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Fluor v Shanghai Zhenhua Heavy Industry Co Ltd

18 May 2018

Fluor entered into a contract with Greater Gabbard Offshore Winds Ltd (“GGOWL”) to engineer, procure and construct the foundations and infrastructure to support 140 wind turbine generators to be installed in the North Sea.

Each foundation comprised of a massive steel structure consisting of rolled steel plates which were welded together to form a cylindrical column. Fluor’s plan was to fabricate the columns in Shanghai and then ship them to the Netherlands to be installed.

Fluor contracted Shanghai Zhenhua Heavy Industry Co Ltd (“Shanghai Zhenhua”) to carry out the welding. The welding carried out by Shanghai Zhenhua contained a significant and unacceptable amount of cracking. The cracks in the welds ultimately put the project into complete disarray.

A dispute arose between Fluor and Shanghai Zhenhua about the quality of Shanghai Zhenhua’s fabrication of steel, which was heard before the Technology and Construction Court (the “TCC”). In its judgment on liability, the TCC held that Shanghai Zhenhua had breached the contract due to its shortcomings in the welding procedure.

In the TCC’s judgment on quantum, Sir Anthony Edwards-Stuart made some interesting points on claims for overheads.

Office overheads are the costs of running the contractor’s operation as a whole, such as the rental of buildings and costs of office staff.[1] If a project is delayed, the contractor’s overheads will continue while its turnover will reduce. In certain circumstances, the contractor may be able to claim the loss and expense associated with its overheads.[2] Importantly, a contractor must show that if the delay had not occurred, it would have secured work or projects which would have produced return which would have contributed towards head office overheads.[3] If a contractor cannot prove this, it will face the argument that the costs would have been incurred in any event and that they are therefore not “losses”.[4]

Fluor sought to claim overheads at a rate of 4%. The figure of 4% was calculated as follows:[5]

  • The GGOWL project amounted to 57% of Fluor’s overall activity for the year.
  • Fluor’s total overheads for the year were £ 22 million
  • 57% of £ 22 million is £ 12.645 million
  • £ 1.3 million was added to this £ 12.645 million for certain infrastructure project-specific overheads
  • The total for overheads on the GGOWL project was thus £ 13.986 million which amounted to 4% of the total GGOWL project cost.

Sir Anthony Edwards-Stuart was not prepared to accept such a calculation. He held that the 4% is simply a ratio of one set of costs against another and tells one nothing about how the costs were increased as a result of the breaches of contract by Shanghai Zhenhua.[6]

Consequently, Sir Anthony Edwards-Stuart concluded that, while Fluor may well have incurred increased overhead costs, Fluor had failed to establish the facts necessary to support its claim therefor and remarked that he was “not prepared to pluck a figure out of the air”.

This case highlights how the courts may not accept simple calculations or estimates when it comes to a claim for office overheads and that doing so may lead to a dismissal of the claim altogether.

  1. [2018] EWHC 490 (TCC), para 20.
  2. Para 20.
  3. Walter Lilly & Company Ltd v Mackay & Anor [2012] EWHC 1773 (TCC) (11 July 2012), 543.
  4. [2018] EWHC 490 (TCC), para 20.
  5. Para 30.
  6. Para 31.

By Kelly Stannard