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Fluor v Shanghai Zhenhua Heavy Industry Co. Ltd  EWHC 490 (TCC) (16 March 2018)
 EWHC 490 (TCC)
[Printable RTF version
||Neutral Citation Number:  EWHC 490 (TCC)
||Case No: HT-2014-000190
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
||Royal Courts of Justice
Rolls Building, Fetter Lane, London, EC4A 1NL
B e f o r e :
Sir Antony Edwards-Stuart
(Sitting as a High Court Judge)
||Shanghai Zhenhua Heavy Industry Co., Ltd (formerly known as Shanghai Zhenhua Port Machinery Co., Ltd
Mr Sean Brannigan QC and Mr Richard Osborne
(instructed by Roberta Downey of Hogan Lovells) for the Claimant
Mr Andrew White QC, and Mr Iain Munro (instructed by Mr Adam Harris of Pinsent Masons) for the Defendant
Hearing date: 2 February 2018
HTML VERSION OF JUDGMENT
Crown Copyright ©
- On 7 October 2016 I handed down a judgment on the issues of liability in this case ("the Liability Judgment") following a hearing held during February, March and April 2016. On 11 January 2018 I handed down the judgment on issues of quantum following a hearing in May and August 2017 ("the Quantum Judgment").
- This is a dispute about the quality of the fabrication of steel monopiles ("MPs") and transition pieces ("TPs") for an offshore wind farm in the North Sea. The Claimant ("Fluor") is an engineering, procurement, construction, maintenance and project management company registered in England (and is a subsidiary of Fluor Corp, the US multinational construction company). The Defendant ("ZPMC") is a well-known steel fabricator, based in Shanghai with a major manufacturing base at Changxing Island. ZPMC has an international reputation as a heavy duty equipment manufacturer, in particular ship to shore container cranes.
- Having found that ZPMC was in breach of contract by reason of cracking in the welding of the MPs and TPs, in the Quantum Judgment I was concerned not only with the assessment of the damages to which Fluor was entitled as a result of the breaches but also with the extent to which the entitlement to damages (which Fluor might otherwise have had) had been curtailed or extinguished by an agreement reached between the parties in June 2010.
- The Quantum Judgment dealt with all Fluor's claims save those under four heads: overhead and profit, VAT, interest and losses on currency conversion. Although a claim for overhead and profit had been mentioned, in neither the Re-Amended Particulars of Claim nor its Closing Note did Fluor put forward a figure for this or identify the heads of claim or items to which either overhead or profit should be added. VAT and interest were left to be dealt with (if not agreed) as consequential matters in the usual way. A claim in respect of currency conversion had been adumbrated by Fluor but no particulars of that claim had been given.
- I therefore directed that Fluor was to identify the sums in paragraphs 615 to 618 of the Quantum Judgment to which it said overhead and profit should be added, together with the basis for doing so, and the amounts claimed for each item. I then gave ZPMC time in which to respond.
- In the event, Fluor has not pursued any claim for profit or in respect of VAT. This judgment is therefore concerned with the claims for overheads, interest and all questions concerned with the currency of payment and, if permissible, losses on currency conversion (a point which may also affect ZPMC's counterclaim).
- At the hearing Fluor was represented, as before, by Mr Sean Brannigan QC and Mr Richard Osborne, instructed by Roberta Downey of Hogan Lovells, and ZPMC was represented by Mr Andrew White QC and Mr Iain Munro, instructed by Mr Adam Harris of Pinsent Masons.
Overall Summary of the figures awarded in the Quantum Judgment
- It is convenient at this point to set out the sums that I awarded Fluor in the Quantum Judgment (at paragraphs 615-618).
- US $.
||Head of claim
||Fluor management in Vlissingen and Camberley
||ECA costs (Ibsoe/ABS)
||ECA costs (MDMC)
||Head of claim
||Fluor management in Vlissingen and Camberley
||Counterclaim damages the settlement
||Head of claim
||Shipment No 2 - the counterfactual case
||MP related costs
||Fluor management in Vlissingen and Camberley
||ECA costs (Ibsoe/ABS)
- Other currencies:
||Head of claim
The claim for overheads
- In its claim in the arbitration against GGOWL Fluor claimed a mark up of 17%, which was claimed to represent a "reasonable mark up for overhead and profit" on all additional work that it alleged had been instructed by GGOWL. This was said to have been a rate that was agreed with GGOWL as applicable to all variations during the project. However, as ZPMC pointed out, a claim for variations made by a contractor against the employer is not the same as a claim for damages for breach of contract made by the contractor against its sub-contractor.
- Although Fluor now recognises that it cannot claim profit on the sums found due by the Court, it does claim a percentage for overheads in respect of all those sums (save for the sum awarded in respect of the settlement with GGOWL) at the rate of 4%.
- In support of this claim Fluor relied on an observation that I made, at paragraph 452 of the Quantum Judgment, when I said that "I can see no reason why Fluor should not be entitled to recover the cost of its general overheads as part of the costs of steps taken in mitigation". This was the only place in the Quantum Judgment where I allowed, in principle, a claim for overheads (at the rate of 2%): however, that arose in an unusual way. It was a claim for the costs of maintaining the TPs during the period immediately following commissioning by Fluor of each WTG and prior to the issue of a WTG Foundation Works Commissioning Certificate ("WFWCC") by GGOWL in relation to that WTG and its foundations. Although this claim did not form part of Fluor's claims for delay (it arose during a later period), in essence it took the form of a claim for delay because it was a claim for the costs of carrying out a particular activity - maintaining the TPs - for an extended period.
- The feature that made this particular claim so unusual was the "major wrinkle" that I mentioned at paragraph 425 of the Quantum Judgment. That was the fact that this particular claim was put forward in two different ways: one as a direct cost and the other as one of the claims that was included in the settlement of the arbitration against GGOWL. Although I dealt with the merits of the claim as a direct cost, arriving at a figure of £582,645 (including 2% overheads), I never awarded that sum to Fluor because I concluded that this particular claim had been taken into account as one of the claims foregone by Fluor, which totalled about £8 million, in the overall settlement with GGOWL (see paragraph 539 of the Quantum Judgment).
- Whilst I do not resile from what I said at paragraph 452 of the Quantum Judgment which, is, I think, consistent with general principle, in the circumstances that I have just described that observation taken by itself does not get Fluor very far.
- In relation to the circumstances in which a claim for overheads can be awarded to a contractor, Fluor submitted as follows:
(a) whenever a company incurs a direct cost, it does not do so in a vacuum, at no cost to itself: it generally incurs head office costs - commonly known as overhead - in doing so;
(b) that overhead cost is just as much a cost of the relevant event as the direct costs; and
(c) it is a cost which should be directly recoverable.
- Whilst ZPMC accepts that overheads can be claimed as a matter of principle, it submits that the circumstances in which a contractor can do so are not present in this case. ZPMC submits that the contractor must show that, had it not been for the breach of contract, its labour force would otherwise have been profitably employed on other work thereby making a contribution to the contractor's fixed overheads (such as head office costs). The loss of the opportunity to recover that contribution to its overheads can be a legitimate head of claim.
- In support of its submission, ZPMC relies paragraphs 13.63-13.64 of Emden's Construction Law (Looseleaf), where the authors say:
"[13.63] Overheads are similar to preliminaries in that they constitute expenditure on support services and general running costs. Whereas preliminaries refer to particular expenditure on the site and contract works, however, overheads are the costs of running the contractor's operation as a whole, including for example the rental of the contractor's buildings and general support staff costs. That overheads can properly be claimed in principle is beyond doubt. If a project is delayed the contractor's overheads continue unaffected while his turnover will be reduced. If he would have been able to undertake other work during the period of delay which would have gone some way towards paying for his overheads, he can claim for the loss involved. In addition, he may have had to devote staff time to dealing with disruption or delay, and if he can show that the staff would otherwise have been gainfully employed that may also form part of a claim.
[13.64] The primary obstacle faced by the contractor is the need to establish these lost opportunities. He must show, in other words, that he would have been able to undertake other work, or that his staff would have been otherwise profitably employed. If he cannot, he faces the argument that the costs would have been incurred in any event being in the nature of overheads and that they are therefore not 'losses'. It may also be difficult for a large contractor to show convincingly that delay on one project has actually affected his ability to take up other opportunities."
- The authors of Emden go on to say, at paragraph 13.68, in relation to the use of additional or replacement plant:
"[13.68] Where the contractor has, because of the employer's default, had to replace an item of plant, to introduce a new item of plant to complete the works, or to use plant in connection with the works for longer than he would otherwise have done, he is entitled to recover the costs he has incurred in doing so. If the plant has been hired, it is the increased hire costs which are recoverable. Where the plant belongs to the contractor, the position may be more complex. He may recover the loss he has suffered because he has been unable to deploy it elsewhere, or hire it out for gain, but this is again subject to a need to prove a particular opportunity which has been foregone. Otherwise, the claim will be limited to any depreciation in value of the plant which has resulted from the intensified or prolonged use."
- I note that in the context of the hire of additional plant, there is no reference in that passage to a potential recovery of overheads. I was also referred also to the decision of Akenhead J in Walter Lilly v Mackay  EWHC 1773 (TCC), at paragraphs 463 and 543, where he said:
"463. This is of some importance when one comes to consider the loss of head office overhead and profit related to delay because that will generally not be incurred until the actual delay beyond the original contractual completion date begins to accrue.
. . .
543. Considering these various authorities, the following conclusions can be drawn:
(a) A contractor can recover head office overheads and profit lost as a result of delay on a construction project caused by factors which entitle it to loss and expense.
(b) It is necessary for the contractor to prove on a balance of probabilities that if the delay had not occurred it would have secured work or projects which would have produced a return (over and above costs) representing a profit and/or a contribution to head office overheads.
(c) The use of a formula, such as Emden or Hudson, is a legitimate and indeed helpful way of ascertaining, on a balance of probabilities, what that return can be calculated to be."
- Fluor's primary submission, which I have quoted above, is in my view not correct. A contractor's head office costs, for example, are fixed - in that, in principle, they are incurred at roughly the same rate every month. When a contractor submits a tender to carry out a contract during a specified period, it will include an allowance for its profit and its fixed costs or overheads. It may happen that, whilst the contract duration is not extended, the contractor has to use more plant than he expected as a result of circumstances for which liability rests with the employer. In that situation the contractor is entitled to claim the direct costs of hiring the additional plant, but his fixed costs - such as the costs of maintaining his head office - will have remained unchanged and so there can be no claim in respect of them.
- But if the effect of the employer's breach of contract is to delay completion, so that the contractor remains on-site for, say, an additional three months, the contractor may have a claim for a contribution to his fixed costs for the extended period if it can show that it would have been able to redeploy its labour force on other profitable work during the period of delay. This is because the contractor would have been deprived of the opportunity to earn, not only profit, but a contribution to its fixed costs during that period.
- In this case, as ZPMC has pointed out, Fluor's claims for delay failed because I held that they had been waived as a result of the agreement made with ZPMC in June 2010.
- Leaving aside the settlement with GGOWL, all the claims made by Fluor in respect of which I have awarded damages, save for one, are in respect of direct costs of one type or another: they include the costs of paying additional staff to manage the project, the costs of retaining consultants in relation to the ECA, the costs of hiring extra plant or equipment, the costs of providing extra storage space, and so on.
- The one exception is the claim in respect of Shipment No 2 and the counterfactual case for which I awarded for a sum slightly in excess of 4.5 million. This claim was based on the loss of the opportunity to install the MPs from Shipment No 2 during period (C) that was, effectively, during July 2009. It was not a claim based on delay, but a claim based on the loss of the opportunity to carry out the work that Fluor had expected to be able to carry out during that period.
- Whilst I do not disagree with anything that has been said by the authors of Emden or by Akenhead J in Walter Lilly, it seems to me that there is at least one other situation in which a contractor could legitimately claim a contribution towards his overheads. This is where his head office overheads have been "thickened" during the period of the contract. I gave an example of how this could happen during the course of argument. Suppose that in its head office a contractor employed six accountants, whose activities concerned the administration of the business generally and were not project related. As a result of the substantial extra administration required to deal with problems caused by a sub-contractor's breach of contract, such as those with Shipment No 1 at Vlissingen, the company's most experienced accountant, Mr Cruncher, is required to spend half his time dealing with those problems. However, fortunately his five colleagues are not overworked and are able to deal with the balance of Mr Cruncher's work in their ordinary working time. But when further problems arise such as those with Shipment No 2 the contractor decides that Mr Cruncher will be required to spend all his time dealing with those problems. Now his colleagues are no longer able to cope with the balance of his work and so a new accountant, Mr Bean-Counter, is taken on. Being inexperienced, Mr Bean-Counter is assigned relatively menial tasks, none of which has anything to do with the breaches of contract. In those circumstances, in spite of the fact that Mr Bean-Counter was not involved with the problems caused by the breaches, it seems to me that the cost of employing him would have been a direct consequence of those breaches and would therefore be recoverable as damages. I did not understand Mr White to dissent from this. It represents a "thickening" of the head office costs.
- However, Fluor has not advanced any case on such a basis. Although it is of limited relevance, I note in passing that Fluor's profit and loss account for the year ended 31 December 2009 shows that whilst its turnover increased by about 50% over that for the previous year, its staff costs fell by just under £3 million. The staff costs fell again the following year (2010) by over £10 million. Of course, these costs are not confined to those employed at head office, but the figures are not perhaps a promising start for any claim based on an increase in overheads so far as staff costs are concerned.
- The figure of 4% is the product of a calculation by Mr Johnston. He has calculated that for 2009 the project cost of the GGOWL contract was £374.735m (57% of Fluor's overall activity for the year). He has calculated that Fluor's total overheads for the year were about £22m, 57% of which produces a figure of £12.645m - which he allocates to the GGOWL contract. To this figure he has added £1.3m for certain infrastructure project-specific overheads, producing a total of £13.986m of overheads allocated to the GGOWL project. This is about 4% of the project cost of £374.735m. I note that Fluor's total overheads for the following year were assessed by Mr Johnston to be £19.093m (there is no figure available for the total overheads for the year 2008).
- Even if I were prepared to accept Mr Johnston's calculation (and I would be hesitant to do so without knowing how the figure of £44.983m shown as "administrative expenses" in Fluor's 2009 accounts has been reduced to an operational overhead cost of some £22m in Mr Johnston's calculation or having the corresponding figures for the previous year), it seems to me that it forms no basis for a claim against ZPMC in respect of increased head office overheads. The figure of 4% is simply a ratio of one set of costs against another: it tells one nothing about the extent to which the former was increased as a result of breaches of contract by ZPMC.
- Like Forbes J in the Tate & Lyle case, I suspect that Fluor may well have incurred increased head overhead costs, such as telephone bills or IT costs, as a result of the breaches of contract by ZPMC, but I am not prepared to pluck a figure out of the air. I appreciate that it may well be very difficult for Fluor to put forward a precise figure, but in the absence of any figure there is little that the court can do.
- For these reasons, I consider that Fluor has failed to establish the facts necessary to support any claim for overheads.
- ZPMC's counterclaim was to recover the balance of the Warranty Bond, 23,409,750, less "the limited claims that fall outside the settlement" (Opening Submissions, paragraph 560). The bank paid this sum on 21 March 2014, which was the full amount of the bond, following a call made by Fluor on 17 March 2014.
- It is common ground that Fluor must give credit for this amount against any recovery in respect of its claim (as Fluor expressly pleaded). However, there is no agreement about the date on which the currency of the bond, euros, should be converted into sterling. There appears to be no dispute about sterling being the appropriate currency into which the money should be converted.
- The currencies in which Fluor trades are principally sterling and US dollars. It does not usually trade in euros, although that was a major currency of this contract.
- I have been referred to numerous authorities, beginning with the decision of the House of Lords in The Despina R  AC 685, including the decision of Mr George Leggatt QC (as he then was) in Fearns v Anglo-Dutch Paint and Chemical Co  1 WLR 366 and, more recently, the decision of Coulson J in Harlequin v Wilkins Kennedy  6 Costs LR 1201. The first two cases provide guidance on the principles to be applied when the parties suffer their losses in different currencies, usually at different times and where each has a cross claim against the other. The second is said to be authority for the proposition that the court has a discretion to convert a judgment sum into sterling at a rate other than the exchange rate prevailing at the date of judgment.
- However, I agree with Mr Brannigan that the situation in this case is different to the type of situation that arose in those cases. Although ZPMC did not consent to Fluor making a demand on the bond, the effect of it was to provide Fluor with an advance payment on account of its claim. ZPMC did not assert any cross claim against Fluor: its only claim was for the return of the bond money, or the balance of it, in the event that Fluor's claim failed or that it obtained judgment for a sum that was less than the amount of the bond. In this respect, it was on precisely the same footing as an interim payment.
- At the time when Fluor made the call on the bond ZPMC's position was that all Fluor's claims arising out of the welding defects had been settled. Accordingly, ZPMC asserted that it was under no liability to Fluor so that at the end of the day it would recover the whole sum wrongly demanded by Fluor when it called the bond.
- As I have noted, Fluor has always accepted that it would have to give credit for the receipt of the payment of the bond money against any sum finally recovered by way of judgment.
- In these circumstances I consider that the correct approach is to treat the receipt of the sum drawn down under the bond, 23,409,750 million, as a payment on account of Fluor's claim.
- The effect of the receipt of the bond money in March 2014 is that Fluor is entitled to interest on all sums that I have awarded (to the extent that the sums were disbursed prior to the date of the payment of the bond) up to the date of the payment of the bond, namely 21 March 2014.
- In relation to sums disbursed in euros, there is no difficulty because these, together with interest up to 21 March 2014, can simply be netted off against the amount of the bond, euro for euro. However, the problem that arises is that when this has been done there will still be a substantial sum, of the order of about 15 million, remaining from the proceeds of the bond.
- It seems to me that there are two ways of dealing with this. The first, as suggested by Fluor, is to take as a starting point the date of receipt of the bond money as the date for converting the balance of the bond money into sterling and then netting off the resultant sum against the sums awarded to Fluor in sterling. That, I think, would leave a balance outstanding to Fluor which would carry interest until the final date of payment. A separate adjustment would have to be made to give Fluor accrued interest on sums paid in sterling prior to 21 March 2014.
- However, Fluor has a gloss on this argument. It submits that it did not in fact make any use of the bond money until August 2014 (because legal proceedings had been threatened by ZPMC), and so that should be the date on which the conversion from euros into sterling takes place. This submission was supported by evidence given by Mr Johnston in a further witness statement dated 23 January 2018. ZPMC strongly resisted the admission of this evidence as coming far too late. What Mr Johnston said was that when Fluor made the call on the bond its right to do so was immediately challenged by ZPMC, who stated that Fluor was not entitled to the money and threatened legal proceedings. Mr Johnson said that Fluor took this threat seriously and therefore took no steps to use the money for several months. ZPMC protested that all this was a late change of case and an attempt to seek an award of damages for currency losses.
- Irrespective of anything said in the witness statement of Mr Johnston, there has never been any dispute about the date on which the bond money was paid to Fluor or, indeed, that from then on Fluor was free to use the money as it wished (this was specifically asserted by ZPMC at paragraph 32.2 of its skeleton argument dated 29 January 2018). In my judgment, Fluor is entitled to submit that, as a matter of law, the conversion of the bond money from euros into sterling should take place as at the date of receipt of the money, rather than the date of final payment of the balance of the judgment sum. Indeed, it can be said with some force if that the usual date for conversion is the date at which the judgment sum is paid then, by parity of reasoning, in respect of an interim payment the date of conversion should be the date of payment of the interim payment. This is a matter of legal submission, not of pleading.
- In relation to Fluor's alternative case, I am wholly unpersuaded by Fluor's submission that the bond money should be converted into sterling in August 2014, simply because that was when Fluor decided to use it. To permit that would, in effect, to be to allow Fluor to take advantage of fluctuations in exchange rates without ZPMC having any say in the matter. That is not a sound foundation for an award of damages.
- Accordingly, it is unnecessary to go into the merits of ZPMC's submission that Fluor needs permission to advance a case that the relevant rate of exchange should be that prevailing in August 2014 and that such permission should not be granted at this late stage. As I have already indicated, there is no room for a pleading objection to Fluor's case about conversion of the currency taking place at the date of payment of the bond, because none of the relevant facts are in issue. The rest is a matter of law.
- Accordingly, in my judgment the first alternative is to convert the balance of the bond money into sterling as at 21 March 2014, having previously netted off against it the sums already paid by Fluor in euros which it has been awarded in the judgment, together with accrued interest. Once this has been done, the resultant balance in sterling should be netted off against the sums awarded by the court in sterling and paid up to that date. Assuming that this leaves a balance owing to Fluor in sterling, that balance will then continue to accrue interest until final payment. In addition, Fluor should have accrued interest at the appropriate rate on sums paid in sterling prior to 21 March 2014 up to that date.
- The second alternative is to leave the balance of the bond money in euros, then add to it a sum in respect of a reasonable rate of interest up to date of final payment, then at that point convert the total sum into sterling and set it off against the sum awarded to Fluor in sterling (together with accrued interest, as appropriate).
- It seems to me that there are two objections to the second alternative. The first is that it treats Fluor as if it was required to keep the bond money in euros until the final payment of the judgment debt, even though everyone accepts that Fluor was free to use the bond of money as it wished. The second objection is that Fluor is to be treated as having received interest at a rate applicable to a hypothetical company in Fluor's financial circumstances without having any regard to the amount of interest (if any) that it did in fact receive. This might give ZPMC an artificial gain: as it is, the effect of the payment of the bond money stops interest running on all sums paid in euros up to that date, thereby limiting the amount ZPMC has to pay by way of interest. If the balance is then converted into sterling, that balance can then be netted off against the sums already paid by Fluor in sterling and thereby prevent any further interest running on those sums also.
- ZPMC submits that the court must adopt the second alternative because that is the rule: it submits that the court does not have the discretion to order currency conversion on any date prior to judgment (or, perhaps more accurately, the date of payment of the judgment sum).
- In my judgment, the authorities do not go this far. No authority was cited to me which involved either an interim payment or a call on a bond. If the authorities show that the time for conversion should be when the relevant sums are ascertained and paid pursuant to a judgment, I cannot see why the same principle should not apply where there has been an advance payment that is on account of the sum finally awarded: in other words that the currency conversion is done at the time of the payment.
- On the other hand, I regard the judgment of Coulson J in Harlequins v Wilkins Kennedy as clear support for the proposition that, where the losses (by one party only) have been sustained in a different currency, the court does have a discretion to express the judgment sum in sterling and, if appropriate, to make it subject to exchange rates applicable when the losses were incurred rather than at the current rate. I accept that the facts of that case were very different from those of the present case, but I can see nothing wrong with the overriding principle that, in relation to exchange rates, the court should have a discretion to do what it considers to be just and in accordance with the principle of restitutio in integrum.
- For these reasons, so far as currency conversion is concerned my decision is as follows:
(a) The sum due to Fluor in euros, 7,165,740, together with accrued interest, is to be netted off against the amount of the bond, 23,409,750, as at 21 March 2014.
(b) The balance is to be converted into sterling as at 21 March 2014.
(c) The balance of the bond money, in sterling, is to be subtracted from the sum awarded in sterling, £15,033,681.
(d) The resultant balance in sterling is to carry interest at the appropriate rate until final date of payment.
(e) Interest up to 21 March 2014 at the appropriate rate is to be added to the sums disbursed in sterling from the applicable start dates. This amount is to be added to the judgment sum.
(f) The sum awarded in US dollars, $5,893,591, together with accrued interest at the appropriate rate up to the final date of payment, is to be paid in US dollars.
(g) The sums awarded in the other currencies, together with accrued interest at the appropriate rate up to the final date of payment, are to be converted into sterling at the final date of payment.
This approach ensures that the court is not awarding interest on interest which, as ZPMC pointed out, was a consequence (unintended) of adding accrued interest on the payments in sterling at step (c) which I did in the draft judgment which was handed down on 5 February 2018. Since that was an error, I have corrected it.
Interest the rate
- It is accepted that the current practice in the Commercial Court and the TCC, in the absence of any specific evidence to the contrary, is to award interest at 2% over the appropriate base rate (prior to 2008/09 it was often 1% over base, but counsel are agreed that nowadays interest is more usually awarded at 2% over base). That is the rate for which ZPMC contends.
- However, it is common ground that if there is suitable evidence before it, the court is free to displace the usual practice as to the rate of interest and to adopt a rate at which "persons with the general attributes of the [claimant] could have borrowed the money" (see, for example, Shearson Lehman Hutton v Maclaine Watson and Co Ltd (No 2)  3 All ER 723, at 733). However, the court is not usually to take into account the particular borrowing arrangements of the individual claimant.
- Fluor put forward three possible rates of interest:
(a) Fluor Corporation's 2011 borrowing cost (3.375%), which was the rate of interest on a 10 year bond that it issued in 2011.
(b) The borrowing rate which could be achieved by a company in Fluor's position, but supported by a substantial parent with the attributes of Fluor Corporation. This was said to be 5.2% in the US market, and slightly less in the UK market.
(c) Fluor's inter company borrowing rate of 6%.
- It seems to me that options (a) and (c) can be eliminated at the outset. Fluor Corporation is not a company with the attributes of Fluor: it is a far wealthier multinational company quoted on the US stock exchange. By contrast, Fluor's inter company borrowing rate was the result of an arrangement that was peculiar to Fluor, which the authorities say is not an appropriate starting point.
- Accordingly, it seems to me that the choice lies between a rate of 2% over base (subject to discussion as to what that base rate should be for any particular currency) or Fluor's option (b). Fluor's option (b) may be adopted if the court is satisfied that this is a rate which a company with the general attributes of Fluor could have borrowed the money. Failing that, the court will adopt the conventional commercial rate.
- The evidence for Fluor's option (b) is in the second witness statement of Mr Johnston. At paragraph 16, he said this:
"Had Fluor Limited sought itself to borrow in the markets on the basis of a parent company guarantee from Fluor Corporation then it would obviously have benefitted to a substantial extent from Fluor Corporation's own credit worthiness. I have spoken to Fluor Corporation's Treasury Department, which is responsible for bond issuing on behalf of Fluor Corporation (including those identified above) which has confirmed my view that Fluor Limited's cost of borrowing in such circumstances would be very likely to represent the Fluor Corporation rate plus a premium to represent the fact that Fluor Limited rather than Fluor Corporation would be the principal borrower, and the Fluor Corporation guarantee would only be available after unsuccessful attempts at recovery from Fluor Limited. In order to ascertain what this premium might have been, I have been provided by the Fluor Treasury Department with publicly available records (from Moody's, the ratings agency) of average rates payable on bonds issued by borrowers with a credit rating of Baa between January 2009 and now (which I exhibit as Exhibit MRJ 19). This is a rating one tier below that held by Fluor Corporation throughout the relevant period and until August 2017 (namely, A3). Taking the average of the interest payable by such borrowers throughout the period relevant to Fluor Limited's losses (June 2009 to December 2017) equates to a rate of 5.2% which I believe to be a reasonable estimate of Fluor Limited's likely cost of borrowing with a parent company guarantee."
- This evidence was challenged by ZPMC on the ground that the rates taken by Mr Johnston applied to the US only, and not to the UK. ZPMC suggested that Fluor's option (b) goes too far and is "a highly artificial" rate: it submits that 3.375% would be more appropriate if reference to US borrowing was thought to be a correct approach.
- However, Mr Johnston responded with a third witness statement made on 31 January 2018, in which he said that there were "no options for Fluor Limited to borrow at a rate anything like this" (paragraph 10). Mr Johnson then carried out exercise of comparing the yields on 10 year government bonds in the UK and the US (all of which is in the public domain) over the period January 2009 to December 2017. He said that the average difference between the two rates was marginal, about 0.1%. However, if one looks at the figures that he has exhibited, it is clear that from 2009 to the end of 2012 the UK interest rates were generally higher (by about 0.1% to 0.3%), whereas from 2013 to 2017 the US rates were higher (albeit that the variation was wider).
- In the absence of any similar evidence from ZPMC, I see no reason not to accept the evidence of Mr Johnston in relation to interest. However, I would not adopt his rate of 5.2% for the whole period: adopting a broad approach taking into account the two sets of figures for the government bonds, I propose to adopt:
(a) in relation to sums in sterling, a rate of 5.4% up to the end of 2012, and from 1 January 2013 to date of payment, a rate of 5.0%; and
(b) in relation to sums in US dollars, I propose to do the reverse: up to the end of 2012 the rate will be 5.0%; thereafter it will be 5.4%.
- In relation to euros, I was inclined initially to adopt ZPMC's suggestion of the euro LIBOR rate, the only remaining alternative of those canvassed being Mr Johnston's rate derived from Moody's US rates. However, since issuing the judgment in draft Fluor has persuaded me that I should adopt Moody's Baa EUR denominated Bond index. For the reasons given below, I have decided to accept the submission. In relation to the other two currencies - the amounts of which are relatively small, I propose to adopt the Sterling OverNight Index Average ("SONIA") but using the 12 month rate (monthly average, as taken by Mr Ross).
Interest the court's jurisdication
- Two days after I handed down this judgment in draft (on 5 February 2018) ZPMC submitted that there was no jurisdiction to include interest in the amounts to be set off against the payment of the amount of the bond on 21 March 2014, with the result that taking interest into account in the netting off exercise was wrong in principle because, as at 21 March 2014, no proceedings had been started.
- The jurisdiction to award interest arises under s 35A of the Senior Courts Act 1981. ZPMC relies on the decisions of the House of Lords in Sempra Metals v HM Commissioners of the Inland Revenue  UKHL 34, at , and of Langstaff J in R (on the application of Kemp) v Denbighshire Local Health Board  EWHC 181 (Admin): it submits that what was decided in those cases meant in the context of this case - that the effect of section 35A was that there had to be proceedings on foot at the time when the bond monies were paid.
- Section 35A(1) of the Senior Courts Act 1981 provides as follows:
"Subject to rules of court, in proceedings (whenever instituted) before the High Court for the recovery of a debt or damages there may be included in any sum for which judgment is given simple interest, at such rate as the court thinks fit or as rules of court may provide, on or any part of the debt or damages in respect of which judgment is given, or payment is made before judgment, for all or any part of the period between the date when the cause of action arose and-
(a) in the case of any sum paid before judgment, the date of the payment; and
(b) in the case of the sum for which judgment was given, the date of the judgment."
- I do not think that either case cited by ZPMC is authority for the proposition for which it contends. In Sempra Metals, at  Lord Hope said:
"There is still no provision in the Act for debts paid late but before the inception of proceedings. Nor is there provision for compound interest."
In that passage Lord Hope was referring the long running controversy about the power of the court to order interest as damages where a debt was paid late but before the start of proceedings.
- At paragraph 89 of his judgment in Kemp, Langstaff J said that "the requirement that there should be proceedings means that, absent proceedings, there can be no award pursuant to the section". In my judgment, once there are proceedings, the rate of interest and the period (or periods) for and amounts to which it should be applied are entirely at the discretion of the court, subject only to the limitations in subsections (a) and (b). In this case the court is exercising its power to award interest between the date when the cause of action arose and the date of payment of a sum before judgment (in this case, the bond money) or, where appropriate, the date of the judgment. Leaving aside the fact that this is arguably too late a stage at which to raise such a point, I consider that it is without merit.
Interest the rate for sums spent in euros
- In its second post (draft) judgment submissions, dated 9 February 2018, Fluor invited me to reconsider the question of the euro rates of interest (as I have already mentioned). This was opposed by ZPMC (in its fourth post judgment submission). Fluor's primary submission was that I should adopt the same rate of interest for euros as I took for the sums awarded in sterling or US dollars.
- Whilst it is correct that I found that the currencies in which Fluor trades principally are sterling and US dollars, it is equally clear that it was carrying on some of its business in euros for the purpose of this contract. The evidence of Mr Johnston, as I understood it, was concerned with the appropriate rates of interest at which a company in Fluor's position could borrow in the UK and US markets. In order to apply these rates to expenditure in euros, on the assumption that Fluor had to buy euros to make the payments, there would have to be a conversion from euros into sterling at the date when each sum was disbursed. Apart from the fact that I did not understand this to have been suggested, in my view that would not be a satisfactory approach. It seemed to me that the only appropriate course was to take a rate of interest appropriate to the Eurozone.
- However, before doing this I did not invite Fluor to suggest any rate of interest as an alternative to the euro LIBOR rate that had been put forward by ZPMC (although I did take the 12 month rate, not the 6 month rate suggested by ZPMC). Fluor now submits that I should use the equivalent information from Moody's to that used in relation to the sterling rates, namely Moody's Baa EUR denominated bond index which is appropriate for a company with Baa status.
- I am sure that Fluor would have suggested this alternative if I had indicated that I was not inclined to adopt its primary submission that I should use the same rate as that for sterling and US dollars, and so I think that it would be unfair not to permit Fluor to put it forward now. To adopt this rate would be more consistent with the approach that I have taken in relation to sterling and US dollars. As a matter of arithmetic, Fluor submits that this would produce an average borrowing rate of 3.84%. Subject to this being agreed by ZPMC as a figure, that is the rate that I propose to adopt.
- I do not propose to take a similar course with the small sums awarded in Yuan and Canadian dollars. I intended to take the rate I did for purely pragmatic reasons, and Fluor has indicated that it is prepared to accept this (although it submits that adopting a similar Baa rate would be a more consistent and appropriate approach).
Interest the period
- There was a dispute as to the date from which interest should run. For Fluor, Mr Ross has calculated interest using a mid-period convention (that assumes that in each month Fluor incurred the costs paid during that month at the midpoint of each month). At the hearing, Fluor proposed that interest should run from 45 days after the date of the relevant invoice. ZPMC did not reject this proposal out of hand and undertook to consider it; a position has now been agreed.
- However, this approach does not fit so easily with the damages awarded in relation to the counterfactual case. Here ZPMC suggested that the start date for period (C) should be 15 September 2009 and, for period (F), 4 March 2010. By contrast, Mr Ross apportioned the sums attributable to the weather-related delay to the months of October, November and December 2009, because this was the period when the lost days would have been made up. In relation to the counterfactual costs, I indicated that I preferred the approach of Mr Ross and the parties have now agreed the dates from which interest is to run, so I need say no more about it.
- Now that the dates have been agreed (or determined by the court), I will leave the parties to calculate the amount of interest for each of the currencies at the rates I have identified, and to carry out the necessary currency conversion on the assumption that I shall hand down this judgment on 16 March 2018 and will order that the sums awarded to be paid within 14 days thereafter.
- During the week following the issue of the draft judgment on 5 February 2018 I received no less than five substantial submissions from the parties inviting me to reconsider matters that I had decided in that draft judgment or, from the other party in response, opposing submissions that I should do so.
- In considering these submissions I followed the guidance given by the Supreme Court in Re L and Another  1 WLR 634, that is to say to deal with the case justly and without being over-rigid about the circumstances in which I should (or should not) do so.
- I thought that each party was to some extent taking the opportunity to re-argue points that had already been canvassed, but it is in the nature of things with matters such as interest and currency conversion that not all the ramifications of every point can be addressed because some will depend on the manner in which the court deals with others. In these circumstances I was therefore inclined to adopt a rather more generous approach than would ordinarily be appropriate.