Can a business recover the cost of investigating or dealing with an issue that leads to litigation?
Yes, according to the Court of Appeal and High Court following the decisions of the cases Bridge UK.com Limited t/a Bridge Communications v Abbey Pynford plc, 2007, and Aerospace Publishing Limited and Anor v Thames Water Utilities Limited, 2007.
The test for recovery
In Aerospace, the court indicated that, in bringing a damages claim for recovery of staff costs, a business must ask itself two questions:
- Was staff time diverted as a consequence of investigating the claim or mitigating the problem?
- If so, did the diversion cause disruption to its business?
In order to succeed on a claim, a business must produce evidence in relation to these two matters. Without such evidence, a claim will fail.
Importantly, proof of lost income/profit is not necessary. Indeed, if the answers to the above questions are “yes”, and the business has sufficient proof, courts are likely to infer that the diverted staff would have produced income (of an amount no less than the cost of employing them during the time they were diverted) but for the diversion.
Calculation of damages
It is clear that the amount that may be recovered is based upon staff time. In Bridge UK.Com, a director’s salary was used to quantify damages. In Aerospace, employees’ costs were used. As is evident from these cases, “staff time” is not limited solely to employees; management time can also be recovered.
When investigating a claim, it is imperative that a business should keep an up to date (and preferably electronic) record of:
- The activities carried out by its diverted staff,
- The duration of these activities,
- The activities that the staff would otherwise have performed, and
- The reason that a particular member of staff was chosen to undertake the activity.
Without these records, recovery will be difficult. Calculating damages after –the event is perfectly valid but is likely to result in an arbitrary reduction in damages.
This was the approach taken by the court in Bridge UK.Com, in which a one-fifth reduction in damages was applied. Indeed, such a calculation may be a laborious undertaking, resulting in further, irrecoverable, wasted staff time.