Records the key to success in any claims situation

Recovery of head office overheads is always one of the most hotly contended issues in any contractual claims situation. In principle, head office overheads and costs are recoverable as a head of damages for breach of contract and consequently as a head of claim where a contractor makes a successful claim for 'direct loss and/or expense' under the terms of his contract.

My own view on what is required to ensure recovery has vacillated over the years, and so I was delighted to receive the transcript of the judgment of his Honour Judge Humphrey Lloyd QC in the recent case of Babcock Energy Ltd v Lodge Sturtevant Ltd (1994), 28 July, unreported, which was an action for breach of contract, where the successful plaintiffs sought to recover the time and cost of certain members of their staff who were engaged in dealing with the disputed matter. The amount claimed was œ86,334, being based on the total number of hours recorded from 1 April 1988 to 31 March 1992, amounting to 5,463 hours, and using constructed charging rates to arrive at the amount claimed.

The issue to be resolved was whether Babcock had actually suffered a loss of this magnitude - the amount of damages is the amount of the proven loss. The same principle applies to the reimbursement of 'direct loss and/or expense' suffered or incurred by the contractor as the direct result of the event relied on. This is a point on which many contractors' claims founder.

Lodge Sturtevant argued that it had not been established that Babcock's personnel, whose hours were recorded had been diverted from other profitable work or that Babcock had taken on additional staff to deal with the dispute.

According to the judge, the evidence was very general, but it showed that at the relevant times Babcock had a full order book. Work had to be farmed out to another company and agency staff had to be employed. 'Given the history of this contract', he said, 'it is not surprising that [a witness] also stated that if the staff had not been involved in dealing with the problems created by the defendants, they would have been fully and gainfully employed elsewhere.

The situation was similar to that in the well-known case of Tate & Lyle Food and Distribution Ltd v Greater London Council [1982] 1 WLR 149 which at one time I thought cast doubt on the use of any 'formula' method for calculating head office overheads: see Building Contract Claims, 2nd edition, 1988, p131. I have now changed my mind as readers of the forthcoming third edition will learn. In that case it was clearly held that expenditure of managerial time in remedying an actionable wrong done to a trading company was claimable as a head of 'special damage'. Little, if any, evidence was put forward to establish to extent of the disruption of the plaintiff's business and no evidence was put forward to support a percentage claim.

The key ruling - which was cited by Judge Lloyd in Babcock - is in the following passage from the judgment of Mr Justice Forbes:

l 'I have no doubt that the expenditure of managerial time in remedying actionable wrong can properly from the subject matter of a head of special damage. In a case such as this it would be wholly unrealistic to assume that no such additional managerial time was in fact expended. I would also accept that it must be extremely difficult to quantify. But modern office arrangements provide for the recording of time spent on particular projects. I do not believe that it would have been impossible for the plaintiffs in this case to have kept some record to show the extent to which their trading routine was disturbed by the necessity for continual dredging sessions... While I am satisfied that this head of damage can properly be claimed, I am not prepared to advance into an area of pure speculation when it comes to quantum. I feel bound to hold that the plaintiffs have failed to prove that any sum is due under this head.'

Lodge Sturtevant urged the judge to reject Babcock's claim on the same basis. They said that Babcock might have been entitled to the additional cost of agency staff and of farming out work because that would be the measure of loss caused by the need for the permanent staff to devote themselves to the problems in hand. It was argued that the fixed staff costs would have been incurred in any event.

His Honour Judge Humphrey Lloyd QC rejected that argument. He said:

l 'Managers are of course employed to sort out problems as they arise. If, however, the magnitude of the problem is such that an untoward degree of time is being spent on it then their costs are recoverable. Looking at the hours recorded I am quite satisfied that is the position in this case. The costs, of course, go beyond those of managers and represent staff cost that would not have been incurred but for the defendants' breach. The plaintiffs might have provided an alternative quantification by reference to the additional cost to them of employing others but I do not consider that they are obliged to do so if they can satisfactorily demonstrate the cost to them of time unnecessarily spent and therefore lost. It is for the defendants to show that the losses prima facie incurred are not the correct measure of damage and this [the defendants] failed to do.' [Emphasis supplied].

This ruling is good news for contractors seeking to establish head office overhead recovery under any of the standard form contracts. But back-up evidence is essential. In Babcock the hours were recorded and provided some benchmark and the actual costs had been worked out. In a prolongation situation, it is for the contractor as claimant to produce evidence of the delay and its extent and also evidence to show that resources were prevented from earning a contribution to overheads.

He must also establish the percentage used - preferably based on historic accounting records. As always, good records are the key to success in any claims situation.