Significant management costs can be incurred when one party is required to reorganize internal resources or divert staff from their usual activities in order to investigate, manage and mitigate the effects of the other party's breach of contract. While such wasted management costs are recognized as a legitimate head of damages for breach of contract, they are often difficult to prove and therefore difficult to recover.
Historically, recovery was made all the more difficult due to inconsistent views given by English courts as to the circumstances in which such management costs would be recoverable and the evidence that would be required to support a successful claim. However, these inconsistencies have been largely resolved in the more recent cases of R+V Versicherung1, Aerospace Publishing2 and Bridge UK.Com3. From these cases it is possible to identify some basic principles that should be followed in order to maximize the prospect of recovering wasted management costs.
The claimant must prove that its staff had been diverted from their usual activities as a result of the breach and that this caused significant disruption to the business
As with all claims, the claimant must show that the other party's breach caused the loss. In claims for the recovery of wasted management costs, the claimant must show that the breach caused a significant disruption to its business such that it was necessary to divert employees or senior management away from their usual activities.
Whether there has been a significant disruption to the claimant's business will be a matter of fact depending on the circumstances of each case. Although it may be difficult for large organizations to show that a particular event caused a significant disruption to business as a whole, it should not be impossible. For example, in Aerospace Publishing, the court was persuaded that it was reasonable to conclude that there had been substantial disruption to the claimant's business from the detailed evidence provided of the time spent by a number of employees in dealing with the defendant's breach of contract.
That employees were diverted from their usual activities can be demonstrated by evidence showing that they were required to investigate, rectify or undertake remedial work in relation to the other party's breach. The court in Aerospace Publishing said that there would be no objection in principle to a claim based on the cost of diverting employees from their usual activities to help deal with the consequence of the breach; claimants do not need to take the possibly more expensive option of engaging additional temporary staff to do so.
It is important to note that it will not be necessary to show that affected employees would otherwise have been involved in profit-making activities in order to successfully claim their salary costs, provided that it can be shown that they were diverted from their usual activities.4 Evidence of a significant decrease in turnover during the period of the diversion and/or an increase in turnover after the diversion ceased, may also assist in proving that there had been a significant disruption to business and/or diversion of staff from their usual activities.
In Bridge UK.Com the manager whose time was being claimed as wasted management costs submitted a witness statement explaining how he, as the New Business Development Manager, should have been out selling and marketing the claimant's business but in fact was unable to do so as he had to be present at the claimant's premises to deal with the effects of the defendant's breach of contract, and this meant that the claimant had suffered losses due to lost opportunities. This, combined with evidence of a significant increase in the claimant's turnover in the years following the remedial works, was sufficient evidence to persuade the court that the defendant's breach caused disruption to the claimant's business and the New Business Development Manager to be diverted from his usual activities.
Quantification of loss could be based on an hourly or daily rate derived from employees' income, but unjustified uplifts are unlikely to succeed
It is often extremely difficult to quantify additional expenditure, loss of revenue and loss of profit attributable to the time that each employee spent dealing with the effects of the breach.
Where actual losses cannot be established, courts will generally infer that had employees not become involved in the effects of the breach they would have applied their time to activities which would have directly or indirectly generated income for the claimant. On this basis, the claimant's losses can be valued, at a minimum, as equivalent to the cost of employing the affected members of staff during this period. The loss attributable to the diversion could then be calculated at an hourly/daily rate derived from the employees' annual income. In Bridge UK.Com the court approved such a calculation but held that the claimant's claim for an additional 25% "opportunity cost" uplift was not recoverable.
Claim-related costs cannot be claimed as damages for breach of contract
Costs incurred by the claimant in collating evidence and preparing submissions or witness statements for legal proceedings cannot be claimed as wasted management costs, instead they should be claimed as part of the costs of bringing the claim. The dividing line between work related to the claim and work attributable to remedying the breach may be difficult to ascertain. The claimant will have the burden of proving that the losses and/or expenses it is claiming were in fact wasted management costs. If the claimant is unable to do so, the claim will fail as a claim for damages.
This was the case in Aerospace Publishing where the claimant had hired two freelance workers to assist following a flood at its premises caused by the defendant's breach of contract. The claimant maintained that most of the freelancers' work related to the inspection and damage resulting from the breach, however the evidence revealed that a large proportion of the sums claimed related to time spent in the three months immediately prior to the claimant submitting its claim. Indeed, one of the freelancer's records stated that time had been spent preparing witness statements. The claimant conceded that the cost of preparing witness statements should have been claimed as part of the costs in the litigation, and not damages for breach of contract. Given these discrepancies in this part of the claim, the court considered that the onus was on Aerospace to adduce clear evidence to show that the rest of the freelancers' time was not also related to claim preparation matters. Aerospace was not able to produce such evidence and therefore its claim for the freelance workers' costs failed in its entirety (although it was still open for it to claim for costs of the action).
Maintain contemporaneous records to support the claim as retrospective assessments are unlikely to result in full recovery
Where possible, claimants should maintain contemporaneous time records that show the extent to which each individual employee had been diverted from their routine work to deal with the breach, for example by way of daily time-sheets. If the claimant does not produce evidence where it would otherwise have been reasonable to do so, it could run the risk of a finding that its claim has not been sufficiently established.5
Nevertheless, if such contemporaneous records are not available it does not mean that the claim will necessarily fail. English courts have held that a retrospective assessment of time spent (e.g. from reconstructing events from memory, other records and witness statements) is a valid method of calculating costs incurred where contemporary records do not exist.6
However, when this method is used, there is always a risk of over or under-estimating the time diverted to the breach. The courts recognize this and are likely to reflect it in their ultimate award. In Bridge UK.Com the court applied a hefty 20% discount to the hours claimed to reflect both the inherent uncertainties in the claimant's retrospective assessment and to account for some hours that had obviously been included in the claim in error.
Conclusion: Practical tips for maintaining evidence in support of the claim
In order to maximize recovery of wasted management costs, claimants should aim to support their claim with clear contemporaneous evidence of costs incurred as a result of the breach. By taking the following steps, a party can seek to maximize recoverability:
- Check whether any contractual notice requirements apply to making claims. Construction contracts commonly require contractors to submit notices of intention to claim either as soon as possible or within a reasonable period of time. Failing to follow these requirements could prevent full recovery of the loss suffered or even bar the claim in its entirety.
Keep detailed records of where personnel have been diverted from their usual work activities to investigate, manage or mitigate the effects of the breach. Ensure that such information includes:
- a description of the relevant breach;
- time-sheets showing the dates and times worked by staff in relation to the effects of the breach in question, together with a description of the work done at those times;
- a justification for the decision to use those employees for those particular tasks;
- a description of the specific work that those employees would have undertaken if they had not otherwise been occupied in relation to the breach; and
- an explanation of how the diversion of staff caused disruption to the business.
- If no or only a few contemporaneous records have been kept, claimants may as an alternative consider preparing witness and documentary evidence to retrospectively assess and prove the time spent dealing with the effects of the breach. Bear in mind that such a retrospective analysis will be more susceptible to attack so the more information and evidence that can be put forward in support the greater the chance of recovery.