Plaintiff v Defendant

Supreme Court of Victoria|2008-08-29|Before: BYRNE J

BUILDING CONTRACTS - profit on unperformed work following termination of contract - nature of profit - whether includes allowance for risk - nature of risk.

COSTS - costs follow the event - whether costs should be apportioned between parties by reference to success on issues - questions determined in two trials - whether failure by plaintiff on many issues at first trial warrants an adverse order for costs of that trial - plaintiff successful overall.

1 On 7 December 2007 I delivered my judgment in this matter upon all questions other than quantum.[1] On 1 August 2008 I delivered my judgment on the remaining questions.[2] Two matters remain for decision:

the entitlement of Lucas Drilling to payment for loss of profit upon unperformed work;
the costs of the proceeding.

2 Since delivering my August 2008 judgment, my attention has been drawn to the fact that I neglected to decide the entitlement of Lucas Drilling to loss of profit pursuant to cl. 24.4(f). With the agreement of the parties I now address the matter.

3 These reasons should be read in conjunction with my two earlier judgments. I use the same terminology. In particular, I draw the same distinction between the cost of an item of work or activity, which means the direct cost of carrying it out,[3] and its value, which means the portion of the contract price which is referable to it in the tender breakdown.[4]

4 The terms of cl. 24.4 are set out in their context in my December 2007 judgment.[5] The entitlement of Lucas Drilling is there said to include:

f) loss of profit, if any, on the remaining parts of the Sub-Contract Works.

The remaining parts are those parts of the contract work which are not dealt with in parts (a), (b), (c), (d) and (e) of cl. 24.4. I have already set out the circumstances in which cl. 24.4 operates.[6]

5 In its current manifestation, the claim of Lucas Drilling for loss of profit is for $452,661.[7] In the August 2008 judgment I assessed the contract value of the work performed prior to termination to be $3,563,296, that is, 71.25% of the contract price.[8] Counsel argued that the contract value of the unperformed work should therefore be the contract sum of $5 million less $3,563,296, that is, $1,436,704. This figure, it is said, is the estimated cost of carrying out the unperformed part of the work plus the tender margin of 46.1%. Relying on paragraph [42] of my August 2008 judgment, they say that this margin represents the profit lost as a consequence of Lucas Drilling having had part of the contract work withdrawn following the termination. In the tender breakdown that part of the $1,436,704 value which represents this margin is $453,334.[9] For present purposes the discrepancy between this sum and the amount claimed is immaterial.

6 At the outset, I observe that this Lucas Drilling approach fails to address two matters. First, on the facts of this case, $1,436,704 does not represent the contract value of the unperformed work. It is clear that, by the date of termination, Lucas Drilling was not going to perform the offshore diving and marine work. For reasons which are not here relevant, this work was to be performed by others. Accordingly, had the contract not been terminated, the contract price would have been reduced by reason of this variation. The variation had not, at the date of termination, been formally documented in terms of cl. 14 or valued, but it is inconceivable that Lucas Drilling should be paid for profit on this work which it was not to perform. Some allowance should therefore be made for this. Second, the margin includes an allowance for risk and overheads. Under cl. 24.4(f) Lucas Drilling is entitled only to profit.

7 Counsel for McDow submitted that I should allow nothing for profit because the profit which would have been earned on the unperformed work had not been identified or valued. Indeed, they said, there is no evidence to support a conclusion that Lucas Drilling would have made any profit at all from that work. This is not correct. It must be remembered that the work in question was not performed. The actual cost of this performance measured against the unconsumed portion of the contract price cannot be known. If the cost was known then it would be simply a question of deducting that cost and overheads from $1,436,704, for this would represent profit. At this point, no allowance for risk would need to be made because the work was in fact performed; any risk would have been actualised. The best that can be done in the present circumstances is to predict the likely cost of the unperformed work. Such a prediction was made in July 2002 when the tender breakdown was prepared and the contract price agreed. Mr Fox attested to the reasonableness of this breakdown. In the circumstances, and absent any evidence to the contrary, I conclude that a reasonable estimate of the cost of the unperformed works is 28.75% of $3,558,498 which is the estimated cost of all the work, that is, $1,023,068 plus risk. Risk must be included because it represents an estimate of the possible cost of performing the work in adverse circumstances. From this amount must be deducted the cost of the diving and offshore marine work which was not to be performed.

8 It is convenient that I record certain evidence in the earlier trial which bears upon this topic and which I have accepted. The allowance in the tender breakdown for margin is $1,442,616. This is made up as follows:

The figures for overheads/indirect costs and profit, total 5% of cost.[10] The figure of $1,264,740 for risk represents 35.56% of the total tender cost because the total of the percentages comprising the margin in the tender breakdown is 40.55% of cost.[11] In fact, for all but six of the activities in the tender breakdown the margin is 46.1%. For the majority of the activities, therefore, the risk allowance represents 41.1% of the cost of that activity.[12] These activities include those with which I am presently concerned.

9 Risk is the prospect that things will not turn out as planned. This is a feature of every aspect of a construction project and a money allowance will normally be made for it. In the present case the same allowance has been applied to nearly all of the activities in the tender breakdown without apparent regard for the fact that some of them are riskier than others. If an activity goes as planned, then the allowance for risk becomes part of the profit for that activity and, perhaps for the whole of the contract work, unless it is applied to cover an unexpected cost overrun on another activity. In this sense, it may be seen as part of the estimator's pessimistic prediction of the performance of the activity. It may then be said that the estimator's prediction of the cost of performing a particular activity being part of the contract work in this case was, say, $10,000, in the event that all went well, and $14,110[13] if it did not. The estimated cost, then, becomes a figure within a range. It may be for this reason that counsel for Lucas Drilling argued that, in order to arrive at profit, the total margin should be applied to the cost of the unperformed work.

10 The allowance for overheads stands in a rather different position. It represents the contribution of the project to the general overheads of the contractor for all of its business activities. For this reason it is difficult to understand why it was included in the margin which is applied to a particular activity rather than to the contract as a whole. Perhaps it is merely a convenient way to deal with this contribution from an accounting point of view. For my purposes, however, it is not part of profit because is it part of the expense of conducting the Lucas Drilling business, which expense is incurred whatever happens to a given project.

11 There was some debate as to the appropriate deduction to be made for the diving and offshore works. The estimate in the tender breakdown of the value of performing this work was $688,000 cost, plus margin, a total of $1,005,168[14] of which I have found that work of a value of $28,614 was performed,[15] so that the tender price referable to the unperformed marine work was $976,554.[16] The tender price referable to the remaining contract work, the work which Lucas Drilling would have had to perform had the contract not been terminated, is therefore reduced from $1,436,704 to $460,150.[17]

12 What was the profit on this work? The value of $460,550 represents a cost of $314,956 after deducting the 46.1% margin. I adopt for this purpose Mr Fox's profit figure of 1.5%.[18] The profit on work costing $314,956 would therefore be $4,724. It should be acknowledged, however, that this profit might in fact be increased if the allowance for risk in the 46.1% margin were not consumed. On the other hand, it might be diminished if adverse matters not included in the risk or costing more than the risk allowance came to pass. It is difficult for me to form a view about this. I was told that, with the HDPE casing in place in both holes, the insertions by thrusting from the landward end would have been less risky and less expensive than allowed for in the contract price. This new procedure was, however, not approved and may never have been permitted. Other activities which remained to be performed appear not to have been so risky. In the circumstances, and doing the best I can, I do not see as likely that the allowance of some 41.1% of cost for risk attending the unperformed work, namely nearly $130,000, would have been consumed. I would therefore allow $25,000 for profit on the unperformed works.

13 It was accepted that the starting point of this analysis is the principle that costs should follow the event. Lucas Drilling was successful and therefore should have its costs of the proceeding.

14 Counsel for McDow then took me to the cases which showed that this rule will be departed from in a number of exceptional circumstances. They pointed to the fact that in the first trial Lucas Drilling had failed in its construction of cl. 24.4 as to the methodology for valuing its entitlement. At the same trial it failed in most of its variation claims, notably its claims for extra payment for the diving and offshore marine work and the re-engineering work. Indeed, it was pointed out that this was the third time that Lucas Drilling had formulated a claim for extra payment for the diving and offshore marine work, and all were unsuccessful. I was reminded that Lucas Drilling had changed its claims again and again and that the figures which it sought at the end of the second trial were very different from those advanced previously.

15 All of this is true. I will nevertheless make an order for costs of the proceeding as a whole in favour of Lucas Drilling. I do so for the following reasons. First Lucas Drilling has obtained a judgment for a substantial money sum, much more than McDow was prepared to pay. Second, a good deal of the complications in this case arose from the fact that it was originally prepared as a proceeding to be tried at the same time as the settled claim by McDow against BHPB. Counsel for both parties did well to disentangle the issues to be tried from those which related only to the settled proceeding. Moreover, some of the changes of position by Lucas Drilling were due to the positive response of its counsel to the urging of the Court that surplus allegations be discarded. Third, it may be accepted that Lucas Drilling was, generally, unsuccessful in the first trial. The order for two trials was made by the Court as part of the proper and efficient management of this complex litigation. A party which co-operates in this process ought not to be treated less favourably than would have been its entitlement had the trial been a single trial. In complex litigation in the modern environment such co-operation should rather be a cause for congratulation. In a single trial, counsel for McDow would have been hard pressed to maintain a position that the costs should be apportioned by reference to the outcome of different issues of fact or law.

16 There were some particular costs issues which were the subject of argument. I indicated during the hearing that I would direct the Taxing Master, if this should be necessary, that the costs of the proceeding should include those of preparing both reports of Mr Fox. While it is true that Lucas Drilling, which called him as a witness, did not rely upon his first report, it was much deployed by counsel for McDow both in the second trial and, to a lesser extent in the first trial. Both Fox reports were admitted into evidence in the second trial.

17 I invited counsel in the course of the second trial to offer argument why there should not be an order that there be no costs allowed for the first half day which was occupied by each of the parties trying to avoid the consequences of my findings in the first trial. I am not persuaded to depart from this position. The order for costs will therefore contain a direction to the Taxing Master that no costs be allowed for this half day.

18 The order for costs will normally include the costs of the preparation of the court book. In this case the court book prepared by the solicitors for Lucas Drilling was deficient and had to be withdrawn and re-prepared. The Taxing Master should therefore include in the costs payable to that party the costs of the preparation of the second court book only.

19 During the trial there were a number of pleading amendments. The orders for costs which I make should not be taken to be an "otherwise order" within the meaning of R.63.17.

20 Finally, there were a number of expert witness statements prepared on behalf of Lucas Drilling for witnesses who were not called. Counsel for that party, however, said that it was not necessary for me to address the costs of those witnesses; it should be left for the Taxing Master.

21 I will therefore, invite counsel for Lucas Drilling to bring in minutes of the final orders which should be made to give effect to the conclusions which I have reached in this proceeding.

[3] As appears in column B of the Schedule to the August 2008 judgment.

[4] As appears in column E of the Schedule.

[6] [2007] VSC 500 at [19] ff, esp. at [19]-[22] and [33], and at [139]-[141].

[7] Outline of argument 11 August 2008 para [41].

[9] $1,436,704 ÷ 146.1% x 46.1% = $453,334.

[14] Activity 6A in the Schedule to the August 2008 judgment.

At a glance

Court

Decision date

Before

Source

Judgment (42 paragraphs)

Parties