Executive Summary

A claimant may issue a claim for particularised overhead costs where it can prove that the relevant head office overheads had "thickened", i.e. necessarily become more expensive, as a direct result of a defendant's breach. A claimant may not, however, claim for overheads where they are calculated as a proportion of losses otherwise proved.

Facts

The claimant, Fluor, had been engaged to construct an offshore wind farm. It appointed the defendant, ZPMC, as the project's steel fabricator and supplier. On 7 October 2016, the Court handed down a liability judgment. ZPMC was found to be in breach of contract for cracking which had appeared in the welding of steel monopoles and transition pieces, component parts of the farm's wind turbine generators.

In January 2018, damages were awarded to Fluor of £15 million and €7 million. These were for a number of 'direct costs' caused by the breach: including the costs of paying additional staff to manage the project, the costs of retaining consultants in respect of the defects and remedial works, the costs of hiring extra plant and equipment, the cost of providing extra storage space and so on.

Following an invitation from the Court, at an instant hearing Fluor also sought an award for overheads amounting to 4% of the award, to reflect its increased head office costs, calculated to be 4% of the project value.

Fluor argued that losses of this nature were just as much a consequence of the breach as the direct costs it had previously claimed for. The direct costs were not incurred in a vacuum, but were inevitably causally connected to the increased head office costs needed to manage the project following discovery of the defects.

ZPMC submitted that a contractor must prove causation by showing that its labour force would have been employed profitably but for the breach: a position endorsed by Emden's Construction Law at para. 13.64, and by the Court in Walter Lilly v Mackay [2012] EWHC 1773 (TCC). ZPMC continued that, even so, this would constitute a separate 'loss of opportunity' claim and was not implicitly a feature of the direct costs alleged by Fluor.

Decision

The Court accepted that the view of overheads as submitted by ZPMC was broadly correct. If, for example, a contractor was required to remain on site for an additional three months as a result of delay by the employer, and was able to prove on the balance of probabilities that this time would have been engaged productively elsewhere, then he would reasonably be entitled to claim for an additional three months' worth of fixed costs, including overheads.

The Court added another possibility, however. That was where a contractor's head office overheads had been "thickened" during the period of the contract, as might occur when head office staff whom would normally be engaged in non-project related matters must, as a consequence of the breach, spend their time dealing with the resultant problems and there is under-capacity to handle the resulting workload, causing the contractor to hire new staff (even where the duties of the new staff are themselves not project-related).

Fluor, however, had not advanced a claim on any such basis. Fluor's case relied on a ratio of 'one set of costs against another' which said nothing about the extent to which the alleged 4% increase in overhead costs was in fact the result of the breach by ZPMC. The Court required a precise figure with causation explained, and was not willing to pluck a figure out of the air on principle.

As such, Fluor had failed to establish the facts necessary to support any claim for overheads.

Comment

In effect, this Judgement introduces the concept that particular elements of overhead costs can now be drawn out by claimants and linked to breaches of duty as, in effect, ordinary losses. Parties on both sides must ensure, however, that causation is proved on the balance of probabilities with reference to specific staff members and specific figures.