment against him.
Assuming a director has the funds to satisfy any judgment, the route to succeeding on a claim is far from straightforward. A claimant company would first need to show, on the balance of probabilities, that its tender was sufficient and that it was likely to achieve the return shown. Once it had done so, the claimant would need to carry out a detailed exercise identifying not only the total cost overruns on the project but a breakdown linking the cost overruns to the reasons why those overruns were incurred.
Some of these reasons could be employer related (such as through the instruction of changes or variations), sub-contractor related (lack of specialised labour resource) or simply outside the control of either party (such as exceptionally adverse weather). In the case of employer related reasons, it may be difficult to entertain a claim such as the one brought by Whessoe as these costs cannot be said to be attributable to any breach by its director and, further, could in the first instance be recovered from the employer. Similarly, the sub-contractor and exceptionally adverse weather grounds may result in irrecoverable additional cost but it cannot be said they arise out of a breach of duty by its directors. Once the costs relating to these reasons are excluded, there will need to be a balance of cost overruns which cannot be explained.
The claimant will then need to carry out a further exercise to understand why these cost overruns were incurred and link the cost overruns to any alleged breaches of duty by its director(s). This is a matter for expert evidence.
Even if the claimant were able to do all of this (which in most cases would be unlikely), this does not rule out the obvious defences the director(s) will be able to advance to rebut the claim. For example, Mr Dale suggested that there were substantial oil and gas projects being undertaken in Milford Haven around the time of the Dragon LNG and as such it was difficult to attract and retain sub-contractors. This would obviously rebut the allegation that Mr Dale did not exercise reasonable care, skill and diligence when he engaged sub-contractors on a cost reimbursable basis. It would appear that market forces dictated he had no alternative.
Similarly, in most cases the director(s) would also be able to point to qualified and experienced employees (such as contractors/commercial managers, quantity surveyors and project managers) to whom most of the day-to-day functions of the procurement and construction of a project such as the Dragon LNG are delegated. This represents a further significant hurdle for the claimant company.
It would appear that the claim against Mr Dale, whilst highlighting potential risks all company directors in the industry face, is a one-off which turns on its own facts. Due to the evidential hurdles that must be overcome in order to succeed in such a claim, it appears that Whessoe itself may struggle to maintain its claim against Mr Dale beyond 1 August 2012.