Fluor Ltd v Shanghai Zhenhua Heavy Industries Ltd

In the principal judgment dated 7 October 2016 I found that ZPMC was liable in contract for the cracks in the monopiles (“MPs”) and transition pieces (“TPs”). However, I held that under the terms of the waiver and warranty letters Fluor could not recover the full extent of its losses. ZPMC submits that the effect of the judgment was that the “vast majority” of Fluor’s claim would be excluded.

However, ZPMC did not go so far as to submit that the damages recoverable by Fluor would be nominal or in an amount that could be regarded as de minimis or derisory. In his eighth witness statement dated 5 October 2016, ZPMC’s solicitor, Mr Adam Harris, said that the claim was “likely to remain a substantial multi-million pound dispute requiring careful scrutiny and analysis" (at paragraph 36).

For completeness, I should mention that ZPMC has a counterclaim for the repayment of €23.4 million which was paid to Fluor following a call on a Warranty Bond in March 2014. ZPMC disputes the validity of Fluor’s call on the bond and therefore counterclaims the full sum paid. In these circumstances ZPMC submits that the court cannot be certain that Fluor will recover anything at all from this litigation - in other words, that it might only obtain judgment for a sum less than €23.4 million. In my view, this has no effect on the merits of the claim, either as to liability or quantum, because - since ZPMC disputes Fluor’s entitlement to retain any part of it - it is in effect no more than a payment on account. In order to be entitled to retain any part of that sum, Fluor must prove its entitlement to it in the usual way.

In these circumstances ZPMC’s primary submission was that the costs of the liability trial should be reserved until the outcome of the trial on quantum. Alternatively, ZPMC submitted that its costs of the waiver and estoppel issues should be paid by Fluor.

Fluor’s submission was rather bolder. It said that it was the overall winner in the liability trial and that it should therefore have its costs of that trial, ZPMC having contended throughout that it was not in breach of contract and, in any event, that Fluor’s claim had been settled in its entirety. In fact, ZPMC made an application last year for the waiver and estoppel issues to be determined as a preliminary issue on the ground that it was likely to win these issues and thereby put an end to the litigation. That application was refused, but the court did direct that there should be separate trials of liability and quantum.

Fluor emphasised that at no stage has ZPMC offered so much as a cent to settle the action or made any relevant admissions. By contrast, I was told during the hearing that Fluor had offered to settle for a certain sum of money although, very properly, I was not told at what stage this offer had been made or any of its terms. However, it seems to me that the existence of this offer prevents the court from making any order for costs in ZPMC’s favour at this stage.

Accordingly, the question before the court is whether or not there should be an order for costs in Fluor’s favour and, if so, what order. Although Fluor’s application for costs is opposed root and branch, ZPMC concedes that if I am minded to make any order for costs in Fluor’s favour then it usually follows that there should be an order for an interim payment on account of those costs also. However, in this case ZPMC submits that there should be no order for an interim payment because the unsatisfactory nature of the costs schedule that has been put forward by Fluor makes it difficult to arrive at any realistic figure in respect of Fluor’s costs of the breach of contract issues. ZPMC relies also on the fact that in January 2015 Fluor put forward a costs estimate of £2 - £3 million. (Footnote: ¹)

On this application Fluor was represented by Mr Sean Brannigan QC and Mr Nicholas Bacon QC instructed by Roberta Downey of Hogan Lovells, and ZPMC was represented by Mr Andrew White QC, Mr Sean O’Sullivan QC and Mr Mark Chennells, instructed by Mr Adam Harris of Pinsent Masons.

CPR 44.2 (2)(a) provides that, if the court decides to make an order about costs, the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party, but sub-paragraph (b) preserves the right of the court to make a different order. In Fox v Foundation Piling [2011] EWCA Civ 799, Jackson LJ observed, at paragraph 62:

“There has been a growing and unwelcome tendency by first instance courts and, dare I say it, this court as well to depart from the starting point set out in rule [44.2 (2)(a)] too far and too often.”

CPR 44.4 (4) provides that in deciding what order (if any) to make about costs, the court will have regard to all the circumstances, including:

Some of the factors to be taken into account when considering the conduct of the parties are set out at CPR 44.4 (5), and CPR 44.4 (6) gives examples of types of order that the court may make including, at (f), an order that a party must pay the cost relating only to a distinct part of the proceedings. However, 44.4 (7) provides that before making an order under paragraph (6)(f) the court will consider whether it is practicable to make an order instead for the payment of a proportion of another party’s costs or costs from or until a certain date only.

In relation to an interim payment, CPR 44.2 (8) provides that where a court orders a party to pay costs subject to detailed assessment “it will order that party to pay a reasonable sum on account of costs, unless there is a good reason not to do so". As Mr Brannigan pointed out, there has been a deliberate change in the wording of this rule in that the verb “will” in the passage that I have quoted has replaced the verb “may” in the earlier version of the rule.

Since no offer has been made by ZPMC, there is nothing to prevent the court making an order for costs in Fluor’s favour in respect of the costs of the liability trial or a distinct part of it. However, before deciding what order to make there are two factors that I should bear in mind. First, it is clear that if I consider that the circumstances warrant it I can properly conclude that the costs of the liability trial should be deferred until all the issues relating to quantum have been determined: see Weill v Mean Fiddler Holdings [2003] EWCA Civ 1058; Shepherds Investment Limited v Andrew Walters [2007] EWCA Civ 292. Second, the fact that there has been a split trial of liability and quantum should not affect the decision. In the Mean Fiddler case, Lightman J said, with the agreement of Ward and Tuckey LJJ, at [33]:

“There is much to be said for the view that the incidence of costs should be the same whether or not for case management reasons there has been an order for a split trial and whether or not the order for a split trial was made on the initiative of the claimant or the defendant. If this is so, in the case where there is a split trial and it is left uncertain until conclusion of the trial on quantum whether the claimant will recover more than nominal damages, it may be proper for the trial judge to defer making any order of the costs of the trial of the issue of liability until the final outcome of the action is known. This may be the case whenever the judge considers that there is a real possibility that the outcome of the assessment of damages may affect the merits of the parties’ entitlement to the costs of the issue of liability. If the judge formed the view that it does, he must consider carefully whether justice to the defendant requires him to postpone any decision on costs until the final outcome of the action is known.”

In my view, it is quite clear that Fluor was the overall winner on the issues relating to breach of contract. ZPMC denied any breach and contended in any event that the MPs and TPs were fit for their purpose, but its case on both aspects was unsuccessful. It is true that, following some late disclosure given shortly before the trial, Fluor made allegations that ZPMC’s management knew about the shortcomings in the prescribed UT regime but chose to say nothing to Fluor about it (what became known as “the conspiracy case”) and that that case also did not succeed. However, I do not consider that it added anything of significance to the overall costs of the liability trial because the questions of ZPMC’s knowledge of the causes of the cracking and what steps were required to eliminate it were at the heart of the case relating to breach of contract. I suspect that almost every document that was put to a witness in the course of the evidence would have been adduced in any event, irrespective of whether or not Fluor was running the conspiracy case.

As it was, I held that ZPMC’s junior management in one branch company was aware of the shortcomings of the scanning regime, but did not report that concern up the management chain as I consider it should have done (or, if it did report it, it did not do so in terms that ensured that the message got through). I held that this was a breach of ZPMC’s obligations in relation to workmanship.

But even if some account should be taken of Fluor’s failure on its case relating to ZPMC’s knowledge, it is in my view offset by the counter allegation made by ZPMC that Fluor’s retained inspectors had similar knowledge at a very early stage. That allegation also failed and it clearly added to the costs of the trial, not least because the evidence of two witnesses had to be heard after the conclusion of the main hearing.

There is ample authority for the proposition that a successful party will not necessarily be deprived of some of its costs because it has lost on one or more issues, because in complex commercial litigation that almost always happens: see, for example, HLB Kidsons v Lloyds Underwriters [2007] EWHC 2699, per Gloster J at paragraph 11; and Travellers Casualty v Sun Life [2006] EWHC 2885, per Christopher Clarke J at paragraph 12.

However, if I thought that there was a real possibility that, at the end of the day, Fluor might recover only nominal damages or a sum that could properly be regarded as derisory having regard to the sum claimed and the level of costs, in particular the irrecoverable costs, of bringing the claim, then I would hesitate before making such an order. However, as I have already indicated, ZPMC’s submissions did not go that far. I regard that as a realistic position for it to have taken. In these circumstances, I can see no reason in principle by Fluor should not have a costs order in its favour that reflects its success on the issues relating to breach of contract.

In relation to the costs of the waiver and estoppel issues, the outcome is far less clear-cut. Whilst it is true that ZPMC did not succeed in defending Fluor’s claim in its entirety, I can see that there might be some force in ZPMC’s assertion that it has excluded the vast majority of Fluor’s claim and was therefore the substantial winner in relation to the waiver and estoppel issues. However, the extent to which that assertion may be correct is not something that I can determine at this stage.

In my view, the only appropriate course in relation to the costs of the waiver and estoppel issues is to reserve them until the outcome of the quantum trial. Accordingly, so far as those costs are concerned, that is the order that I shall make.

However, before I make any order that Fluor should have the costs of the issues relating to breach of contract, I must consider whether or not I can do justice by ordering ZPMC to pay a proportion of Fluor’s costs of the liability trial or whether I should order ZPMC to pay the costs relating to a particular period. In my view, the latter is not a realistic option in this case. However, the former course does merit consideration.

Fluor’s breakdown of its costs provides no information as to how those costs have been split between the common issues, the breach of contract issues and the waiver and estoppel issues. So far as the solicitors’ costs are concerned, it is simply a list of fee earners showing the hours spent and the charging rates. There is then a separate list of disbursements, such as counsels’ fees, experts’ fees and other disbursements (such as translation and transcription fees).

ZPMC is in a rather better position. For the purpose of the trial its legal team was effectively divided into two separate cost centres, so that it is able to be rather more precise about the apportionment of its costs as between the breach of contract and the waiver and estoppel issues. Of total costs of about £8.5 million, ZPMC says that about £4.5 million was attributable to the waiver and estoppel issues and about £4 million to the breach of contract issues.

However, I do not consider that this breakdown can be taken at face value because it takes no account of common costs: that is to say, the costs of that proportion of the evidence, both oral and documentary, which can properly be said to be relevant to both issues. For example, the construction of the waiver and warranty letters is an exercise that has to be carried out against the background of the factual matrix. Further, the waiver and estoppel issues had to be considered against the background of what happened, the knowledge of the parties and any shared understanding.

But the extent of the common costs is to a significant extent dependent on the period of time during which the events relevant to the breach of contract issues, on the one hand, and the waiver and estoppel issues, on the other hand, took place. In terms of breach of contract and, in particular, the issue of fitness for purpose, the relevant period was from about mid 2008 to about October 2009. So far as the waiver and warranty issues are concerned, the crucial events took place between about May 2009 (when the possibility of extensive transverse cracking became apparent) and June 2010 (when the waiver and warranty letters were signed, although subsequent events also fell for consideration).

For these reasons, I do not consider that ZPMC’s breakdown can be considered wholly accurate. Doing the best I can, on the basis of my assessment of the material produced during the trial, I consider that the common costs probably represent about 20% of the whole. This would mean, therefore, that in relation to ZPMC’s costs, the balance of 80% would have to be apportioned between the breach of contract issues and the waiver and estoppel issues in the ratio 4:4.5 (assuming that the common costs were equally divided between the two).

So far as Fluor’s case is concerned, a substantial amount of time at the trial was taken up with the evidence that was put before the arbitrators, both oral and in witness statements. So, by comparison with ZPMC’s breakdown, I consider that a larger proportion of the (non common) costs of the trial should be attributed to the waiver and estoppel issues to which this evidence was relevant. Although Fluor incurred very substantial costs in relation to experts - just under £800,000 - a proportion of those costs are attributable to experts who were not called at the trial.

Taking a broad brush, which is all I can do, I consider that Fluor’s costs should be apportioned as follows: common costs - 20%, waiver and estoppel issues - 45%, and breach of contract issues - 35%.

I am in no position to assess the amount of Fluor’s overall costs of the liability trial, and so those costs will have to go to detailed assessment on the standard basis if they cannot be agreed. I consider that it will be less costly and time consuming to assess Fluor’s overall costs of the liability trial, rather than to assess the costs of the breach of contract issues alone.

In these circumstances, it seems to me that the appropriate order is that ZPMC should pay 35% of Fluor’s costs of the liability trial. However, as an alternative, I would be prepared to make an order that Fluor should have its costs of the breach of contract issues - if, but only if, both parties agree that that would be a more pragmatic solution.

Either form of order will have to be the subject of a detailed assessment and so the court is required to make an order for an interim payment, unless there is good reason not to do so. ZPMC says that there are good reasons for not making such an order.

First, ZPMC refers the court to the marked disparity between the costs estimate that Fluor put forward in January 2015 (£2 - £3 million) and its current estimate of costs in the sum of £8.2 million. ZPMC says that, since Fluor had effectively run the case once before, it should have been able to form a reliable assessment of its costs: the fact that its costs are now said to be about three times greater than the estimate raises serious questions as to the reasonableness of those costs.

Second, ZPMC submits that Fluor had the advantage of having been involved in the arbitration against GGOWL and therefore much of its case was already prepared. For ZPMC, by contrast, this litigation was new territory. In addition, ZPMC says that it bore the brunt of the costs of translation because few of its witnesses spoke English and virtually all of its internal documents were in Chinese and had to be translated into English. In these circumstances it submits that it would have expected Fluor’s costs to be substantially lower than ZPMC’s costs.

On the other hand, Fluor also had substantial costs of translation because it had to have ZPMC’s internal documents translated before it could appreciate and assess their significance. I note that it claims over £1 million in respect of “paralegals/translators”, and that figure does not surprise me. Further, Fluor was the claimant and a claimant’s costs are usually greater than those of a defendant.

In these circumstances, whilst I am prepared to accept that Fluor may well recover significantly less than the amount of the costs claimed in its schedule (although this is not a prediction that this will prove to be the case), it is plain that it must have incurred very substantial costs in order to mount a claim of this size and complexity. Accordingly, I see no good reason for not ordering an interim payment on account of Fluor’s costs.

In relation to its application that it should have the whole of its costs of the liability trial, Fluor submitted that there should be an interim payment of £6 million, slightly less than 75% of its total costs. I regard this proportion as unreasonably optimistic.

The amount of any interim payment is to be “a reasonable sum". That does not necessarily mean, as Christopher Clarke J explained in Excalibur Ventures v Texas Keystone [2015] EWHC 566 (Comm) “a fair irreducible minimum”. He said, at [23]:

“What is a reasonable amount will depend on the circumstances, the chief of which is that there will, by definition, have been no detailed assessment and thus an element of uncertainty, the extent of which may differ widely from case to case as to what will be allowed on detailed assessment. Any sum will have to be an estimate. A reasonable sum will often be one that was an estimate of the likely level of recovery subject, as the costs claimants accept, to an appropriate margin to allow for error in the estimation. This can be done by taking the lowest figure in a likely range or making a deduction from a single estimated figure or perhaps from the lowest within the range if the range itself is not very broad.”

Adopting a broad brush appraisal of the figures set out in Fluor’s costs schedule, and assuming them to be correct, I do not consider that the court can safely assume that the costs attributable to the breach of contract issues will have exceeded about £2.9 million (Footnote: ²). Quite by chance, or perhaps not, this happens to coincide almost precisely with my overall assessment of the costs attributable to the breach of contract issues as 35%. But this, of course, assumes that the figures in the schedule are reasonable and will be recovered in full.

As I have already indicated, I consider that the 25% reduction proposed by Fluor to reflect the reduction on a detailed assessment is too little. For the purpose of this application I propose to err on the side of caution and reduce my figure of £2.9 million by about 40% to reflect the inherent uncertainty in the figures and the points made by ZPMC.

Accordingly, I consider that the appropriate amount to order by way of interim payment on account of Fluor’s costs of the breach of contract issues is £1.75 million. That sum is to be paid by 4 pm on 28 October 2016.