Construction disputes How to claim future loss

In major construction and engineering disputes, it can be a tough job for the Claimant to prove its loss. One of the least enjoyable telephone conversations for lawyers and clients alike is the one where the lawyer explains the need to produce detailed documentary evidence of all the sums claimed in the dispute. This often amounts to volume upon volume of invoices, back-up material and payment records which the client must dig out. Quantum experts then lose themselves for weeks in verification exercises and the whole task adds significant legal costs to the losses already incurred by the Claimant.

Where the Claimant’s loss has not yet been incurred, the “drowning by invoice” process does not take place. However there are other difficulties to face.

Uncertain loss

Imagine a claim for defects to a substantial infrastructure asset.

The remedial solution may be a complex one to be implemented in phases, not all of which phases may have been completed by the time the dispute is heard. Once the

solution is in place, ongoing inspection, monitoring and maintenance may be needed over the remaining service life of the asset, to ensure that the solution continues to perform as it should. This is particularly likely to be the case where the solution is novel and untested, which it may be where one is operating in a relatively new industry (such as offshore wind) or with new technologies (state of the art designs). The cost to the Claimant of future remedial activities like these will all be prospective loss.

Prospective loss is, by its nature, subject to many uncertainties. In the case of a defective infrastructure asset, works planned for the future may never be performed if circumstances change – say the Claimant decides to upgrade or decommission the asset rather than completing the repairs. If the work is performed, it could cost more than anticipated (or less, but then it never seems to be less). For example, supplier costs will probably increase over time and this increase may not necessarily be in line with any recognised index or formula. Unexpected conditions, such as ground or weather conditions, may be encountered. Inspection regimes may have to be stepped up in later years if their results in earlier years prove disappointing.

Defendants have the upper hand when it comes to the question of loss in a dispute, as the burden of proof is on the Claimant to prove both the fact and amount of its loss. Otherwise only nominal damages may be available.

Tactics and timing

Claimants do not have crystal balls and nor do Technology & Construction Court judges. So how should uncertain, prospective losses be addressed in litigation?

Ideally a Claimant will wait until all its losses have crystallised before bringing its claim. However this will not be possible where the limitation period is soon to expire or where commercial objectives dictate otherwise, as they often do. The Claimant may prefer to recover now for cash flow reasons or to minimise the risk of finding the Defendant to be insolvent later on.

Theoretically, a Claimant could treat its actual and prospective losses separately, pursuing its actual loss only and leaving aside prospective loss arising from the same cause of action until it has crystallised. This could be a dangerous tactic though. It could fall foul of the principle in Henderson v Henderson1 which precludes a party from raising in subsequent proceedings matters which were not, but could and should have been, raised in earlier proceedings. To protect its position, the Claimant would be wise to ask the court to expressly reserve prospective loss for future determination. In some circumstances the court may be persuaded to do so2 (particularly if both parties have agreed to that course), but it remains somewhat unusual.

Another route could be to seek a declaration of liability or an indemnity in relation to prospective loss rather than damages, to avoid the difficulties of quantifying the loss until later. But the Claimant cannot be confident that this approach will find favour with the court. Indeed, the court may prefer to reserve the assessment of the loss instead3.

1 [1843-1860] All ER Rep 3782 See, for example, Deeny v Gooda Walker [1995] 1 WLR 12063 See the obiter remarks of Somervell LJ and Denning LJ in Trans Trust SPRL v Danubian Trading Co [1952] 2 QB 297 CA at 303 and 307.

Pragmatic approach

The courts take a pragmatic approach to prospective loss.

They accept that it is difficult to assess, but do not treat this as a reason to refuse to award substantial compensation. In Chaplin v Hicks,4 Vaughan Williams LJ made clear:

“The fact that damages cannot be assessed with certainty does not relieve the wrongdoer of the necessity of paying damages.”

The courts also accept that there may be limitations on the evidence that can be adduced to substantiate prospective loss. In Biggin v Permanite,5 Devlin J said:

“Where precise evidence is obtainable, the court naturally expects to have it. Where it is not, the court must do the best it can.”

The Claimant must go as far as it reasonably can though. According to Bowen LJ in Ratcliffe v Evans6:

“As much certainty and particularity must be insisted on, both in pleading and proof of damage, as is reasonable, having regard to the circumstances and to the nature of the acts themselves by which the damage is done.”

In a nutshell, the courts will not shy away from awarding damages just because the loss is difficult to quantify. (Otherwise how could they deal justly with personal injury actions, the ongoing financial loss attributable to an injury being inherently uncertain? Nor could they deal with loss of future profits claims.) The key is that the Claimant must have done all it reasonably can to address the uncertainty.

4 [1911] 2 KB 786 CA at 7925 [1951] 1 KB 422 at 4386 [1892] 2 QB 524 at 532 to 533

The rationale for this pragmatic approach is that litigation should achieve finality. Prima facie if later the Claimant suffers more loss than was anticipated at trial, it cannot come back for more. Likewise the Defendant cannot come back if the loss turns out to be less than anticipated.

Requirements for recovery

So what specifically must the Claimant do to address the uncertainty and recover prospective loss?

The following four hurdles come out of cases such as Parabola Investments Ltd & Others v Browallia Cal Ltd7 and The MV Maersk Columbo8. To take a defects claim like that described above, the Claimant must establish:

1. what future remedial works are planned;

2. that it is probable that the works will be performed;

3. that it is reasonable to incur the costs of the planned works; and

4. that the quantum of the loss is fair and reasonable between the parties.

The first two limbs are determined on a balance of probabilities. The second two rest instead on the concept of reasonableness.

Let us look at each requirement, beginning with the first two:

1. What future remedial works are planned

2. It is probable that the works will be performed

The Claimant will need to adduce factual evidence of the works and its commitment to them. This could include:

a) a witness statement from a knowledgeable member of the technical team explaining the scope of the works;

b) a further witness statement from a board member confirming that authority has been given for the works;

7 [2009] EWHC 901 (Comm)8 Southampton Container Terminals Ltd v Hansa Schifffahrtsgesellschaft mbH & Co [2001] EWCA Civ 717

c) documentary evidence in support, such as scope documents, drawings, programmes, pricing documents, minutes of board meetings at which the remedial proposals were approved and procurement documentation/contracts under which the work will be performed.

The more advanced the remedial proposals, the easier it is likely to be for the Claimant to persuade the court that the works will in future take place. Under-developed remedial schemes may be attacked by the Defendant as too uncertain or speculative to attract recovery.

3. It is reasonable for the Claimant to incur the costs of the planned works

Detailed factual evidence will be required from the Claimant’s technical and commercial teams as to why the remedial works and costs are (reasonably) necessary. The factual witnesses can expect to be cross-examined intensely on this point and they will be in dangerous territory if the scheme is ill-researched. The Defendant may argue that the Claimant has failed to consider all the options or is adopting an over-costly scheme. It may put forward an alternative scheme as more appropriate. More fundamentally, the Defendant may argue that a one-stop fix should have been implemented in the first place and that the need for any future work at all simply demonstrates that the original fix was inadequate.

Where possible, the Claimant can refer to analogous projects on which similar remedial solutions were successfully adopted. It will also help to refer to any external technical advice obtained on the need for the future works. There is authority in Board of Governors of Hospitals for Sick Children v McLaughlin & Harvey plc9 that, if it was reasonably foreseeable that the Claimant would depend on expert advice to decide which remedial scheme to adopt, prima facie the Claimant can recover for the scheme carried out pursuant to that advice, unless the advice was negligent. This case related to remedial work already performed, but the same principle of reliance on expert advice should equally apply to future works.

9 19 Con LR 25

The contemporaneous technical advice should be complemented by evidence from the Claimant’s independent expert witness confirming that, in his opinion, it is indeed reasonable to perform the future work. The expert witness should go a step further and confirm that the work is actually required by technical standards and/or good and prudent practice, if this is the case.

There is a pitfall where in reality the driver for the future works is not, or not solely, the defects for which the Defendant is responsible. A perceptive Defendant will challenge recovery for future works that would have been needed in any event, that will primarily serve another technical or commercial goal or that incorporate an element of betterment.

4. The quantum of the loss is fair and reasonable between the parties

The quantum of the prospective loss must be transparent, broken down and substantiated as far as it reasonably can be, even though it has not yet been incurred.10 Contract prices should be supplied if they have been obtained; failing that, estimates; failing that, the Claimant will at least need to point to the other data or past experience on which its quantification of the loss rests.

A real problem with prospective loss is that quantum may change over time. Estimates often go up (or down, but then they never seem to go down) as the project team gains a better understanding of the work scope and risks. Contract prices can change through variations as the work progresses. How does the Claimant deal with the shifting quantum?

10 Bowen LJ’s comment in Ratcliffe v Evans that: “As much certainty and particularity must be insisted on… as is reasonable…”. [1892] 2 QB 524 at 532

Often the tendency is to leave quantum until relatively late in the case, focusing more on liability early on. Hence statements of case spend page upon page on duty, breach and damage, only to cover off quantum in a matter of lines or with the phrase “to be assessed”. With prospective loss, and particularly where quantum may change over time, this is an appealing approach to the Claimant. However it may not be strategically wise. Without quantum properly in play, liability sits in a vacuum. The Defendant cannot fully assess its exposure and the prospects of an amicable settlement of the claim diminish.

A better strategy could be to plead the quantum of the prospective loss at the outset and then revisit and update it if necessary before trial. The Claimant needs to closely protect its credibility here though – significant changes in the figures will undermine its case on quantum. If a key factual witness is responsible for these changes, then his/her own credibility as witness could also be undermined, posing a wider threat to the case. Expressing the assumptions and contingencies on which quantum is based in the first place may help to explain any changes later.

An independent quantum expert witness will need to verify the quantum of the claim. Instead of verifying that the appropriate sum has been paid, he will be verifying that the estimate/quotation of future costs is consistent with the intended remedial activities and tallies with the sources from which it is derived. Hopefully he can also opine that the estimate/quotation appears fair, reasonable or at least appropriate to him and that the assumptions and contingencies it is based on are reasonable. The quantum expert can also address inflation. Often the inflation that would attract to the future costs can be offset by the advantage to the Claimant of receiving an early payment from the Defendant.

Balancing act

The courts’ pragmatic approach to prospective loss provides an efficient means of dealing with prospective loss simultaneously with actual loss arising from the same breach, giving the parties finality on their entire dispute. Recovering prospective loss is not straightforward though – there are several hurdles for the Claimant to overcome, for which detailed factual and expert evidence will be required, and there is plentiful scope for the Defendant to undermine the claim at each hurdle.

In remedial costs claims, the Claimant will need to consider its remedial options carefully and lay a clear audit trail leading to its chosen scheme. There is a balance to strike here – commercially a Claimant may not wish to spend too much time and cost on formulating remedial plans that are not going to be implemented until later; legally it may need to do so if it is to recover these costs at trial. But at least it makes a change from drowning in invoices.

Practical tips for claiming prospective loss

• Do you need to bring the claim now or can it wait until the loss has crystallised?

• Claim only for prospective works that are driven by the Defendant’s breach, that it is reasonable to perform and that will, on a balance of probabilities, be performed.

• Ensure that the quantum sought is fair and reasonable.

• A detailed audit trail, involving external technical advice where appropriate, should be put in place when the remedial works are scoped and priced.

• Beware if the quantum of the prospective loss alters – this can affect the credibility of witnesses and the case more generally.

For further information please contact:

Simon Oats Global Head of Construction and Engineering

+44 207 919 4750 simonoats@eversheds.com

James Pickavance Partner

0845 497 4646jamespickavance@eversheds.com

Authors

Kate Hencken Principal Associate

0845 497 4867kathrynhencken@eversheds.com

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