Lost profits? Then prove it

Sir Antony Edwards-Stuart in a judgment of 16 March 2018, involving Fluor and Shanghai Zhenhua Heavy Industry Co Ltd (ZPMC), denied the successful claimant any entitlement to claim head office overheads and profit. This ruling reminds us of the requirements for claiming head office overheads and the importance of adducing credible evidence to support them.

The facts related to the fabrication of steel piles and transition pieces for an offshore wind farm in the North Sea. ZPMC, a steel fabricator based in Shanghai, had supplied these components to Fluor, which had in turn agreed with its own client to engineer, procure and construct the foundations and infrastructure to support 140 wind turbine generators being installed 26km off the coast of Suffolk. The foundation for each turbine comprised the steel pile, which was a massive steel structure composed of individual “cans” of rolled steel plates welded together to form a cylindrical column, typically 65m long, 5m-6m wide and weighing between 550 and 700 tonnes. Each of these steel piles was to be driven 32m into the sea bed. At the top of each pile sat a transition piece, 23m long and 5m wide, which provided the connection between the steel pile and the structure above it.

It is necessary for the contractor to prove on a balance of probabilities that if the delay had not occurred it would have secured work that would have produced a return

In an earlier judgment in 2016, ZPMC had been found liable for a breach of contract by reason of cracking to the welding in the steel piles and the transition pieces. A second judgment in January 2018 consequently had to consider which losses Fluor could recover as damages. However, whereas Fluor had claimed its overhead and profit in its “reamended particulars of claim”, it had not identified specifically the sums to which it claimed entitlement. Thus the judge invited the parties to deliver further submissions. Following delivery of these submissions and further argument, the third judgment was delivered in March 2018.

Fluor had secured a 17% “reasonable mark-up for overhead and profit” on all additional work applicable to all variations during the project. However, as ZPMC pointed out, a claim for variations made by a contractor against the employer is not the same as a claim for damages for breach of contract made by the contractor against its subcontractor. This distinction was accepted by the court. Variations require the valuation of the additional work. Overheads and profit will form a constituent part of this valuation. Damages conversely are intended to compensate for losses, which Fluor needed to establish. Fluor belatedly conceded it could not claim for loss of profit, but did persist in its claims for recovery of head office overheads. Its already awarded damages, save for one exception, related to direct costs, which included the costs of paying additional staff to manage the project, retaining engineering consultants, hiring extra plant or equipment, and providing extra storage space. The one exception was based on the loss of the opportunity to carry out the work that Fluor had expected to be performed. 

Fluor may well have incurred increased office overhead costs, but in the absence of any evidence of its losses, there was little that a court could do

Head office overheads are fixed, thus Fluor had to demonstrate that, without the breach of contract, its labour force would otherwise have been profitably employed on other work thereby making a contribution to fixed overheads (such as head office costs). The loss of the opportunity to recover that contribution to its overheads could then be a legitimate head of claim. Otherwise, Fluor was faced with the argument that the costs would have been incurred in any event – being in the nature of overheads – and that they could not be considered as its loss. 

Having reviewed the various authorities, the court concluded that:

• A contractor can recover head office overheads and profit lost as a result of delay on a construction project caused by factors that entitle it to loss and expense.
• It is necessary for the contractor to prove on a balance of probabilities that if the delay had not occurred it would have secured work that would have produced a return (over and above costs) representing a profit and/or a contribution to head office overheads. The use of a formula, such as Emden or Hudson, is a legitimate and indeed helpful way of ascertaining, on a balance of probabilities, what was its entitlement.
• A contractor could also legitimately claim additional monies where his head office overheads have been “thickened” during the period of the contract. This may arise where it was necessary to employ additional personnel and resources to deal with the consequences of a breach of contract. Fluor may well have incurred increased head office overhead costs, such as telephone bills or IT costs, as a result of the breaches of contract by ZPMC, but in the absence of any evidence of its losses, there was little that a court could do. 

Jeffrey Brown is a partner in the London office at Veale Wasbrough Vizards