Australian Construction Law Newsletter

The Two Hudson Formulas

- Philip Davenport

Issue #18 14

So far as concerns the profit element, Hudson contin-ues, "There is no doubt that satisfactory evidence on thesematters is necessary." Perhaps it is on account of thesecaveats that proponents of the Extra Cost Formula playdown the profit aspect ofthe Hudson Formula and empha-

a loss that has already been proved. An example of thedifference is illustrated by comparing a Canadian case (3),where the Hudson Formula [used as a Lost Chance For-mula] was acceptedwhen loss ofincome had already beenproven, with a United States case (4) where the claimanttried unsuccessfully to use the Eichley formula [which isdescribed inPrinciples andPolicies atp.128 as an identicalformula] as an ExtraCostFormula toprove an entitlement.In that case no loss of income or loss of the opportunity toearn income was proved.

There seems to be no dispute that the Hudson Formulawas 'put forward for the first time in the tenth edition ofHudson in 1970' (5) At p. 599 of Hudson the formula is:

Hudson at p.598 says " ... it is the practice of mostcontractors of any substance in major contracts, aftermaking their best estimate of the prime cost of the wholeproject, to add a singlepercentage thereto for both [the off-site overheads, usually known as 'Head Office Over-heads', and profit]". Later on p. 598 Hudson refers to apercentage of the prime cost. It is this single percentagethat is the "H.O.l Profit Percentage" in the formula. (6)

Hudson says at p.598 "Other things being equal, thecontractor's loss from an extended contract period mustbe a proportionate extension of this percentage, and theloss calculated in this way is a real loss ... ".[emphasisadded]. Itison this proposition that theExtraCostFormulais based. On the next page Hudson adds caveats in respectof the profit element in the Formula but omits to say thatcaveats should also apply to the off-site element in theFormula. The caveats applying to the profit element arethat:

1. " ... theprofitbudgettedfor by the contractor inhis prices was in fact capable of being earnedby himelsewhere had the contractor been freeto leave the delayed contract at the propertime";

2. " ... the profit percentage was a realistic one atthat time" [Hudson presumably means at thetime of tendering] ;

3. "... there was thereafter no change in themarket, so that work of at least the sameprofitability would have been available to himat the end of the contract period" .

This was to have been simply a critique of the HudsonFormula but in researching the subject, it becameapparent that there are several different formulasmasquerading as the Hudson Formula.

They fall into two categories which I will call the:1. Extra Cost Formula;2. Lost Chance Formula.

The former appears to have its origin in the proposi-tions to be found at pp. 597 to 599 of Hudson (1). InPrinciples and Policies (2) the author of Hudson, DuncanWallace placed such limitations and qualifications on theapplication of the Hudson Formula that it took on a quitedifferent complexion. The Lost Chance Formula is basedon the Hudson Formula as reinterpreted by Principles andPolicies.

The essential difference between the formulas lies inthe alleged use which can be made of them. The purposeof this paper is to point out that whichever version of theHudson Formula is used, it has no basis in law or logic.

Proponents of the Extra Cost Formula argue that as aconsequence ofdelay caused by the Principal the contrac-tor is entitled to an extra amount for off-site [head office]overheads, sometimes called 'unfunded overheads', andthat the formula can be used to calculate the entitlement.As if the Hudson Formula were a legal maxim, they quoteit as authority. Hudson's Building and Engineering Con-tracts is a respected text and at p. 598 it does say:

Other things being equal, the contractor's loss froman extended contract period must be a proportion-ate extension ofthis percentageofhis contract sum,and the loss calculated this way is a real loss ...[emphasis added].

However, this is not a proposition for which Hudsongives any authority and it lacks the qualifications made inPrinciples and Policies. In State of South Australia vFricker Carrington Holdings [1985] 3BCL72 BollenJ.inthe Full Court of South Australia said of the HudsonFormula, "It is not a formula in a statute or in a regulation.One cannottake a formula saidby a textwriter to be usuallyused and to assert that arbitrators must use it."

Proponents of the Lost Chance Formula argue thatdelay by the Principal prevents the contractor from utilis-ing labour and resources [tied up in performance of thedelayed contract] to earn income for the contractor fromother sources. They say that the Lost Chance Formula canbe used to evaluate this loss. This is consistent with the useof the Hudson Formula as contemplated in Principles andPolicies. The Lost Chance Formula cannot be used toprove a lost chance of earning income but merely toevaluate the lost chance which has otherwise been proven.

The Extra Cost Formula is used in an attempt to provea loss while the Lost Chance Formula is used to evaluate

H 0 IProfit Percentaie x Contract Sum x100 Contract Period

[e.g. in weeks]

Periodof delay

[in weeks]

Australian Construction Law Newsletter Issue #18 15

sise the off-site overheads aspect, even to the extent ofaltering the terminology in the Hudson Formula.

An examplemay serve to illustrate. Note theversion ofthe Hudson Formula appearing in two papers by D.S.Jones"Legal Basis for Extension of Time Claims and Quantifi-cation of Delay Costs" in [1988] 7 ACLR 8 at p.23 and in"Subcontractors' Remedies and Liabilities for Delay" in[1989] 5 BCL16 at p.42.

Note how "Off-site overheads Percentage" has re-placed "H.O.lProfit Percentage" as the first item in theformula. The word 'Profit' has disappeared. Jones says "Inthe preparation of the tender it is common practice for thecontractor to make the best estimate of the prime costs ofthe whole project and to add a sum as representative of therelevantportion ofthe off-siteoverheads. The contractor'sloss relating to ofT-site overheads consequent upon adelay is primafacie a proportionate increase in the portionso applied." [emphasis added].

Jones is apparently influenced by Hudson's originalexplanation of the Formula before it was redefined inPrinciples and Policies. Jones appears to consider that theFormula calculates an actual loss of overheads as distinctfrom the quantification of the loss of the opportunity toearn money. I have categorised this version of the HudsonFormula as an Extra Cost Formula.

In Principles and Policies, while not specifically resil-ing from the proposition that"Other things being equal, thecontractor's loss from an extendedcontractperiod must bea proportionate extensionofthis percentageofhis contractsum, and the loss calculated in this way is areal loss ..."DuncanWallace is much more guarded in what he says. Atpp.116 - 117 Duncan Wallace redefines "Head OfficeOverheads" by limiting them to costs "which are notincurred specifically and exclusively for the contract, andwhich will not be increased or reduced by the course ofevents occurring on the contract, or by its profitability orinternal economics.... [e.g.] the salaries of directors andheadoffice personnel, the maintenance and servicechargesorrents ofheador area offices, higher managementemolu-ments of all kinds, and company financing and pensionobligations ... The fundamental characteristic is that thisexpenditure will neither increase nor decrease as a conse-quence ofdelay, or anything else, occurring on thecontractin question."

So far as concerns "profit" in the formula, in Principlesand Policies Duncan Wallace says"... the profitability ofthe particular delayed contract will not be of direct rele-vance to the calculation". he says 'It will be the hypotheti-cal profit which the contractorganisation might have beenexpected to earn elsewhere, had completion not beendelayed." Duncan Wallace at p.118 draws an analogy to a'profit earning machine' .

Purporting to rely on what is said in Hudson atpp. 598-

Off-siteoverheadsPercentaie

100%

x Contract Sum x Period of DelayContractPeriod

599 some contractors have argued that to apply theformula the contractor had only to prove the single per-centage which the contractor used when tendering. How-ever, it is apparent from Principles and Policies that toapply the formula, the figures and percentages used for thedelayed contract are irrelevant and that the contractorwould have to prove the contribution to 'fixed overheads'and the 'hypothetical profit' which the 'profit earningmachine' would have made were it not for the delay. Theapparent usefulness of the formula immediately evapo-rates.

Now consider the influence which the redefinition ofthe Hudson Formula in Principles andPolicies has had. D.Byrne QC in "The Prolongation Costs Claim" in [1988] 4BeL 181 atp.187 calls the following the Hudson Formula:

Head office % x Contract sum x Weeks ofdelay = Overhead100 Contract period claimed

[weeks]

Byrne makes reference to Principles and Policies andwas obviously influenced by Duncan Wallace's redefini-tion of the Hudson Formula.

Byrne says " ... in the Hudson Formula it is necessaryto adopt a ratio representing the percentage that headoffice overheads bear to total outgoings"[emphasisadded]. At p. 189 Byrne says " ... this article prefers tocharacterise the claim as one for the lost opportunity toearn a contribution towards overheads from otber proj-ects." Byrne says that presumptions on which thecontractor's loss is predicated include that the delay incompletion has prevented the contractorfrom undertakingfurther work and "This will require proof. If the construc-tion industry suffers such a down-tum that there is no workavailable at the original completion date then clearly noloss is suffered."

Byrne sets out in some detail the matters which thecontractor must prove, including "That the nature of thecontractor's business is such that it was not reasonable orpractical for him to have obtained extra work during thedelay period." Byrne says, "The loss is in truth the loss ofopportunity to make a profit from other projects whichcannot be undertaken during the period of the delay."

In Principles and Policies Duncan Wallace at p.130says:

... it follows that as a matter of first principle, thatif the contractor's enterprise was in a position totake on any available amount of work during thedelay period, so that it did not need the delayedcontract organisation to do so [as for example, inthe case of some contractors who operate almostentirely through sub-contractors, or where the en-terprise had considerable spare resources and ca-pacity during theperiodofdelay], or if, conversely,no work was available at the time due to the state ofthe market, then no claim at all would be justifiedunder this head, whatever formula was used, ...Someevidence will therefore, be necessary to show... that the detention of the contract organisation

Australian Construction Law Newsletter Issue #18 16

[plant, key men, working capital, etc.] imposed astringency or restriction preventing the enterprisefrom taking on new work until its return.

The Hudson formula promoted by Byrne is the LostChance Formula. Now let us look at two examples of theExtra Cost Formula.

K. Hinds in "Claims for Extension ofTime" in [1989]5 BCL246 at266 calls the following the Hudson Formula:

Note how Laan also has amended the Hudson Formulaand it now does not mention 'profit'. Laan at p.24 says,"When the contract period is extended or prolonged, thatcontract again has to bear its fair share of the company'soverheads costs during the extended period. Hence, ifand to the extent that the extension of the contract periodis due to circumstances for which the contractor is entitled

Hinds' attempt to explain the logic behind the HudsonFormula shows the confusion which exists in the construc-tion industry.

H. Laan in "Delay Claims - An Alternative Approachto Calculating Head Office Overheads" in [1990] 14Australian Construction Law Newsletter 23 at p.26 saysthat the following is the Hudson Formula:

toclaim~, and as company overheads by definitionconstitute a 'cost', then it is necessary to find a means ofcalculating the appropriate level ofcompany overheadsattributable to the compensable extended contractperiod."Iemphasis added].

Like Hinds and Jones, Laan is a proponent of an ExtraCost Formula but Laan proposes a different formula toreplace the Hudson Formula. Nevertheless it is still anExtra Cost Formula.

Dorter and Sharkey in Building and ConstructionContracts in Australia, Law Book Company, Sydney,1990 at p.7192 merely set out the formula as in Hudsonand say, "There are even some fairly well-recognisedformula for delay cost claims. First, the Hudson formulacould be said to be the most readily recognisedin Englandand Australia for calculating off-site overheads andprofit.Nonetheless, the formula is far from perfect ...". Dorter andSharkey make no distinction between costs and the loss ofan opportunity.

The attraction of the Extra Cost Formula is that wereit to be accepted by the court the claimant would not haveto prove that, but for the delay, the contractor would havebeen able to earn income elsewhere sufficient to provide acertain level of return over and above direct costs. Thedifference between direct costs and total income fromcontracting is the amount available for off-site overheadsand profit. In view of the extent of proof necessary toestablish the applicabilityofthe Lost Chance Formula, theFormula becomes irrelevant. Once prevention and loss ofincome have already been proved, the Lost Chance For-mula is not necessary to prove the amount of the loss.Moreover, for the reasons discussed below, the formulawould not apply in many cases where a contractor wouldnevertheless have an entitlement to recompense for loss ofincome.

Where the claim is not made under a provision of thecontract but for breach ofcontract, the question ofremote-ness arises (8). Later I will demonstrate that frequently'loss of a chance' is too remote to be recoverable asdamages.

If a contractor attempts to use the Extra Cost Formulato demonstrate or quantify an alleged actual extra cost,then it is easy to show that the Formula does not demon-strate or quantify an actual extra cost. Although in Hudsonat p.598 Duncan Wallace refers to a "real loss", in Prin-ciples and Policies he makes it clear that the Formula isonly intended to value the loss of a chance. In Principlesand Policies at p.132 after describing the Hudson Formulaand the Eichley Formula, Duncan Wallace says, "Theobjectof all these formulae is to reach a fair estimate of aparticularcontractorganisation's profit and fixed overheadpotential earning capacity at the beginning of the periodofdelay." At pp.127 and 128 after describing the applica-tion of the Hudson Formula Duncan Wallace says of theresult, "That figure can then be applied to any period ofdelay for which the owner is legally responsible, and thefinal result will represent the total return obtainableelsewhere had the contractornotbeen delayed."[emphasisadded].

Period ofDelay

ProlongationPeriod[in weeks]

Percenta~e x Contract Sum x100 Contract Period

Off-siteOverheadsLoss forPeriodof delay

Note how the Hudson Formula has been amended andthat the word 'profit' no longer appears. Note how theformula purports to give "Off-site overheads Loss", notthe value of the lost chance to earn income. Hinds says atp. 265 " ... the basis of claim logic is that there would be areduced amount ofdirect costs to which off-site expensescan be charged, that is unabsorbed overhead."

In "Claims: Preparation - Presentation - Negotiation"in [1990] 6 BCl 252 at p. 253 Hinds says "A short cutmethod ofcalculating overheads is to use the Hudson orsimilar formulae." [emphasis added]. At p.254 Hinds says"Obviously there are usually quantifiable off-site over-heads but, in my view, for payment to be received, onemust show that off-site overheads are:

First, a cost and not something that would haveoccurred anyway (7) irrespective of the difficul-ties that arose [this may not apply when damagesare being claimed];Secondly, if direct proof from cost ledgers can notbe readily dissected then use of a general formula,such as Hudson, is shown to be appropriate in yoursubmission."

Company Overheads x Contract Sum xExpressed as % of Contract PeriodTotal Company

Billings

Australian Construction Law Newsletter Issue #18 17

Why is the Hudson Formula used? The Formula isusedby contractor's in an attempt to avoid the necessity forproofofloss (9). As can beseen from the various books andpapers that promote the use of the Hudson Formula,contractors might be excused if they believe that theFormula can be used to prove claims. As will appear fromthe cases cited below, the Formula has apparently beenused by some arbitrators but precisely how is not clear.Duncan Wallace's claim at p.128 of his Principles andPolicies that "There has been no reported case of theformula being rejected or criticised in the U.K. or Com-monwealth ..." is no longer true (10).

In the eventofwrongful delay caused by the Principal,to what is the Contractor entitled? If the claim is made onthe basis of a clause in the contract providing for extraremuneration fordelay, then thequantumofthecontractor'sentitlementdepends upon the interpretation ofthe contractprovision.InFinnegan vSheffieldbelow it seems that 'lossand expense' was held to include loss of a chance to earnincome. If the claim is made in tort then othermatters arisewhich are beyond the scope of this paper, in particular,with respect to liability for economic loss.

If the claim is based on breach of contract then thecontractor's entitlement is to damages. The starting pointis Robinson v. Harman [1848] 1 Exch 850 where BaronParke formulated the classic statement:

[w]here a party sustains a loss by reason ofa breachof contract, he is, so far as money can do it, to beplaced in the same situation, with respect to dam-ages, as if the contract had been performed.

There is no entitlement to any moneys unless a provenloss has been sustained. This is the first rock on whichproponents of the Extra Cost Formula founder. A goodexample is theBerleyIndustries casebelow. Proponents ofthe Lost Chance Formula don't founder on this rockbecause they do not claim that the formula has any appli-cation until loss has been proven.

Take, for example, a dredging contractor who has onedredge and works 365 days a year, work always beingimmediately available whenever one contract ends. Nowassume that the contractor's directcosts [labour, fuel, etc.]are $8,000 a day and that the contractor invariably winscontracts at a rate of $10,000 per day. According toHudson, the contractor's "H.O.IProfitPercentage" for thepurpose of the Hudson Formula is 25%. Now assume thatin the course of a 10 day contract for a Principal, thePrincipal in breach of contract causes a delay of 2 days.

The contractor's loss ofincome is of$10,000 a day for2 days. The Principal's breach of contract has not causedthe contractor to incur the direct costs [$8,000 per day].These would have been incurred whether ornot the dredgewas working. Subject to giving a credit for any saving [e.g.in fuel] while the dredge is not being used, the contractor'sdamages are $10,000 per day of the delay, a total of$20,000.

In this particular example, subject to correcting thepercentage the Hudson Formula would arrive at the sameresult but by a round about method. The Hudson Formula

presupposes that the Principal will pay the contractor anamount equal to the direct costs [in this instance $16,000].The Formula then endeavours to measure the loss ofincome over and above so much thereof as is reimbursedby the Principal's payment of direct costs. The Formulawould give us:

~ x 100.000 x 2 = $5,000100 10

When the $5,000 is added to the directcosts of$16,000it will be seen that the contractor would make a profit of$1,000 from the delay.

This highlights the refinement made by Duncan Wal-lace in Principles and Policy. Whereas in Hudson atp. 598DuncanWallace spoke ofapercentage added to the 'primecost' [direct costs], Principles and Policy would make thepercentage 20%. The difference between the direct costs[$8,000 per day] and the income [$10,000] per day as apercentage of the income is 20%.

The Formula now gives us:2Q x $100,000 x 2 = $4000.100 10

which when added to the direct costs would equal theloss of income of $20,000. It can be seen that even whencorrection is made for the ambiguity in the two possiblepercentages, the Hudson Formula is a round about andcumbersome method of arriving at the loss of income.

Moreover, the proponents of the formula say that itonly works if the contractor can prove that work at thesame rate of $10,000 per day is available. Obviously, thecontractor still loses income even ifthe available work willreturn less than $10,000 per day. The contractor who wasrelying upon the Hudson Formula to prove the loss ofincome may well miss out. A contractor would be betteradvised to eschew all reference to the Hudson Formula andsimply prove the actual income lost.

Now let us assume that the dredging contractor hasperiods when the dredge is idle because there are nocontracts or times when to continue to win contracts, thecontractor must reduce the margin of $2,000 per day.Hudson atp.599 says that the Formula assumes 'that therewas thereafter no change in the market, so that work of atleast the same general level of profitability would havebeen available (11) ... at the end of the contract period."andcontinues 'There is no doubt that satisfactoryevidenceon these matters is necessary."

This means that unless the dredging contractor is abletoproduce satisfactory evidence that butforthePrincipal'sbreach ofcontract, the contractor would have been able toearn $10,000 per day, the contractor could not say that theHudson Formula has any application. At p.127 of Prin-ciples and Policies Duncan Wallace again points out theneed for the contractor to produce evidence that' a compa-rable return will be capable ofbeing earned by the contractorganisation upon completionofthe contract, so thatdelayin freeing that organisation for new work will, to thatextent, reduce the returns obtainable elsewhere by the con-tractor."

Australian Construction Law Newsletter

Assume that a delay on one contract delays the com-mencement ofor disrupts the progress of another contractand means that there are 'unabsorbed off-site overheads'(12) during the period of the delay, but the delay does notprevent the contractor from taking on any available work.In that event the contractor's damage would not be loss ofincome [it may be postponed but it is not lost] and pre-sumably the proponents of the Lost Chance Formulawould not argue that it applies. However, the proponentsof the Extra Cost Formula would argue that their formulaapplies.

Now is a convenient time to raise another aspect ofcontract law and that is that the party in breach is not liablefor unduly remote consequences of a breach. The startingpoint is the famous statementofBaron Alderson in thecaseof Hadley v Baxendale:

[w]here two parties have made a contract whichone of them has broken, the damages which theother party ought to receive in respect of suchbreach ofcontract should be such as may fairly andreasonably be considered either arising naturally,Le. according to the usual course of things, fromsuch breach of contract itself, or such as mayreasonably be supposed to have been in thecontemplation or both parties, at the time theymade their contract, as the probable result orthe breach or it.

This is generally known as the 'rule in Hadley vBaxendale'. The words emphasised are frequently de-scribed as the second limb of the rule.

Before the question ofwhether the loss was too remoteto be recoverable, there is question is whether any loss ofincome did in fact arise from the breach ofcontract by thePrincipal. If the delay has not prevented the contractorfrom earning any income then loss of income is not a headof damage. Nevertheless, the direct costs consequentialupon the delay may fairly and reasonably be considered toarise from the delay. If the delay has caused the contractorto lose income and the income would exceed the directcosts, the contractor may prefer to try to recover the loss ofincome.

In some types ofbusiness it may be that loss ofincomewould arise naturally from a delay, thereby falling withinthe first limb ofthe rule in Hadley vBaxendale. However,in the construction industry where contracts are generallydependant upon the success of tenders, it is not infrequentfor there to be gaps between contracts and for there to beno actual loss ofincome as a consequence ofa delay. In thecase of a large contracting organisation, income is morelikely to depend upon the success or otherwise of tendersthan upon the availability of the particular personnel andplant tied up on the delayed contract.

That raises the second limb of the rule in Hadley vBaxendale. Can it be said that at the time the contract wasmade, it was within the contemplation of both parties thataprobable consequence ofbreach ofthe contract would bethat the contractor would lose income If the answer is"No", then the loss of income is too remote to be recover-

Issue #18

able. Loss of a particular contract of which the Principalwas unaware would be too remote (13).

Recoverability of loss of income will depend firstlyupon income in fact being lost as a consequence of thePrincipal's breach and secondly upon the actual or pre-sumed knowledge of the parties at the time of the makingof the contract.

Now suppose that the dredging contractor is a largecompany engaged in a number of different activities andwith numerous contracts going at anyone time. Thecompany would have many employees and would recruitand retrench staff as the work load required and wouldsubcontract out much work. Would the delay on onecontract prevent the contractor from earning any income?Would the contractor have to forego tendering for anyparticular contracts because of a delay on one contract. Ifso, is it the first days' delay that prevents the contractorfrom tendering for other contracts? The contractor wouldhave difficulty in demonstrating precisely when the con-tractor was prevented from earning income elsewhere.Frequently the delay alleged by the contractor is a combi-nation of a number of small individual delays, none ofwhich on its own could be said to have prevented thecontractor from undertaking other available contracts. Inthat event, the contractorwouldnot be able to show that thecontractor was prevented from taking on other work.

This an another example of where, in the absence ofany 'prevention' the proponents of the Lost Chance For-mula would not seek to apply it but the proponents of theExtra Cost Formula would presumably seek to argue thattheir formula applies to the sum of the delays.

Itcouldnotbe said that itwas within the contemplationof the parties that a delay by the Principal would cause thecontractor to fail to tender for any particular contract. Thatwould be too remote (14).

It will be a rare instance where it can be demonstratedwith certainty that other work would have been availableto the contractor but for the delay. It will usually be achance that other work would have been available. How isthe chance evaluated? If there was a fifty/fifty chance thatbut for the delay the contractor would have earnt incomefrom another contract using the resources tied up in thedelayed contract, is the contractor entitled to 100%, 50%or none of the lost income? It seems that the answer is'none' .However, ifthe contractor were to satisfy the courton the balance ofprobabilities that there would have beenavailable work, even though it is a 51/49 chance, thecontractor is entitled to 100%. I willnot explorefurther thisfascinating topic but refer the reader to the recent HighCourt decision in Malec v Hutton and the discussion in 64ALJ9.

Reported CasesI propose now to discuss three cases in which the

Hudson Formula has been raised and one in which asimilar (15) formula has been rejected.

Ellis-Don Limited v The Parking AuthorityofTorontois a 1978 decision of a single judge in the Supreme CourtofOntario. It is reported in [1987] 6ACLR1 and 28 Build.

18

Australian Construction Law Newsletter Issue #18 19

LR 98. O'Leary J. said:There was ample evidence tendered before me thatthe men tied up for an extra 17 weeks through thefault of the defendant could have been readilyemployed elsewhere and could have continued toearn overhead and profit for the plaintiff in theamount of $2,445 per week....

If a contractor is entitled to damages for loss ofincome to coverheadoffice overheads, why shouldhe not also beentitled to damages for loss ofincomethat would result in normal profit. ...

That is not to say that the plaintiffwould have beenentitled to claimthe lost profit on a contract it couldotherwise have hadifsuch acontractwas lost by the17 week delay. It is one thing to say that the partieswhen the contract was entered into should havecontemplated that there was a real dangeror seriouspossibility that staff tied up by the defendant's faultbeyond what would have been the date of comple-tion would be unable to earn normal profit andoverhead for the plaintiff elsewhere. It is quiteanother thing to say the parties should have con-templated that the profit from a particular contractwouldbe lost becauseofdelay incompletioncausedby the defendant. There is no claim in this case forloss ofprofit from any particular contract that waslost, butI feel itworthwhile to make the distinction.

The case concerned a building contract. Commence-ment of work was delayed because the Principal failed toget building permits. The contractor proved that if super-visory engineering and managerial staff had not been tiedup for an extra 17 weeks on this project, they could havebeen earning not only their salaries but also off-site over-head and profit for the contractor. Although reference ismade to the Hudson Formula, the awardoflost income wasnot dependant upon the Formula or its application. Thecase was a case of income lost as a consequence ofbreachof contract. The case cannot be taken as indicative ofjudicial approval of use of the Extra Cost Formula but itcouldbe said to be an exampleofthe applicationofthe LostChance Formula.

Now compare the case of State ofSouth Australia vFricker Carrington Holdings Pty. Ltd. [1985] 3 BCL 72where the Hudson- Formula is discussed in the context ofa claim, not for loss of income as in Ellis-Dona, but for off-site overheads. Bollen J. in the Full Court of the SupremeCourt of South Australia said of the Hudson Formula, "Itis not a formula in a statute or in a regulation. One cannottake a formula said by a text writer to be usually used andto assert that arbitrators must use it. If this matter isreconsidered consistently with my opinion the arbitratorsshould not use the formula without proof that it is appro-priate."

Another example of the failure of the Extra CostFormula is Berley Industries, Inc., v City ofNew York 45N.Y. 2d 685 where the Court ofAppeals was faced with a

claim for 'increased home office overhead expenses dur-ing the period of overrun'. The claimant argued that byapplying theEichley formula (16) aclaimcouldbeproved.The CourtofAppeals ofNew York found that the plaintiffhad failed to substantiate "even a single penny's increasein overheads beyond what the rest of the plaintiff's busi-ness would in any event have required" and that "Themathematical formula [which the plaintiffput] did not fillthevoid" the Court approvedofthe following statementbyMurphy J. in the lower court:

The damages computed under the 'Eichley for-mula' .would be the same in this case whether theplaintiff had completed only 1% or 99% of the jobon the scheduled completion date of May 7, 1971.This rather bizarre result is caused by the fact thatthe 'Eichley formula' focuses on the length of thedelay to the exclusion of many other importantfactors bearing on actual damages. If, on May 7,1971, the plaintiff was merely required to spend$100 to complete the job, the 'Eichley formula'would still require that the defendant pay $19,262for the 335 day delay ... I can only conclude that themathematical computations under the 'Eichleyformula' produce a figure with, at best, a chancerelationship to actual damages, and at worst, norelationship at all.

I.F. Finnegan Ltd. v Sheffield City Council [1988] 43Build. LR 124 was decided inEngland by StabbQC sittingas a deputy judge. It arose out of a claim under a specialcondition providing an entitlement for loss and expense inrespect of disruption caused by delay by the Principal ingiving possession. It was not a claim for damages forbreach of contract. The judge said:

It is generally accepted that, on principle, a contrac-tor who is delayed in completing a contract due tothe default of his employer, may properly have aclaim for head office or off-site overheads duringthe period of the delay, on the basis that the work-force, but for the delay, might have had the oppor-tunity ofbeing employedon anothercontractwhichwould have had the effectoffunding the overheadsduring the overrun period.

While not specifically identifying the claim as one forloss of income, the statement is consistent with a claim forloss of income. Then the judge says, " ...this claim inrespect of overheads is not a claim for actual loss but aclaim for funding overheads during the period ofoverrun,but for which the contract sum had not made provision."Later he says, "... this claim for overheads during theperiod of overrun is not related to actual loss". Since thecontractprovision was for 'loss and expense' , it is difficultto see how the judge could have awarded anything if therewas no actual loss.

Later he says, "The work carried out during the periodof overrun must have consisted of both direct and sub-contracted labour and both must have incurred expendi-ture on overheads. It is this unfunded expenditure which is

Australian Construction Law Newsletter

the subject of this part of the plaintiff's claim. The plain-tiffs do not seek to recover their actual overheads expen-diture for the overrun period but to substitute the fundingof overheads which a notional other contract wouldhave provided."

The reference to another contract would suggest thattheclaimants were seeking recompense for loss ofincome.The judge rejected the plaintiffs method of calculationand, without saying whether he was awarding an amountfor loss of income or for actual extra expenditure onoverheads as a consequenceofthe delay, the judge said"...I infinitely prefer the Hudson Formula which, in myjudgment, is the right one to apply in this case, that is tosay, overhead and profit percentage based upon a fairannual average, multiplied by the contract sum and theperiod of delay in weeks, divided by the contract period."He chose 6% for overheads and profit.

Thejudge's reasons [or absence thereof] leave much tobe desired. The editors of the Building Law Reports atp.127 point out that "It was not apparently argued that theHudson Formula might be inappropriate in the circum-stances ... it should not be assumed that the use in this caseofthe Hudson Formula is indicativeofany general judicialapproval of it particularly since there appears to have beenno objection on the part of the employer to an assessmentof the loss and expense on that basis."

The editors also quote from an unreportedEnglish caseof Whittall Builders v Chester-ie-Street District Councilwhere the Recorder said:

Lastly, I cometo the overheads andprofit. Whathasto be calculated here is the contribution to off-siteoverheads and profit which the contractor mightreasonably have been expected to earn with theseresources if not deprived of them. The percentageto be taken for overheads andprofit for this purposeis not therefore the percentage allowed by thecontractor in compiling the price for this particularcontract, which may have been larger or smallerthan his usual percentage and mayor may not havebeen realised. It is not that percentage that one hasto take for this purpose but the average percentageearned by the contractor on his turnover as shownby the contractor's accounts.

It is submitted that the Recorder was speaking of theLost Chance Formula.

ConclusionContractors would be better advised to ignore formu-

las when trying to prove damages for delay. In attemptingto use a formula the claimant is likely to becomeembroiledin an argument on the applicability of the formula. It is aninteresting legal argument and is likely to make the lawreports. However, the argument is unlikely to succeed, it islikely to prove expensive to run and it will divert attentionfrom the real issue which is to prove the contractor's actualloss.

A contractor should explore the question of whetherthe delay has in fact caused any loss of income and if so

Issue #18

how that loss can be demonstrated. If the contractor isseparately paid the direct costs incurred during the periodof delay and they are less than the income which couldhave been earnt but for the delay, the balance represents theloss of profit and contribution to overheads. There is noneed to demonstrate the usual margin for profit or foroverheads or that the contractor would have earnt aprofit.Relevant issues include:

1. Theprobabilityofthecontractorearning extraincome but for the delay;

2. The amount ofincome which but for the delaythe contractor might have earnt;

3. The savings [amounts which the contractorwouldhave had to expendto earn that income,the expenditure of which has been saved];

4. Whether the loss ofincome would reasonablyhave been within the contemplation of theparties at the time of contracting (17).

This is not an exhaustive list. There may be issues ofmitigation. The contractor may have to answer argumentsthat the contractor could have mitigated the loss ofincomeby hiring plant [to replace that tied up on the delayedcontract] or engaging subcontractors or more staff orpaying overtime.

It is most unlikely that a contractor could, in the faceof an argument from the other party, persuade a court thata formula is a valid substitute for proofof any matter. If analleged loss cannot be proved otherwise than by recourseto a formula, then it is time to question whether the loss infact occurred.

References1. Hudson's Building andEngineering Contracts 10th

ed., Sweet and Maxwell, London, 1970.2. Contruction Contracts: Principles and Policies in

Tort and Contract, Sweet and Maxwell, Lon-don, 1986, pp.114 to 132.

3. See the Ellis-Don case discussed below.4. See the Berley Industries case discussed below.5. This claim is made by Duncan Wallace, the author

of Hudson's Building and Engineering Contracts10th ed. Sweet and Maxwell, London 1970 [called"Hudson"], in his book Construction Contracts:Principles and Policies in Tort and Contract, Sweetand Maxwell, London 1986 [called"Principles andPolicies"].

6. In Principles and Policies Duncan Wallace correctsthis and makes it clear that what should be used asthe percentage is not the percentage added to theprime cost but the percentage that off-site over-heads and profit bear to the contractor's overallincome. For example, if the prime cost in an esti-mate is $800,000 and the contractprice is $lm., theoff-site overheads and profit as a percentage of theprime cost would be 25% but as a percentage of thecontractor's overall income, off-site overheads andprofit are 20%. The effect of this ambiguity is dem-onstrated later.

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Australian Construction Law Newsletter

7. Compare Principles and Policies at p. 127 where itis said, "The fundamental characteristic is that thisexpenditure will neither increase or decrease as aconsequence of delay, or of anything else, occur-ring on the contract in question'" but at p.597 ofHudson it is said that off-site overheads will bepartly independent of the actual site expenditureandwill partly be dependanton additional adminis-trative expenditure in relation to the extended con-tract period. What writers seem to overlook is thatsome additional off-site overheads may be an extracost as a consequence of delay and some may beunaffected by delay but still be relevant for thepurpose of evaluating loss of income.

8. Hadley v Baxendale [1854] 9 Exch 341, 354[hereafter Hadley v Baxendale].

9. Dorter and Sharkey at p.7193 say, "In summary, ifone cannot persuade to the standard ofproof usingone of [the formulas], one has to be prepared for avery lengthy, tedious and expensive vouching andverification to the standard ofsatisfying an auditor,even though one's client will probably not havesufficientrecords for that." Withrespect, 'vouchingand verification to the standard of satisfying anauditor is an exaggeration' but the statement doesshow the concern which lawyers have about prov-ing a loss and why they try to invoke a formula.

10. See State ofSouth Australia v Fricker Carringtonbelow.

11. Note how Duncan Wallace takes no account of themore common situation where the otherwork mighthave been available rather than would have beenavailable. See below for discussion of remotenessand valuing a chance.

12. The expression is found in thequotation from Hindsabove.

13. See quotation from El/is-Don case below.14. The point is discussed in the quotation from the

Ellis-Don case below.15. Duncan Wallace calls it an 'identical formula' at

p.128 of Principles and Policies.16. In his Introduction in a paper "A Farewell to Eich-

ley?" [1984] 14 Public Law Journal 276 P. AMcGeehin says:

"Since the theory was first introduced in 1960as partofaBoardofContractAppeals case, theEichley formula ofcalculating and recoveringhome office general and administrative ex-penses [G&A] has been widely used by con-tractors, boards and courts when computingclaim damages.... In recent years, the boardsand courts have begun to criticise Eichley as ameasure of damages ...".

17. The remoteness issue discussed above.

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