| Date | 12 August 1998 |
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| Judgment | Norwest Holst Construction -v- Co-operative Wholesale Society, ORB 17 February 1998 |
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| The Issue | Formula based approach to the calculation of head office overheads. |
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| Implication |
Further indication of the applicability of the formula approach to the calculation of head office overheads particularly in the subcontract context. Such calculations remain subject to a number of key principles. |
printI recently discussed the case of Norwest Holst Construction -v- Co-operative Wholesale Society decided in the Official Referee's court on 17 February 1998. In that article I considered the manner in which the court had addressed the re-measurement of electrical and mechanical services where a subcontractor's work was depicted upon schematic drawings. It was held that bends, tees and necessary deviations in constructing the works would properly form part of the re-measurement to be incorporated in the ascertained final subcontract sum. This case also dealt with a rather unusual approach to the assessment of head office overheads. Norwest Holst were main contractors for a library building called the "learning resources centre" to be constructed at the John Moores University in Liverpool. CWS were subcontractors for the installation of the mechanical and electrical services. Substantial claims were made by CWS concerning the delay and disruption of their works. Included within these claims was approximately £150,000 for head office overheads. In dealing with this the arbitrator awarded that the delay in completing the subcontract works did involve the subcontractor's head office employees in additional costs. He concluded that but for the extra time spent on this subcontract, such time would have been spent productively on other contracts, because in general the subcontractor was trading profitably during a period of intense competition in the construction industry. Based on this reasoning the arbitrator then progressed to calculate the amount of overheads due to the subcontractor on the basis of the Emden's formula. This involved taking the original subcontract sum and multiplying it by a percentage of 17.56 representing the subcontractor's overheads determined from previous year's accounts. The resulting figure was then divided by the original contract period of 34 weeks, and multiplied by the length of the extension to the contract period being 24 weeks. At this point the arbitrator made two final adjustments. Firstly, he considered that the Emden's formula should be adjusted such that it applied to only 19 weeks of delay as opposed to the 24 week overrun, and secondly he calculated that only 20% of the figure should be allowed on the basis that this was his assessment of the sums that could be attributed to this particular subcontract. All of these matters ended up in front of his Honour Judge Thornton QC who was asked to try the following question of law: "Was the arbitrator entitled to use a formula to ascertain direct loss and/or expense incurred by way of overheads (1) in relation to additional overheads and/or (2) in relation to unabsorbed overheads, in the absence of a finding by the arbitrator of a reduction of turnover directly attributable to the delay which caused the loss and expense. In carrying out this assessment the arbitrator had made the comment that just because damages could not be assessed with certainty the wrongdoer should not escape punishment. "Rough justice" was better than no justice at all. Norwest firstly argued that the arbitrator could only make a finding that additional overheads had been incurred if the actual costs were identified. This the arbitrator had failed to do. Judge Thornton dealt with this swiftly. He considered that the arbitrator's statement that he was "satisfied that CWS had suffered a loss" amounted to a finding of primary fact and as such could not be questioned in the appeal. Secondly Norwest questioned the existence of the necessary foundations for assessing loss and expense upon a formula geared to the subcontractor's overhead recovery. Judge Thornton considered that the necessary foundations for such an approach were as follows: (1) The loss in question must be proved to have occurred; (2) The delay in question must be shown to have caused the contractor to decline to take on other work which was available and which would have contributed to its overhead recovery. Alternatively it must have caused a reduction in the overhead recovery in the relevant financial year or years which would have been earned but for that delay; (3) The delay must not have had associated with it a commensurate increase in turnover and recovery towards overheads; (4) The overheads must not have been ones which would have been incurred in any event without the contractor achieving turnover to pay for them; and (5) There must have been no change in the market affecting the possibility of earning profit elsewhere and an alternative market must have been available. Judge Thornton held that these requirements were present in relation to the loss found to have occurred. In respect of the second of those it was clear that the loss of turnover had not occurred since CWS had in fact substantially increased their turnover during the relevant period. However according to Judge Thornton this was adequately catered for by the reduction in recovery of 20% applied by the arbitrator. It followed from all of this that the formula based recovery was in principle available for that part of the loss which represented unabsorbed overheads. A further challenge by Norwest was that the formula based assessment was inappropriate when considering additional overheads since it was the responsibility of the arbitrator to ascertain these amounts. This precluded making a general assessment. Quoting from the case of McAlpine -v- Property and Land Contractors Judge Lloyd QC said "practitioners are generally sceptical about the application of such formulae on the grounds that it is the actual loss and expense which is admissible." Judge Thornton made the very interesting observation that whilst JCT 80 called for the architect to make such an ascertainment, no such requirement fell to be considered in the context of a subcontract where the parties were required to agree the loss and expense. Accordingly in default of agreement the arbitrator would determine what the parties should have agreed, namely what is to be reasonably regarded as a relevant loss. In an appropriate case that agreement might therefore be reflected by a formula based calculation.
CJ-9828
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