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Loss & Expense, Conditions Precedent and Global Claims
The recent case of Walter Lilly & Company Limited v Mackay and DMW Developments Limited is an extremely important judgment which clarifies the legal position on some of the most frequently disputed issues in the construction industry, namely:
- concurrent delay;
- the correct approach to analysing a contractor’s entitlement to an extension of time;
- a contractor’s entitlement to loss and/or expense under a JCT contract;
- global claims; and
- loss of profit/overheads claims.
In our last article, we considered the delay-related aspects of the case. This article focuses on the loss and expense-related issues considered in the case.
In early 2004, Walter Lilly & Company Limited (“WLC”) were engaged by Mr Mackay via his company DMW Developments Limited (“DMW”) to build a luxury 5 storey home for Mr Mackay and his family in London. The £15m project was expected to take 18 months to complete. WLC was engaged pursuant to a JCT Standard Form of Building Contract 1998 Edition Private Without Quantities.
Substantial delays to the project were caused by on-going design decisions and practical completion was not achieved until July 2008. The court found that WLC was not responsible for any of this delay, as it was all caused by late decisions and instructions on the part of DMW and/or their Architects. WLC sought to recover over £2m of costs from Mr Mackay and DMW arising from the delays to the project.
Loss and Expense under JCT Contracts
WLC’s loss and expense claim consisted of over £1.4m for its own prolongation costs, £678,000 in respect of sums paid to its sub-contractors for delay and disruption and £276,000 for loss of overheads and profit.
In order to assess WLC’s entitlement to loss and/or expense, the court had to consider the meaning of clause 26 of WLC’s contract, which was substantially the same as clause 4.23 in the JCT Standard Building Contract 2011. The clause required WLC to make its application for loss and/or expense as soon as it had become, or should reasonably have become, apparent that the regular progress of the works was being or was likely to be affected by a Relevant Matter and provide sufficient details to enable the Architect/QS to ascertain the amount of loss and/or expense.
Having considered the wording of the clause, the court noted that:
- The JCT loss and/or expense clause creates 2 conditions precedent which must be satisfied by the contractor. First, the contractor must make a timely application to the Architect. Second, the contractor must provide the Architect/QS with details to enable him to ascertain the amount of loss and/or expense which has been or is being incurred.
- It is difficult and undesirable to lay down any general rule about exactly what sort of details must be provided by the contractor in support of its claim.
- It is important to bear in mind that the Architect/QS already has extensive knowledge of the project and will not need to be provided with every single piece of available evidence.
- The clause only requires “details” – the contractor does not necessarily need to provide all the accounting information which supports its claim. A failure by the contractor to prove beyond doubt every penny’s worth of loss and expense does not mean the condition precedent is not achieved or that the entire claim must fail.
- The Architect/QS must simply be provided with enough information to enable him to be satisfied that some or all of the loss and/or expense claims has been or is likely to be incurred. There is no requirement for the Architect/QS to be absolutely certain.
- Given that the purpose of the clause is to compensate the contractor for loss suffered due to matters which are at the fault and risk of the employer, there is no need to construe it strictly against the contractor. The clause must be considered in a sensible and commercial way that would resonate with commercial parties in the real world.
A global claim is a claim which identifies numerous potential/actual causes of delay and resulting costs without specifying exactly what delays have resulted in particular costs being incurred. In the past, the courts have approached such claims with caution, largely on the basis that it is unfair to the defendant to have to defend a claim where the claimant has not clearly identified cause and effect. DMW argued that WLC’s loss and expense claim was a global claim and therefore not enforceable.
The court considered the previous case law on global claims and identified the following useful principles:
- Claims by contractors for loss and/or expense must always be proved as a matter of fact. The contractor must show, on a balance of probabilities, (i) that events occurred which entitle it to claim loss and/or expense, (ii) that those events caused delay and/or disruption to the works and (iii) that the delay/disruption caused it to incur loss and/or expense. There is no set way of proving these 3 elements – it is for the contractor to present evidence which it considers is sufficient to prove its claim.
- Although there is nothing wrong in principle with a global claim, such claims do create added evidential difficulties for the contractor to overcome.
- In order to bring a global claim, the contractor does not have to establish that it is impossible for it to identify cause and effect, but the contractor must nevertheless prove that it is entitled to recover loss and/or expense.
- If a global claim is to succeed, the contractor will have to demonstrate that the loss it has incurred (i.e. the difference between what the contractor has been paid and the costs it has incurred) would not have occurred in any event. This will require the contractor to establish that its tender was sufficiently well priced to have resulted in a net return.
The court found that WLC’s claim was not global because WLC had sought to identify the specific additional costs it incurred and link those to the causes of delay/disruption relied upon.
Loss of Profit/Overheads Claims
WLC claimed over £276,000 for loss of profit and overheads. This claim was based on the fact that as a result of the delay to this project, WLC was unable to take on other projects and therefore lost profit as a result. In addition, WLC lost the opportunity to spread the cost of its head office overheads onto those other projects.
The court made the following observations in relation to loss of profit/overheads claims:
- Contractors are entitled to recover lost profit and/or overheads which stem from delays caused by factors which entitle the contractor to claim loss and/or expense.
- Contractors must prove on a balance of probabilities that if the delay had not occurred, it would have secured work which would have resulted in a profit and/or a contribution to head office overheads.
- Using a formula such as the Emden formula or the Hudson formula is a legitimate and helpful way of ascertaining the value of the lost profit/overheads.
The court, which appeared impressed by WLC’s very detailed records of lost tender opportunities, upheld WLC’s claim for lost profit/overheads in its entirety.
The court’s review of the JCT loss and expense provisions is extremely useful for anyone working under a JCT contract, and is likely to be of great assistance to contractors who are being pressurised to provide extremely detailed substantiation in support of their loss and expense claims.
Although the case confirms that global claims are permissible, it does stress that global claims are not easy claims to bring. Contractors should therefore ensure that they are in position to avoid having to make global claims by endeavouring to keep detailed records of delays which arise and losses that are incurred as a result.
Contractors wishing to make claims for lost profit and/or overheads must ensure they can prove they have declined work elsewhere and keep adequate records to this effect.This article contains information of general interest about current legal issues, but does not provide legal advice. It is prepared for the general information of our clients and other interested parties. This article should not be relied upon in any specific situation without appropriate legal advice. If you require legal advice on any of the issues raised in this article, please contact one of our specialist construction lawyers.