| Date | 3 July 2002 |
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| Judgment | Amec Process & Energy Limited -v- Stork Engineers & Contractors BV (No4), TCC 15 March 2002 |
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| The Issue | Payment of interest or financing charges. |
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| Implication |
Providing a contractor can demonstrate that it has actually incurred financing charges as a consequence of the late payment of monies due under a contract, it will generally be able to recover these either as damages for breach of contract or as a contractual entitlement. Compounded interest will be awarded where that reflects the loss incurred. |
printThe circumstances in which a contractor might become entitled to the payment of interest as a result of receiving late payments were examined in the recent decision of Amec Process & Energy -v- Stork Engineers & Contractors. In 1995, Shell UK engaged a Swiss company called SBM to provide a floating production unit for the extraction and processing of crude oil from the North Sea. The construction of the unit was based upon a ship's hull, which SBM procured from a Japanese shipyard. SBM then engaged Stork to design, fabricate, construct, install and pre-commission the topside facilities. Stork, who carried out the design and supplied certain materials, in turn sub-contracted the remainder of its contract work to Amec. The works did not progress well, and in due course Amec commenced proceedings against Stork for additional payments in excess of some £13 million. A lengthy litigation ensued, culminating in a fourth judgment to deal with some residual points in dispute between the parties, including the payment of interest on monetary judgment sums awarded in Amec's favour. His Honour Judge Thornton QC related the background to the claim. Amec had submitted extensive claims for payment for variations and for disruption and acceleration costs during the construction period. In common with most engineering contracts, the contract between the parties provided that these claims should be evaluated according to either a contract schedule of rates, a reimbursable cost approach or, alternatively, by agreement upon a lump sum. Monies were then to be included in the valuation for monthly interim payments due to Amec. In the event, as a consequence of the number and extent of the variations and the time pressures to which Stork was subjected, Stork generally failed to comply with these procedures. Where Stork failed to accept that the variation had been instructed, or did not agree to the whole of the sum contended for by Amec, the claim for that variation was parked until Stork was prepared to discuss it further. Generally, Stork also declined to recognise any claim for indirect costs, so that the valuation, invoicing and payment procedures were never operated. In effect, no further payment was made by Stork until after judgment had been given by the court in Amec's favour. The claim for interest put forward by Amec was on three alternative footings. Firstly, compound interest was claimed on the basis that the contract terms allowed for the reimbursement of financing charges. Secondly, interest was claimed as damages for breach of contract. Finally, as a fall-back position, Amec claimed statutory simple interest pursuant to the court's discretionary powers to award interest on judgment sums. Judge Thornton noted that Amec's claim for contractual interest would be based upon the two decisions of the Court of Appeal in Minter -v- WHTSO in 1981, and the Rees & Kirby -v- Swansea City Council in 1986. In Minter, it was clarified that a contractor would be entitled to reimbursement of interest reasonably paid on capital required to finance variations or work disrupted by the lack of necessary instructions, all as a component part of the direct loss and expense provisions of the contract. In Rees & Kirby, the court held that it was a realistic approach to recognise that a claim in respect of financing charges consists of a claim based upon the interest paid by the claimant party to its bank during the relevant period. Since banks would be expected to calculate interest on a compound basis, there was no reason why that fact should not be taken into account when calculating the claimant's loss and expense. Judge Thornton noted that Amec would firstly have to demonstrate that it had incurred the finance charges in question and secondly that the contract permitted an evaluation which would embrace the payment of interest. With regard to the first point, the court held that Amec had financed the work from its own resources and from the use of inter-company loans and financing facilities provided by its parent company. These facilities were provided by the parent at a commercial rate of interest compounded at monthly rests. Secondly it was clear that the contract provided for reimbursement of the net cost of the claimed work, together with costs and additions to cover overheads and the like. This was sufficient to embrace the payment of interest to enable the work to be financed. Judge Thornton concluded that having regard to the valuation provisions of the contract, nothing could be fairer or more reasonable than that the extra cost to Amec of funding the additional work should be recoverable from Stork. Following Rees & Kirby, Amec was also entitled to the calculation of interest on a compounded basis to reflect the manner in which its works were financed. Having satisfied himself that Amec was entitled to interest under the provisions of the contract, Judge Thornton also considered the alternative evaluation of interest as damages for breach of contract. He concluded that since Stork had had access to Amec's funding and accounting arrangements during its investigations prior to the award of contract, it would have been in the specific contemplation of Stork at the date of contract, that late payment of part of the contract price would have to be met by Amec by borrowing money on overdraft or other similar arrangements. It followed that the claim for financing could also be made as one for damages for breach of contract pursuant to the second limb of the 1854 case of Hadley -v- Baxendale, being a foreseeable loss in the specific knowledge of the parties at the time of making the contract.
CJ-0225
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