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Recoverable damages for wasted staff costs

Recent case law has provided guidance on the court’s current approach to the issue of recoverability of staff costs involved in the investigation of a…

R+V Versicherung AG v Risk Insurance & Reinsurance Solutions SA [2006] EWHC 42 (Comm)

Recent case law has provided some further guidance on the court’s current approach to the issue of recoverability of staff costs involved in the investigation of a claim.

In the well reported 2006 case of R+V Versicherung the court was asked to determine whether the claimant was entitled to recover damages for the costs of managerial and staff time spent investigating a claim for conspiracy.

Mrs Justice Gloster ruled that, provided that they could show some “significant disruption” to the business and that staff had been “significantly diverted from the usual activities”, the claimant could recover the costs of wasted staff time spent on the investigation and mitigation of the breach, notwithstanding that no additional expenditure or loss of revenue or profit could be shown.

Is R+V Versicherung still good law? It would appear so.

Recent decisions

The principles laid down R+V Versicherung have since been considered in the following cases:

Aerospace Publishing Ltd & Anr ("Aerospace") v Thames Water Utilities Ltd [2007] EWCA Civ 3

In this case, a water main belonging to Thames Water burst causing flooding to the claimant’s archive of historic aviation material. As a result of the flood, the claimant sought to recover the costs of staff time and divergence costs. The Court of Appeal considered both tort and contract cases on the issue of recoverability of staff costs and held that there is no longer a distinction. In this tortious case, the Court of Appeal confirmed the position in R + V Versicherung and held that the internal costs of management and staff being diverted by another party’s breach are recoverable. The court also clarified what is to be proved in order for a claimant to make a successful claim for wasted staff costs:

Three point test:
  1. In order to succeed with its claim, a claimant must adduce all the evidence that it could reasonably adduce to show the extent of the diversion of staff;
  2. Further, the claimant must establish that the diversion of staff caused significant disruption to its business;
  3. If the first two elements can be established, it is reasonable for the court to infer that, had the staff not been diverted from their usual activities, they would have directly or indirectly generated revenue for the claimant in an amount at least equal to the cost of employing them during that time.

Bridge UK.com Limited v Abbey Pynford plc [2007] EWHC 728 (TCC)

In this breach of contract case, the claimant printing company claimed damages for various losses caused by breach of contract by the defendant engineering company for negligently failing to complete a contract. Justice Ramsey adopted the approach in R + V Versicherung, but did not consider the decision in Aerospace.

The claimant in this case did not keep contemporaneous records of the time spent. Instead a retrospective assessment of the time spent was made by examining documents and other records. The court accepted the lack of records, but reduced the damages awarded by 20% in recognition of the uncertainty in that approach.

Clancy Consulting Ltd v Derwent Holdings Ltd [2010] EWHC 762 (TCC)

R + V Versicherung was applied in this case, whereby Justice Coulson recognised that claims for management time were not always easy to establish and

“required, firstly, a proper causal link between the cost incurred and the alleged default on the part of the defendant, and secondly, proof of the extent to which the ordinary trading routine of the claimant was disturbed.”

Carillion JM Ltd v Phi Group Ltd [2011] EWHC 1379 (TCC)

Mr Justice Akenhead in this case affirmed the position in R + V Versicherung and Bridge:

"There is no issue and rightly so that in principle that in-house management and similar costs reasonably and properly incurred by a company in connection with remedial works are otherwise recoverable damages…"

Flogas Britain Ltd v Calor Gas Ltd [2013] EWHC 3060 (Ch)

In 2013, the court was required to determine the damages due to the claimant owing to the defendant’s admitted misuse of part of the claimant’s customer database. Aerospace was followed and it was held that the diversion of the employees had caused significant disruption to the claimant’s business.

Kendon Packaging Ltd v Greater London Authority [2015] UKUT 354 (LC)

In 2015 the court determined the compensation payable to a company that had been forced to relocate its operating premises as a result of The London Development Agency (Lower Lea Valley, Olympic & Legacy) Compulsory Purchase Order 2005.

It was held that there was no lack of evidence as to loss due to management time and the claimant had provided a detailed breakdown of the time spent on matters related to the purchase order, together with evidence of the directors' remuneration. Whilst it would not be appropriate to compensate the directors for every single hour they had spent on matters relating to the purchase order, it would not be fair to refuse any compensation for their diversions just because, subsequent to the move, they had become supremely successful. Fair compensation for the losses caused by the distractions to management time was awarded.

Admiralty Practice

It has been a longstanding principle when assessing collision claims that a shipowner is entitled to an amount to be added to their claim for damages against the other ship, to cover disruption to business costs and expenditure of management time in dealing with claims arising out of the collision.

Customarily this is simply assessed at 1% of the shipowner’s proven claim. This principle was relied upon by Justice Clarke in the case of The Kumanovo [1998] 2 Lloyd’s Rep 301 whereby the shipowner was entitled to recover damages without the need to incur likely further costs and disruption in proving the loss. This contrasts with the approach of the general law referred to above.

The Admiralty principle perhaps evolved as a pragmatic approach to avoid having to do what is clearly required under the current general law i.e. produce evidence of the claimant’s management or staff time and cost involved in investigating the claim.

In The Kumanovo, following a collision between two ships, a claim for lost cargo was made by the owners, which included an additional 1% on top of the ordinary award as an "agency" claim for disruption to business and management expenses incurred as a result of a collision. It was held as a matter of principle, that the cost of management time spent on dealing with the consequences of a collision could be recovered under the head of expenditure loss.

However, whilst it is an established convention that the Admiralty Court would permit shipowners to claim an additional 1% for "agency" without the need to prove the actual loss, there was no authority for the convention to be extended to cargo owners. Although it was permissible for the cargo owners to claim the cost of disruption to business and additional management expenses, this had to be included as a separate head of claim and evidence had to be adduced to quantify the actual loss.

In the case of Carisbrooke Shipping CV5 v Bird Port Limited (The "Charlotte C") [2005] EWHC 1974 (Admiralty) the shipowner suffered a number of losses, including the loss of freight/hire due to damage to the vessel, superintendency costs and disruption to business and expenditure of other management time in dealing with the incident. It was held that the wages of a ships’ superintendent cannot be recovered as a head of damage, as the wages of a superintendent would still be payable in any event. However, if additional expenditure is incurred, such as appointing additional staff, travel expenses and overtime, it is recoverable as "expenditure loss". This was caveated by the notion of reasonableness and proportionality.

Comment

The decisions following R + V Versicherung confirm that the costs of wasted staff and management time are still being treated as recoverable and that damages are calculated by reference to the cost of the employees' time, rather than by reference to lost revenue, in both tortious and contractual cases. This is the case even in the circumstances such as in Bridge whereby a detailed record of the time spent is not available.

It is a theme inherent in recent case law, that proof of actual lost revenue is not required; it is enough for the court to infer that, had there not been a significant disruption, the employee or management would not have been diverted from their usual activities and they would have generated income for the business. However, clients should consider that in order to prove disruption and diversion of staff time, it would be necessary for the business to show decrease in turnover before and after the crisis.

The expectation should be that the court will demand a more detailed record of wasted time for higher value claims and therefore a more cautious and methodical approach to recording time spent should be adopted in these instances.

Consequentially, in light of the developments in the general law, the principle under Admiralty collision law may need to be reviewed.

In respect of collisions involving significant investigation expense, shipowners should carefully consider the possibility that the court may take a slightly deeper look at the damages being sought. Therefore it may too be prudent for shipowners to begin to keep detailed and accurate records of time spent wherever possible, even in times of collision crisis, in order to protect their position when seeking to recover damages for disruption to business costs and expenditure of management time.

For further information about Weightmans LLP or to discuss any of the issues in this update, please contact:

Marie O’Grady, Trainee Solicitor, on 0151 243 3389 / marie.o’grady@weightmans.com

Phil James, Partner and Head of Marine Practice Area, on 0151 243 9849 / phil.james@weightmans.com