MANAGERS COSTS RECOVERABLE IN CLAIMS AGAINST SUPPLIERS

Supply Side

Suppliers of materials and equipment are usually resistant to claims received from a buyer for faulty goods which includes anything other than straightforward replacement or remedial costs. The Scottish case of Euro Pools v Clydeside Steel Fabrications Ltd arose out of the purchase of filtration equipment for pubic swimming pools which were being constructed at Burntisland and East Molesey in Surrey and involved a dispute concerning managerial costs associated with the supply of defective equipment.

Euro Pools had a contract with the main contractor for the swimming pool water management systems for both contracts. Clydeside supplied the filtration equipment. The purpose of the filtration equipment is to remove impurities from the water which has to pass through sand and gravel filter media inside a large tank shaped like an upright cylinder. The water is warm and chlorinated and as such is corrosive. To prevent corrosion the tanks are lined with high build epoxy. It was Clydeside’s duty under its contract to design filtration equipment which was fit for its purpose

Defective Goods from Suppliers

Some two months after commissioning it was discovered that the protective lining inside the tanks had failed. Clydeside disputed that there was any corrosion and Euro Pools managing director who became involved in the matter found that in fact there was widespread corrosion. Fenwick Inspection Services Ltd were appointed by Euro Pools to provide advice on the remedial works which were principally carried out by Tyneside Filtration and Engineering Services Ltd. Some of the work involved in decommissioning and recommissioning the filters was carried out by Euro Pools own employees.

Claims were levied by Euro Pool against Clydeside in the sum of 8119 pounds in respect of the Burntisland pool and 12106 pounds for the one at East Molesey. These claims included the cost of engaging Tyneside Filtration and Engineering Services and Fenwick Inspection together with a sum in respect of the time spent by Euro Pool’s managing director in attending meetings and dealing with substantial correspondence and telephone calls in organising and co-ordinating repairs. The cost of Euro Pools engineers who were involved in the resolving the problem was also included in the claim.

Remedy

Clydeside attacked the claim on the basis that the costs were remedial costs sustained under the contract with the main contractor. This seems an odd argument as the costs were incurred as a result of the faulty equipment they supplied and was quickly dismissed by the judge. The second argument has a little more substance. Clydeside’s case was that Euro Pools entitlement was to recover any actual cost or loss which resulted as a direct consequence of the defective equipment.

The managing director and engineers were not employed specifically in relation to the remedial works and therefore their salaries would have been paid in any event. This being the case Euro Pool had sustained no ascertainable loss as a result of the defects. It was accepted however that fuel costs in relation to visits to the swimming pools were an extra cost which could be recovered.

The judge again was not impressed. His view was that a managing director will normally be expected to devote the whole of his time in the affairs of his employer involving company strategy, searching for new markets and the developments of new products. If he is diverted from these tasks to deal with remedial equipment obtained from a supplier this will deny him the time which he would otherwise have spent on his normal tasks and as such represents a loss to his employer. The same principle applies to engineers in that time spent on remedial work represents time which could have been profitably spent on their employers work.

Quantification

The claim included the basic salaries of the managing director and engineers plus a mark up for overheads. The mark up for the engineer was 350% added to the hourly charge with a 50% increase on top of the managing directors salary costs. The percentage addition for the engineers was said to be the usual mark up for daywork in the industry and the addition in respect of the managing director was intended to represent a reasonable amount. The judge accepted in principle that overheads are rightfully to be included in the claim. He felt that a contribution should be made to cover such matters as the cost of maintaining business premises, computer systems, head office and accounting staff, salesmen, estimators and general technical support.

Looking Forward

With decisions such as this one the question normally asked is whether it is likely to have any affect on the manner in which disputes arising out of construction contracts are resolved in the future. The recovery of managerial costs was the subject of a dispute in the case of Tate and Lyle v Greater London Council. In this case the claim was rejected due to lack of proper supporting evidence but the principle however was in general terms accepted. The Euro Pools case moved the situation on a notch as the court became involved with reinforcing the principle and in addition offered a view on the method of calculation.

This case however may be a clarion call for suppliers to review the limitation clauses in their standard terms to ensure that liability extends only to physical remedial costs and excludes managerial time. Such a limitation however to accord with The Unfair Contract Terms Act and therefore be effective would have to be shown to be reasonable.

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