Application of loss of profit

Loss of profit is a critical issue within any project. Most contracts contain a provision
to vary the work covered by the contract, this includes omitting work. It may be
necessary to omit work from a contractor as a result of circumstances on site. In the
instance of an omission, it is possible to see loss and expense occurring as well as
loss of profit.
Clearly, if a large amount of work is omitted then the contractor would be faced with a
loss of profit which might prove difficult to earn elsewhere on the project, hence they
could argue an entitlement to loss of profit.
Within a contract the power to omit is limited though. For example, if an employer
decided to take work from one contractor on site and give it to another then that
would constitutes a breach of contract for which the employer would be liable.
This situation was illustrated in Carr v J.A. Berriman Pty Ltd where it was stated:
The clause is a common and useful clause, the obvious power of which, so far as
is relevant to the present case, is to enable the architect to direct additions to, or
substitutions in, or omissions from, the building as planned, which may turn out, in
his opinion, to be desirable in the course of the performance of the contract. The
words quoted from it would authorise the architect... to direct that particular items
of work included in the plans and specifications shall not be carried out. But they
do not, in my opinion authorise him to say that particular items so included shall
be carried out not by the builder with whom the contract is made but by some
other builder or contractor. The words used do not, in their natural meaning
extend so far, and a power in the architect to hand over at will any part of the
contract to another contractor will be a most unreasonable power, which very
clear words would be required to confer.
Claiming
Where a contractor makes a claim for loss of profit he needs to demonstrate that he
would have earned such a profit. This is a difficult task! The calculation should be
based on:
Cost data: Work out what has been spent to date and project further expenditure to
completion deduct this sum from the sum in the contract [for the work] which gives
the profit that would have been earned. This should be compared to the costs and
budget prepared at the start of the tender process. The downside to this approach is
that the cost of work is not always uniform and even a simple task, such as pipe
laying, can become more costly the further away from the plant and material store
the works are undertaken. Similarly steelwork erecting becomes more costly the
higher one needs to crane the components. Therefore such an approach is
subjective to the assumptions made and is open to criticism.
Average profit: Alternatively a claim for loss of profit could be based upon the
average profit earned by the company over the past 3 years as taken from company
accounts. This method has received the support of the courts in Harmon CFEM
Facades (UK) v The House of Commons where a subcontractor lost the opportunity
to undertake a cladding contract and was awarded the profit they might have earned.
In this instance the court was robust and did not allow arguments as to the merits of
earning a profit to distract from the entitlement.
Time in contracts and extensions of time

Time in construction and engineering contracts forms the basis of many disputes. It is
the nearly always the catalyst for loss and expense type claims and the reference to
liquidated damages.
Contracts usually provide the contractor with a fixed period of time, which can be
extended, to complete the works. It is also by implication accepted that a contract
can miss its completion date and complete at some date after completion.
A contract will usually deal with these eventualities, however, there are limits beyond
which a contractor could be faced with the termination of his employment. It is usually
the case that the architect or engineer have to issue a notice which would trigger the
employers entitlement to determine a contractors employment. An architect or
engineer acting as administrator will understand the circumstances and use their
judgement prior to issuing any notice.
Where contracts do not stipulate a completion date, it is possible for employers to
give notice making time of the essence and requiring a contractor to complete by a
stipulated date (see Rickards (Charles) v Oppenheim [1950] 1 KB 616). Where the
contractor fails to perform by that date the employer would be in a position to reject
any further work on the contract.
During a contract an architect or engineer can extend the completion date because
the contract permits and there is an event which entitles the contractor to more time.
In doing so, the architect or engineer will extend the completion date. Where there
are extensions of time granted, and there is an entitlement to loss and expense, it
must be noted that the loss and expense applies to those costs during the period of
delay and not the extended period as shown below.

Figure 1: Timeline
Difficulties can complicate matters where there are concurrent delays. In these
instances there may be two delaying factors that run concurrently. The Malmaison
judgment (in Henry Boot Construction (UK) Ltd v Malmaison Hotel (Manchester) Ltd
[1999] All ER 118; 70 Con LR 32) effectively states that, where there are two delaying
events and one provides an entitlement to and extension of time and the other does
not, then an extension of time should be granted in full. When dealing with such
events it might appear on first impressions rather unjust but that is the current
position; however, this is not shared in other parts of the world. The Society of
Construction Law Delay and Disruption Protocol supports this position that, where
the employer delays the contractor and the contractor is in delay, then the concurrent
delay should not reduce the contractors entitlement to an EOT. This discounts any
apportionment which to many might seem more just.
The Scottish case of City Inn Ltd v Shepherd Construction (City Inn Ltd v Shepherd
Construction Ltd [2010] BLR 473) has often been used to argue that, where 2
concurrent events give rise to a delay and only 1 is a relevant event giving rise to an
entitlement (to an EOT), the contractor ought to be awarded an apportionment of the
delay period. The Walter Lilly case (Walter Lilly & Company Limited and Gils Patrick
Cyril Mackay & DMW Developments Limited [2012] EWHC 1773 (TCC)) provided
that Malmaison applied and that City Inn was inapplicable within this jurisdiction.

When dealing with delays to completion the need to establish the causes of delay is
of paramount importance, as is the evidence which supports the delay. Second, it is
important to establish clearly when the events occurred, the start and finish of any
delay. These facts are often very hard to identify with any degree of precision;
however, it is the very foundation of any claim.
The provisions of the contract must be observed as they provide the entitlement and
in some instances may state what happens if there is concurrent delay.
There are many specialist firms that deal with matters of delay and, if matters are
complex, it is often worthwhile seeking an independent opinion on entitlement.
Another area that provides fertile ground for disputes to arise is when contracts
stipulate a contract duration rather than a commencement and completion date. This
is common in subcontracts where it is often the case that a main contractor does not
known the date upon which a subcontractor will be required because of changing
circumstances on site. Many instances occur where subcontracts commence upon
receipt of a phone call and the subcontract is subsequently disrupted. In such
situations the inability to pin point the start date often leads to considerable difficulty
in assessing the liability of the subcontractor for any delays.