| Date | 15 June 2005 |
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| Judgment | Robertson Group (Construction) Ltd v Amey-Miller (Edinburgh) Joint Venture, Outer House Court of Session, 10 May 2005 |
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| The Issue | Use of the expression "all direct costs and directly incurred losses". |
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| Implication |
A contractual entitlement to direct costs and directly incurred losses will generally include reasonable overheads and profit. |
printIn July 2001 the Amey-Miller Joint Venture was negotiating a private finance initiative arrangement for the refurbishment of the former Royal High School in Edinburgh. The Robertson Group had submitted a tender to Amey-Miller for the construction works with the intention that a JCT contract would be executed by the parties in the order of £8 million. Although financial close had not been achieved under the PFI contract, by October 2001 it was clear that works would have to commence on site in order to maintain the intended programme. Accordingly, an interim contract was made between the parties based upon the terms of a letter of intent issued by Amey-Miller, which was accepted by Robertson by their starting work on the project. The letter of intent indicated that Amey-Miller intended to enter into a contract with Robertson for the refurbishment, remodelling and construction works at the high school. Subject to a limit of expenditure of £500,000 the letter indicated that Amey-Miller would reimburse "all direct costs and directly incurred losses", should the formal contract fail to be concluded. Obtaining financial close proved more difficult than originally anticipated and by September 2002 the parties were still working under the basis of the interim contract, but with the increase in spend raised to a maximum of £5 million. This was still intended to operate as a "stop-gap" contract pending the conclusion of a formal contract between the parties on the basis of the JCT 98 conditions. By October 2002 however, it became apparent that the parties would not be able to reach agreement on the terms of a formal contract. By that time, Robertson had reached the spending limit specified in the latest amendment to the letter of intent and accordingly, the contract arrangement under which works had been proceeding was terminated. This led to proceedings under which Robertson claimed outstanding payments of approximately £800,000 and Amey-Miller counterclaimed over £400,000 for late completion and defective works. Those disputes continue unresolved, but as a preliminary issue the parties recently came before the Outer House of the Court of Session in Edinburgh to obtain a ruling on the meaning of the expression "all direct costs and directly incurred losses" used within the letter of intent. Amey-Miller contended that the use of that expression restricted sums due to Robertson to the costs of labour, plant and materials used on the high school contract. Amey-Miller argued that this excluded costs attributable to Robertson's business, such as for example head office overheads, and would exclude any element of profit on the contract. By contrast Robertson contended that the expression "all direct costs and directly incurred losses" permitted them to recover not only the cost of labour and materials expended on the works together with the cost of plant and sums paid to subcontractors, but also an appropriate sum to cover their head office overheads and an appropriate element for profit. Lord Drummond Young accepted that the expression "all direct costs and directly incurred losses" was not one which was used in any of the standard forms of building contract. Nevertheless, it clearly had a similarity to the phrase "direct loss and/or expense" found in JCT contracts. The words "direct" or "directly" had been the subject of a number of judicial decisions in the context of the JCT forms of contract. These decisions made it clear that the word "direct" was concerned with the remoteness of loss, not causation. For direct loss or expense to be recoverable, it must obviously be caused by a contractually relevant matter, but not all such loss or expense was recoverable. The word "direct" signified something additional to the mere existence of a causal connection. It denoted that the loss or expense in question must flow naturally from the contractual event relied upon in the sense of the first rule of Hadley v Baxendale. In cases involving breach of contract, the general principle was that the innocent party would be entitled to be put in the same position as he would have been if the contract had been performed. The significance of the word "loss" was therefore that it could include both a loss of profit and a contribution to general overheads. The dispute between Amey-Miller and Robertson did not involve a breach of contract but involved a specific contractual entitlement. Lord Drummond Young commented that the intention to make a profit lies at the heart of all commercial activity and the law must recognise that elementary economic fact. Accordingly, he was of the opinion that the failure of a contractor to make a profit should be accounted as a loss, not only in calculating damages for breach of contract, but also in construing contractual terms relating to goods and services. The same would be true of a contribution to general corporate overheads. Indeed, until such a contribution had been earned, it could not be said that any profit had been generated. In conclusion, the expression "all direct costs and directly incurred losses" permitted Robertson to recover reasonable sums for general corporate overheads and profit, providing those overheads and profit arose naturally in the usual course of things from the works instructed by Amey-Miller.
CJ-0523
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