Practical Issues arising from Valuation of Claims

Transcription

1 Practical Issues arising from Valuation of Claims Presented by KK Cheung and Joseph Chung, Partners of Deacons and Allen Lai, Senior Consultant of Charlton Martin Consultants Limited Presentation on 16 June Today s Roadmap Global Claims - KK Claims for Office Overheads and Profit - Joseph Practical Issues arising from Claims for Loss and Expense - Allen and Joseph 1

2 3 Introduction (1) A typical contractor s claim for delay or commonly referred to as prolongation costs would cover the following heads:- increased preliminaries; overheads; loss of profit; increased costs resulting from inflation; interest for non-payment of money; Such claims are often controversial both as to the extent of delay caused by the employer and quantification 4 Introduction (2) The basis for calculation can often be theoretical and ignores the fundamental principal that damages are to compensate for actual loss it is not the function of the Courts where there is a breach of contract knowingly to put the plaintiff in a better financial position than if the contract had been properly performed. (C&P Haulage v Middleton (1983)) 2

3 5 What is a global claim? (1)... where a global or composite sum, however computed, is put forward as the measure of damage or of contractual compensation where there are two or more separate matters of claim or complaint, and where it is said to be impractical or impossible to provide a breakdown or sub-division of the sum claimed between those matters. [Hudson s Building and Engineering Contracts, 11 th ed, 8-200] 6 What is a global claim? (2) A global or total cost claim is simply, as its name implies, one in which the cost of the work incurred by the Contractor in its execution is compared with the tender or contract allowance for that work to arrive at the claimed amount. The court or tribunal is then invited to infer that the entirety of the cost overrun is the result of breaches by the employer or events for which they are responsible. [Hudson s Building and Engineering Contract, 13 th ed, 6-076] where the connection between the matters complained of and their consequences whether in terms of time or money are not fully spelled out. [52 BLR 5] 3

4 7 What is a global claim? Examples (3) Example 1 In breach of the contract, the Employer caused delay in completion of the Project Particulars 1) Delay in giving possession of the Site to the Contractor; 2) Delay in nomination of sub-contractor; 3) Delay in completion of works by separate specialist contractor; and 4) Issue of variation orders during culpable delay of the contractor. By reason of the matters aforesaid, the completion of the Project was delayed by 100 days and the contractor suffered loss and damages Particulars 100 days x HK$10,000 per day = HK$1,000,000 8 What is a global claim? Examples (4) Example 2 In breach of the Consultancy Agreement, the Employer caused delay and disruption to the Services Particulars 1) Delay in providing instructions to the Consultant; 2) Issue of instructions suspending the Services; and 3) Issue of instructions changing the sequence of the Services. By reasons of the matters aforesaid, the Consultant suffered loss and damage Particulars Amount (HK$) 1) Actual cost of the Consultant in performing the Services 1,200,000 Less 2) Original contract sum (1,000,000) LOSS & DAMAGE HK$200,000 4

5 9 What is a global claim? (5) Frequent objections to a global claim: had the claimant kept proper site records, a global claim could be avoided. It is difficult to see how a claimant who has failed to keep records should be in a better position to subject the defendant to difficulties in attending to the global claim a global claim assumes in the contractor s favour that the tender allowance was adequate, that the contractor proceeded with an appropriate degree of expedition and efficiency and that there were no other matters affecting progress other than those for which the employer was responsible 10 Case Law on Global Claims (1) Walter Lilly & Co Ltd v Mackay and another (no. 2) (2012) provides useful guidance on how the Courts should approach a global claim 5

6 11 Case Law on Global Claims (2) Walter Lilly & Co Ltd v Mackay and another (no. 2) (2012) Facts in 2004, WLC was appointed as a main contractor to construct three houses in London there was substantial delay in the project. The employer withheld LDs. WLC claimed EoTs and associated loss and expense the employer argued that WLC s claim for loss and expense was a global claim the Court discussed previous line of authorities and summarised the position on global claims as follows:- 12 Case Law on Global Claims (3) claims by contractors for delay or disruption-related loss and expense must be proved as a matter of fact. The contractor has to demonstrate that, first, events occurred which entitle it to loss and expense, secondly, that those events caused delay and/or disruption and thirdly that such delay or disruption caused it to incur loss and/or expense. as a matter of principle, the claimant contractor does not need to show that it is impossible to plead and prove cause and effect in the normal way or that such impossibility is not the fault of the claimant it is open to contractors to prove the above elements with whatever evidence there is nothing wrong in principle with a total or global cost claim. However, there are added evidential difficulties which a claimant contractor has to overcome. It will generally have to establish that the loss which it has incurred would not have been incurred in any event. Thus, it will need to demonstrate that its accepted tender was sufficiently well priced that it would have made some net return. It will need to demonstrate in effect that there are no other matters which actually occurred (other than those relied upon in its pleaded case and which it has proved are likely to have caused the loss) 6

7 13 Case Law on Global Claims (4) the fact that one or a series of events or factors which are the risk or fault of the claimant contractor caused or contributed to the total or global loss does not necessarily mean that the claimant contractor can recover nothing. It depends on what the impact of those events or factors is obviously, there is no need for the court to go down the global or total cost route if the actual cost attributable to individual loss-causing events can be readily or practicably determined To sum up, there is nothing wrong in principle in lodging a global claim. The contractor does not need to show impossibility to pursue such a claim. However, if he does so, there will be added evidential burden upon the contractor 14 Claims for overheads and profit Introduction (1) This section of the talk will focus on claims for office overheads and loss of profit Overheads:- this refers to the costs of running the contractor s general business as opposed to site costs for the subject project overheads are general administrative costs incurred by the contractor in order to do business. These costs are funded by all contractor enterprises but not directly attributable to any one contract on which it is engaged e.g. rent, rates, electricity, staff, directors salaries 7

8 15 Claims for overheads and profit Introduction (2) if particular head-office costs are proved to have increased by the contract s delay i.e. additional overheads, they are recoverable e.g. cost of extra staff recruited the contractor could also claim on the basis that but for the delays, workforce would have had the opportunity of being employed on another contract which would have had the effect of contributing to the overheads during the delayed period i.e. unabsorbed overheads to make a claim for unabsorbed overheads, the contractor must show because of the employer s delay, the contractor was prevented from taking on other overhead earning work the contractor failed to recover the overheads it could reasonably have expected during the period of prolongation the contractor was unable to recover such overheads because its resources had been tied up by the employer's delay 16 Claims for overheads and profit Introduction (3) Loss of profit: contractors commonly claim for loss of profit arising out of the diminution in turnover a claim for loss of profit does not fail merely because the subject contract was unprofitable the issue is what the contractor would have done with the money if he had received it at the proper time 8

9 17 Claims for overheads and profit Introduction (4) Claims for overheads and loss of profit are always difficult and expensive to proof in a conventional fashion, since time spent by each individual on each contract is not usually separately recorded. Further, it is difficult to prove how much profit a contractor would have loss on a contract on which it did not tender 18 Formula approach (1) 2 formula most commonly used to try to overcome the above difficulties in quantifying claim for office overheads and loss of profit: Hudson formula Emden formula It is important to bear in mind that whichever formula is used, it is only a tool for quantifying the loss. The contractor still has to prove that there were unabsorbed overheads i.e. as to its existence 9

10 19 Formula approach Hudson formula (2) Derived from Hudson s Building Contracts (11 th Edition) Estimated HO & profit % x Contract sum x Weeks of delay = O/Hs claimed 100 Contract period (in weeks) weekly overheads 20 Formula approach Hudson formula (3) Requires estimate of percentage office overheads/profit for subject contract such estimate might never have been achieved Effectively extends contract office overheads & profit % pro rata over period of delay It assumes:- that the profit or overhead contribution was capable of being earned elsewhere at the time of delay that the profit and overhead percentage is a reasonable one that work of the same level of profitability and/or overhead recovery was available during the period of delay The above needs to be proved by the contractor before moving to the next step of applying the Hudson formula to quantify its claim 10

11 21 Formula approach Hudson formula (4) Hudson formula applied in:- JF Finnegan Limited v Sheffield City Council (1988) VGC Construction Ltd v Jackson Civil Engineering Ltd (2008) JF Finnegan Facts JF contracted with SCC for improvement works to 34 houses JF claimed for loss overheads Held Court applied Hudson formula The Court derived the relevant percentage in the Hudson formula by reference to JF s gross profit in its accounts over several years (6%) 6% x 632, x 34.5 weeks / 25 weeks = approx. 53,000 (relevant (Contract sum) (weeks of delay) (contract period) percentage) 22 Formula approach Hudson formula (5) Note that the SCL Delay and Disruption Protocol (October 2002) (SCL Protocol) suggests:- the use of the Hudson s formula is not supported. This is because it is dependent on the adequacy or otherwise of the tender in question, and because the calculation is derived from a number which in itself contains an element of head office overheads and profit, so there is double counting. the formula contains a mathematical inaccuracy in that it allows a claim for overheads and profit on the amount already included in the contract sum. The formula should be contract sum less overheads and profit instead of simply contract sum 11

12 23 Formula approach Emden formula (6) Derived from Emden s Building Contracts and Practice (8 th edition) Emden formula is similar to Hudson formula, except that instead of using % overhead/profit allocated by the contractor, it looks at the contractor's actual overhead costs/profit as a proportion of turnover & extends that pro rata over the period of delay 24 Formula approach Emden formula (7) HO & Profit Turnover x Contract sum Contract period x Weeks of delay = O/Hs claimed (in weeks) 12

13 25 Formula approach Emden formula (8) Applied in: Hsin Chong Construction (Asia) Ltd v Henble Ltd (2006) Walter Lilly & Co Ltd v Mackay and another (no. 2) (2012) Jebsen & Company Ltd v Watfield Technology Ltd (2003) Facts Tai Po Water Treatment Works Watfield was Jebsen s sub-contractor for supply and installation of cranes and hoists Watfield claimed prolongation costs and relied on Hudson formula to claim loss overheads Held Court accepted that Watfield had lost the opportunity to bid for 9 projects during the prolonged period Court adopted gross profit/turnover based on average spread over 3 years as per Watfield s accounts 27.81% x $5,480,000 x 215 days / 375 days = $873,753 (gross profit/ (Sub-Contract sum) (days of delay) (Sub-Contract period) turnover) 26 Formula approach Walter Lilly (9) Walter Lilly & Co Ltd v Mackay and another (no. 2) (2012) in its claim for loss and expense for delay, WLC used the Emden formula and claimed 276, for loss of overheads and profit 13

14 27 Formula approach Walter Lilly (10) Held a contractor can recover head office overheads and profit lost as a result of delay on a construction project caused by factors which 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 or projects which would have produced a return (over and above costs) representing a profit and/or the 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 thatreturncanbecalculatedtobe in this case, WLC s claim for loss of overheads and profit was allowed in full 28 Thank you for your participation Any Questions? 14