The credit crunch and resulting economic fallout has already led to a marked increase in litigation. As with any downturn, losses flow and claims against the professionals involved will follow. Worrying developments in one particular area of law suggest such claims may be larger than ever before. Robbie Constance and Daniel Hemming consider recent case law which means that claimants can now recover the cost of wasted management and staff time.
Claimants are increasingly seeking to recover for wasted management and staff time as part of their claims for business interruption caused by negligent advice, even where no additional expenditure or loss of profits is proved. Recent case law confirms that this is an increasingly recognised head of damage, and the previous burden to prove actual disruption is slowly being relaxed.
In R+V Versicherung AG v Risk Insurance & Reinsurance Solutions SA & Others1, R+V had employed both external consultants and its own staff in investigating and mitigating a conspiracy perpetrated by the defendants. As one would expect, the claim for the expense of employing the external consultants was not challenged; the dispute concerned R+V's claim for the costs of internal staff time, where no loss of profits had been proved.
An earlier decision2 had suggested that there could be no recovery of such costs in the absence of proof of additional expenditure or loss of profits, since staff, even if they had been diverted from their ordinary activities, would have been paid anyway and, therefore, the claimant had suffered no loss. In R+V this reasoning was rejected and the court concluded that the "cost of wasted staff time spent on the investigation and/or mitigation of the tort" was a recoverable head of damage in its own right. The court added the proviso that the burden fell squarely on the claimant to demonstrate with reasonable certainty that the wasted time was directly attributable to the defendant's acts. Further, there needed to be significant disruption to the claimant's business and significant diversion of staff from normal activities.
The judgment in R+V was approved by the Court of Appeal in Aerospace Publishing Ltd and Midsummer Books Ltd v Thames Water Utilities Ltd 3. This claim included wasted staff time in dealing with the flooding of the claimant's premises by a burst water main. The Court of Appeal rejected the part of the claim relating to the costs of employing two ex-employees on a freelance basis, whose activities had included the drafting of witness statements. These were identified as costs in the action, rather than damages. It then concluded that the earlier authorities concerning the recovery of staff time established three propositions:
- The fact and extent of the diversion of staff from normal business activities had to be properly established by the claimant;
- The claimant had to show that this diversion of staff had caused significant disruption to his business; and
- Although, strictly speaking, claims ought to be cast as loss of revenue resulting from diversion of staff, it was reasonable for the courts to infer that diverted staff would have generated revenue at least equal to the cost of employing them.
In Bridge UK.com Ltd v Abbey Pynford Plc4 the court developed the principle still further and allowed a claim for wasted staff time based merely on the retrospective assessment of the employee in question. The employee estimated that he had spent 128 hours in dealing with the problems created by the defendant's negligence. The court held that the claimant was entitled to recover the cost of 100 of the estimated 128 hours, making a 'discount' to allow for the imprecision of the quantification.
The evidential burden on the claimant was further relaxed in the case of Aziz Al-Rawas v Pegasus Energy Ltd & Others5. The court accepted that the claimant had failed to produce any evidence of disruption to their business, but decided that "the application of common sense may fill the gap". Since it was obvious that the defendant's actions would have disrupted the claimant's business there was no need for it to produce any specific evidence. Notably, the court also reaffirmed the important distinction between staff time spent on preparation of the claim itself and staff time spent in investigating or mitigating the problems caused by the defendant, confirming that the former remains irrecoverable either as damages or as costs in the litigation.
In 4 Eng Ltd v Roger Harper & Another 6 the claimants were again able to recover damages for staff time spent investigating the defendants' fraudulent activities. However, this was not under the Aerospace 'business disruption' head. The claimant had initially formulated its claim as one for business disruption, seeking to recover time spent by two of its directors dealing with the matter. The claimant later located a board resolution which resolved to provide additional remuneration to the two directors for work undertaken in investigating the fraud. The court agreed that the claimant had incurred an additional liability to its directors for which it was entitled to be compensated. The change of pleading had a significant impact on the amount which was eventually recovered. The original business disruption claim had been calculated on the basis of the directors' salaries at a total of just £279,879. The claim based on the higher board approved hourly rate increased the quantum to £711,200 (of which £624,888 was eventually recovered).
This last decision creates obvious cause for concern. It could pave the way for larger claims to include the time costs of existing staff engaged in investigating or mitigating problems as a new and separate liability for damages. Claimants will argue that this is fair compensation reflecting the costs which would otherwise be incurred hiring external consultants. Others may create sham devices to give the appearance of additional costs with which to exaggerate their claim and increase nuisance or negotiation value. We await with interest the judicial consideration this case receives and the treatment of wasted staff time in claims against accountants and other professionals arising out of the credit crunch. Large financial institutions that have considerable in-house technical, consultancy and legal resource are likely to seek to exploit these developments when pursuing claims against their external advisers.
On the bright side, the distinction remains clearly drawn between costs incurred in investigation and mitigation and costs incurred dealing with the claim and litigation itself. There is no immediate danger of the courts allowing recovery for the time of staff spent, for example, preparing witness statements. Further, the requirement that there must be a significant disruption to the claimant's business should remain a barrier to some claims under this head. Though the courts appear willing, in clear cases, to infer this from other evidence, it should still be difficult to establish where the claimant operates a very large business and where the problem only effects a discrete part of it. Much will depend on claimants having the foresight to keep complete contemporaneous records of “wasted” staff time. However, in these unprecedented times claims seeking to recover substantial sums for wasted management and staff time are increasingly likely to succeed.