Fluor v Shanghai Zhenhua Heavy Industry Co. Ltd, Court of Appeal - Technology and Construction Court, March 16, 2018, [2018] EWHC 490 (TCC)

Resolution Date:March 16, 2018
Issuing Organization:Technology and Construction Court
Actores:Fluor v Shanghai Zhenhua Heavy Industry Co. Ltd

Case No: HT-2014-000190

Neutral Citation Number: [2018] EWHC 490 (TCC)




Royal Courts of Justice

Rolls Building, Fetter Lane, London, EC4A 1NL

Date: 16/03/2018

Before :

Sir Antony Edwards-Stuart

(Sitting as a High Court Judge)

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Between :

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Mr Sean Brannigan QC and Mr Richard Osborne

(instructed by Roberta Downey of Hogan Lovells) for the Claimant

Mr Andrew White QC, and Mr Iain Munro (instructed by Mr Adam Harris of Pinsent Masons) for the Defendant

Hearing date: 2 February 2018

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1. On 7 October 2016 I handed down a judgment on the issues of liability in this case (``the Liability Judgment'') following a hearing held during February, March and April 2016. On 11 January 2018 I handed down the judgment on issues of quantum following a hearing in May and August 2017 (``the Quantum Judgment'').

2. This is a dispute about the quality of the fabrication of steel monopiles (``MPs'') and transition pieces (``TPs'') for an offshore wind farm in the North Sea. The Claimant (``Fluor'') is an engineering, procurement, construction, maintenance and project management company registered in England (and is a subsidiary of Fluor Corp, the US multinational construction company). The Defendant (``ZPMC'') is a well-known steel fabricator, based in Shanghai with a major manufacturing base at Changxing Island. ZPMC has an international reputation as a heavy duty equipment manufacturer, in particular ship to shore container cranes.

3. Having found that ZPMC was in breach of contract by reason of cracking in the welding of the MPs and TPs, in the Quantum Judgment I was concerned not only with the assessment of the damages to which Fluor was entitled as a result of the breaches but also with the extent to which the entitlement to damages (which Fluor might otherwise have had) had been curtailed or extinguished by an agreement reached between the parties in June 2010.

4. The Quantum Judgment dealt with all Fluor's claims save those under four heads: overhead and profit, VAT, interest and losses on currency conversion. Although a claim for overhead and profit had been mentioned, in neither the Re-Amended Particulars of Claim nor its Closing Note did Fluor put forward a figure for this or identify the heads of claim or items to which either overhead or profit should be added. VAT and interest were left to be dealt with (if not agreed) as consequential matters in the usual way. A claim in respect of currency conversion had been adumbrated by Fluor but no particulars of that claim had been given.

5. I therefore directed that Fluor was to identify the sums in paragraphs 615 to 618 of the Quantum Judgment to which it said overhead and profit should be added, together with the basis for doing so, and the amounts claimed for each item. I then gave ZPMC time in which to respond.

6. In the event, Fluor has not pursued any claim for profit or in respect of VAT. This judgment is therefore concerned with the claims for overheads, interest and all questions concerned with the currency of payment and, if permissible, losses on currency conversion (a point which may also affect ZPMC's counterclaim).

7. At the hearing Fluor was represented, as before, by Mr Sean Brannigan QC and Mr Richard Osborne, instructed by Roberta Downey of Hogan Lovells, and ZPMC was represented by Mr Andrew White QC and Mr Iain Munro, instructed by Mr Adam Harris of Pinsent Masons.

Overall Summary of the figures awarded in the Quantum Judgment

8. It is convenient at this point to set out the sums that I awarded Fluor in the Quantum Judgment (at paragraphs 615-618).

9. US $.

10. GBP.

11. Euro.

12. Other currencies:

The claim for overheads

13. In its claim in the arbitration against GGOWL Fluor claimed a mark up of 17%, which was claimed to represent a ``reasonable mark up for overhead and profit'' on all additional work that it alleged had been instructed by GGOWL. This was said to have been a rate that was agreed with GGOWL as applicable to all variations during the project. However, as ZPMC pointed out, a claim for variations made by a contractor against the employer is not the same as a claim for damages for breach of contract made by the contractor against its sub-contractor.

14. Although Fluor now recognises that it cannot claim profit on the sums found due by the Court, it does claim a percentage for overheads in respect of all those sums (save for the sum awarded in respect of the settlement with GGOWL) at the rate of 4%.

15. In support of this claim Fluor relied on an observation that I made, at paragraph 452 of the Quantum Judgment, when I said that ``I can see no reason why Fluor should not be entitled to recover the cost of its general overheads as part of the costs of steps taken in mitigation''. This was the only place in the Quantum Judgment where I allowed, in principle, a claim for overheads (at the rate of 2%): however, that arose in an unusual way. It was a claim for the costs of maintaining the TPs during the period immediately following commissioning by Fluor of each WTG and prior to the issue of a WTG Foundation Works Commissioning Certificate (``WFWCC'') by GGOWL in relation to that WTG and its foundations. Although this claim did not form part of Fluor's claims for delay (it arose during a later period), in essence it took the form of a claim for delay because it was a claim for the costs of carrying out a particular activity - maintaining the TPs - for an extended period.

16. The feature that made this particular claim so unusual was the ``major wrinkle'' that I mentioned at paragraph 425 of the Quantum Judgment. That was the fact that this particular claim was put forward in two different ways: one as a direct cost and the other as one of the claims that was included in the settlement of the arbitration against GGOWL. Although I dealt with the merits of the claim as a direct cost, arriving at a figure of £582,645 (including 2% overheads), I never awarded that sum to Fluor because I concluded that this particular claim had been taken into account as one of the claims foregone by Fluor, which totalled about £8 million, in the overall settlement with GGOWL (see paragraph 539 of the Quantum Judgment).

17. Whilst I do not resile from what I said at paragraph 452 of the Quantum Judgment which, is, I think, consistent with general principle, in the circumstances that I have just described that observation taken by itself does not get Fluor very far.

18. In relation to the circumstances in which a claim for overheads can be awarded to a contractor, Fluor submitted as follows:

(a) whenever a company incurs a direct cost, it does not do so in a vacuum, at no cost to itself: it generally incurs head office costs - commonly known as overhead - in doing so;

(b) that overhead cost is just as much a cost of the relevant event as the direct costs; and

(c) it is a cost which should be directly recoverable.

19. Whilst ZPMC accepts that overheads can be claimed as a matter of principle, it submits that the circumstances in which a contractor can do so are not present in this case. ZPMC submits that the contractor must show that, had it not been for the breach of contract, its labour force would otherwise have been profitably employed on other work thereby making a contribution to the contractor's fixed overheads (such as head office costs). The loss of the opportunity to recover that contribution to its overheads can be a legitimate head of claim.

20. In support of its submission, ZPMC relies paragraphs 13.63-13.64 of Emden's Construction Law (Looseleaf), where the authors say:

``[13.63] Overheads are similar to preliminaries in that they constitute expenditure on support services and general running costs. Whereas preliminaries refer to particular expenditure on the site and contract works, however, overheads are the costs of running the contractor's operation as a whole, including for example the rental of the contractor's buildings and general support staff costs. That overheads can properly be claimed in principle is beyond doubt. If a project is delayed the contractor's overheads continue unaffected while his turnover will be reduced. If he would have been able to undertake other work during the period of delay which would have gone some way towards paying for his overheads, he can claim for the loss involved. In addition, he may have had to devote staff time to dealing with disruption or delay, and if he can show that the staff would otherwise have been gainfully employed that may also form part of a claim. ...

[13.64] The primary obstacle faced by the contractor is the need to establish these lost opportunities. He must show, in other words, that he would have been able to undertake other work, or that his staff would have been otherwise profitably employed. If he cannot, he faces the argument that the costs would have been incurred in any event - being in the nature of overheads - and that they are therefore not `losses'. It may also be difficult for a large contractor to show convincingly that delay on one project has actually affected his ability to take up other opportunities.''

(ZPMC's emphasis)

21. The authors of Emden go on to say, at paragraph 13.68, in relation to the use of additional or replacement plant:

``[13.68] Where the contractor has, because of the employer's default, had to...

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