Show me the money! Claims for loss of profit and contribution to overheads following repudiatory breach

I was recently successful in defending an Employer-developer in the course of a recent adjudication under the Scheme for Construction Contracts. The contract was a JCT Minor Works (2016 edn), with a Contract Sum of circa ￡500k. The Contractor sought a declaration that the Employer was in repudiatory breach of contract, together with an order for payment of circa ￡100k, being the monetary benefit (or Contractor's margin) which the Contractor alleged it was deprived of by reason of the Employer's repudiation. Critically, the Contractor sought to prove its loss of profits and contribution to overheads by reference to its tender build up, and not the contractual schedule of rates.

The works never in fact commenced, however around 6 months following the alleged agreed start date the Contractor sent an email to the Employer to the effect that, due to material cost increases, it needed to 're-quote' the entirety of the works at a revised Contract Sum of circa ￡600k. The Employer did not agree to the 're-quoting' of the entire works, as it could only obtain funding for the original Contract Sum. It proceeded to carry out the works itself.

The client sought to defend on the basis of (i) if there was a repudiation, the Contractor was first in breach and so there was no case to answer and (ii) presupposing there was a repudiatory breach, on the basis of the Contractor's pleaded loss (i.e. the tender build up) the repudiation ultimately saved the Contractor from performing an unprofitable contract, and so no monies fell due as damages.

On the first limb, it was argued that the Contractor's 're-quoting' of the works was outwith any of the contractual conditions precedent to entitlement. Even if the Contractor had followed the correct contractual mechanism, the value of the 're-quoting' was far in excess of its best case entitlement. On the second limb, it was not disputed that had there been a repudiation in fact, the Contractor was entitled to recover the loss of financial benefit that it would have derived from contract had the Employer not been in breach. However, the Contractor's sole reliance on its tender build-up was wholly insufficient to prove its pleaded case, such that its entire case was 'embarrassing for want of particularity', that is to say it was so vague, unclear, or ambiguous as to 'embarrass' or frustrate the Employer in its efforts to understand the nature of the claim against it. It was clear that in light of the Contractor's email revising the Contract Sum upwards by circa ￡100k that it had very little to no hope of achieving a margin. Further, expert evidence obtained by the Employer demonstrated that even on the Contractor's tender build up, if the works had proceed the Contractor would have likely suffered a loss of circa ￡5k, and so the Employer's repudiation in effect saved the Contractor from performing a loss-making contract.

The Contractor argued that its email 're-quoting' the works was an advisory notice of a potential entitlement to loss and expense, but that the 're-quoting' email was ultimately irrelevant, because it was entitled to benefit it was deprived of, and had the works proceed as agreed it would have made a margin of circa ￡100k. The Employer argued that recovery of damages consequential upon repudiatory breach is not commensurable with a delay claim for loss and expense, and that in any event reliance on the tender build alone was not, of itself, sufficient to prove loss of profit and contribution to overheads. The tender build up demonstrated what the Contractor believed it might have made in margin; not what it in fact would have made.

The adjudicator decided that Contractor's re-quoting of the works in the manner that it did was insufficient evidence of it having decided to no longer be bound by the terms of the contract, and so the Employer undertaking the works itself was a repudiatory breach. However the adjudicator accepted the Employer's arguments that the Contractor's claim for loss of profit and contribution to overheads was unproven. Where an Employer repudiates the Contractor's employment, the Contractor is entitled to recover his loss of margin, derived from the monies it would have earned in performing the works, less the cost of its performance. It was insufficient for the Contractor to simply point to a partially evidenced tender build as proof of its actual loss. The adjudicator accepted the that the Contractor's email 're-quoting' the works showed that the Contractor's need to revise the Contract Sum by circa ￡100k meant that any loss of profit would have been wiped out, and consequently the Contractor would not have recovered any contribution to its overheads. Having determined that the Contractor was unsuccessful its claim for an order for payment, the Adjudicator decided that the Contractor should pay 100% of his fees.

While this fractious dispute ultimately resulted in a positive outcome for my client, the lessons for any party defending a claim for loss of overheads and profit consequent on repudiatory breach are:

1. The fact that your client may be in repudiatory breach is not necessarily fatal to resisting a claim for damages consequent on that breach.
2. Where repudiatory breach is shown, the innocent party is entitled to recover the financial benefit it would have derived had the contract been performed in the absence of the repudiatory conduct. In the case of a construction contract, that loss is likely to be the monies it would have earned in performing the contract, less the cost of its performance.
3. Proving potential loss is not the same as proving actual loss. It is insufficient to simply rely on bare or unsubstantiated proofs when claiming loss of profit: if a party cannot prove each line item making up the various components of its tender and the party's margin, then that limb of the claim deserves to fail. To succeed in a loss of profit claim, the innocent party must demonstrate with a sufficient degree of particularity how its losses have accrued.
4. Fundamentally, if the evidence relied on by the innocent party clear shows that it would have returned a loss in any event, the innocent party is entitled to neither its assumed loss of profit or any contribution to its overheads. A declaration to the effect that the other party was in repudiatory breach is likely to be of little practical use where, in the case of an adjudication, party costs are irrecoverable.
5. Where a claim for loss of profit also includes a claim for contribution to overheads, it is important that the innocent party can demonstrate how overheads accrue (for example, if the innocent party is a 'brass-plaque' company with several companies registered at one address it ought to be able to show, if claiming a loss of office turnover, how such turnover is delineated between the various companies that operate out of the one address).

If you require any advice in relation to construction related disputes, the?Construction & Infrastructure Team at DWF?would be able to assist or for more information on the topic discussed in the article, please contact?David Humphreys.