| Date | 7 November 1996 |
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| Judgment | St Modwen Developments Ltd -v- Bowmer and Kirkland Ltd. 20 August 1996 |
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| The Issue | Reimbursement of head office overheads and profit during period of delay. |
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| Implication |
Formula approach will be acceptable providing the contractor can prove constraint upon its own resources and lost opportunity in the form of alternative business foregone. |
printThere are a number of reported cases where the courts have approved the reimbursement of head office overheads and profit 'lost' by a contractor during a period of project delay. Nevertheless, the matter remains contentious and the recent case of St Modwen Developments Limited -v- Bowmer and Kirkland presents an opportunity to clarify the issue. In September 1990 St Modwen entered into a contract under the JCT 80 form with Bowmer and Kirkland for the construction of an office block at a business park near Manchester. The project was delayed and a number of claims ended up in front of an arbitrator. Last week I dealt with one of these claims which concerned the payment of profit and attendance on domestic subcontractors following instructions to expend provisional sums. On this issue, the arbitrator had awarded the contractor: "the sum of £ 57,549.00 for shortfall in the recovery of company overhead requirements due to the prolongation of the construction period with financial charges and simple interest." The employer appealed this part of the award. Before deciding the matters, the judge reviewed previous decisions and relevant guidance. In the Canadian case of Ellis-Don Ltd -v- The Parking Authority of Toronto, the contractor was entitled to recover as damages for delay resulting from breach of contract, a weekly sum in respect of the costs of site overheads and loss of profit calculated by reference to the tender figure of 3.8%. An earlier Canadian case of Shore and Horwitz -v- Franki similarly recompensed the contractor for overheads and profit denied from being earned elsewhere as a consequence of delay. There it had been argued that since only a proportion of the labour force was directly employed and the remainder were provided by labour only subcontractors who had made no claim against the main contractor, the damages under this head should be proportionately reduced. This was rejected on the grounds that actual loss was not involved, but instead a claim to fund overheads from overall turnover. Of particular interest are also the passages dealing with overheads and profit claims in Hudson's Eleventh Edition, starting at page 8.182: "The formula ...... assumes the existence of a favourable market when an adequate profit and fixed overhead percentage will be available to be earned during the delay period. [It] also assumes an element of constraint - that is to say the contractor's resources will be limited or stretched so that he will be unable to take on work elsewhere if it offers itself until his working capital and site organisation have been released from the delayed contract. For these reasons this type of claim may be difficult to establish by evidence in the more recent recessionary climate in the United Kingdom." Alfred McAlpine -v- Property and Land Contractors (see Contract Journal dated 1 February 1996) was also considered, but it seems, misunderstood. This complicated judgment must be taken to support the formulae approach, albeit of the more sophisticated 'Eichleay' method. Also considered was the Tate and Lyle -v- GLC case in 1982 where the contractor claimed 2½% on prime costs for managerial time. Here the judge accepted that such a head of claim was admissible but refused to award any sum as he considered that the quantum was approached by way of pure speculation. In Babcock Energy -v-Lodge Sturtevant Judge Lloyd also held that it was perfectly reasonable to expect a contractor to keep accurate records and that percentage assessments would be unsatisfactory. What these latter two cases emphasise is that where the claim is for recovery of additional overheads directly expended during a period of delay, a formula method of calculation will generally be unacceptable. The contractor will be required to demonstrate and prove actual loss. Where however the contractor is able to demonstrate a loss of opportunity to use resources on other sites it has been readily accepted that a formula approach might be applied. Two such cases for this proposition are Whittal Builders -v- Chester-le-Street and J F Finnegan -v- Sheffield City Council. Clearly the arbitrator was well versed in these subjects. In his award he said: "I am not sure that Ellis-Don really assists the employer except insofar as it cautions against the automatic application of a formula approach without evidence to establish there was a genuine loss and that there was work available on which the contractor could have earned a return to contribute towards his overheads and profit, but for his prolonged involvement in the contract in question." In the event the court upheld the arbitrator's award. They were satisfied that the factual evidence relied upon by the arbitrator was extensive in support of the contention that opportunity loss had been incurred by the contractor. It had been accepted by the employer that the construction industry was buoyant at the material time. These were precisely the conditions in which a formula approach would be acceptable.
CJ-9637
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