Fluor v Shanghai Zhenhua Heavy Industry Co. Ltd

A contractor may recover head-office overheads caused by breach only by proving a recoverable loss. This may arise from delay causing lost opportunities to deploy resources profitably, or from a demonstrable thickening of head-office costs. A percentage allocation of general overheads, without evidence that the breach increased those costs, is insufficient.

A payment under a bond may be treated as an interim payment on account. Where appropriate, the court may convert the currencies at the date of that payment and net the amounts accordingly. The court has discretion to select a just exchange-rate approach and an interest rate supported by evidence of borrowing costs for companies with the claimant’s general attributes.

The judgment concerned issues left outstanding after earlier liability and quantum judgments in a dispute concerning defective steel monopiles and transition pieces supplied for an offshore wind farm. Liability had been established against Shanghai Zhenhua Heavy Industry Co. Ltd, and damages had been assessed, subject to claims for overheads, interest and currency conversion.

Fluor claimed a percentage uplift for head-office overheads. It also sought directions concerning the treatment of a euro-denominated warranty bond, the date and method of currency conversion, applicable interest rates, and the court’s jurisdiction to include interest in the accounting exercise. The central questions were whether the overhead claim was proved and how the bond, currencies and interest should be dealt with.

1. Overheads. Fluor’s claim for a 4% allocation of overheads failed. Fixed head-office costs do not become recoverable merely because direct costs are incurred. In a delay case, a contractor may recover a contribution to fixed overheads where it proves that it could have redeployed its resources on profitable work during the delay. A further recoverable situation may arise where the breach demonstrably thickens head-office costs by requiring additional staff or resources. Fluor had advanced neither case and its percentage calculation did not show any increase caused by the breaches.
2. The approach in Walter Lilly v Mackay [2012] EWHC 1773 (TCC) was consistent with these principles. The court also noted that the awarded Shipment No 2 claim concerned a lost opportunity to carry out work, rather than delay, but no overhead claim had been established on that basis.
3. Currency conversion. The euro-denominated warranty bond was an advance payment on account of Fluor’s claim. The euro sums awarded, with accrued interest, were to be netted against the bond at 21 March 2014. The balance was then to be converted into sterling at that date and set off against the sterling award. The court rejected conversion in August 2014 merely because Fluor then chose to use the money.
4. The authorities, including The Despina R [1979] AC 685, Fearns v Anglo-Dutch Paint and Chemical Co [2011] 1 WLR 366 and Harlequin v Wilkins Kennedy [2016] 6 Costs LR 1201, did not establish an inflexible rule requiring conversion only at judgment or final payment. The court retained a discretion to adopt an approach consistent with restitutio in integrum.
5. Interest. The conventional rate was 2% over the appropriate base rate, but the court could adopt a supported rate reflecting borrowing costs for a company with the claimant’s general attributes. Individual borrowing arrangements and the parent company’s own borrowing rate were unsuitable. Rates were fixed by currency and period on the evidence. Under section 35A of the Senior Courts Act 1981, once proceedings existed, the court could determine the applicable periods, amounts and rates subject to the statutory limits. The parties were directed to calculate the sums and payment was ordered within 14 days.

This was a first-instance judgment dealing with issues left outstanding after the court’s earlier liability and quantum judgments. No appeal history was stated.