Recovering the costs of managerial time, as damages.

Naomi Stafford Associate, Pinsent Masons LLP explains. These internal costs normally include time spent by a manager or director in trying to resolve and sort out the dispute in its early days. This time may be spent investigating the issue (for example trying to find remedial solutions on site) or mitigating any loss (by organising additional labour for example) and often diverts the staff concerned from winning work or working on other jobs.  This is often described as “wasted management” costs.   

So can these wasted management costs be recovered as part of the damages claim in the event that party is successful in any later dispute proceedings?  Further is it possible for a party to recover for loss of revenue which would have been generated if the management time spent on the dispute had been utilised elsewhere?

 In principle, a party is able to recover “wasted management” costs as damages.  Further it is possible to recover for loss of revenue in certain circumstances.

However, wasted management costs are one of the more difficult elements to prove in a damages claim.  There are unlikely to be invoices or significant evidence as to how the management time was spent.   As a result it is often hard to prove and ultimately not recovered. The Court of Appeal has now laid down some useful guidelines as to how the Courts will award and assess wasted management costs:

1. Freelance costs will not normally be recoverable as damages.  This is because freelancers are usually brought in to inspect and assess the damages (which is in effect the costs of the claim) and therefore this will not be awarded as damages for the wronged party;
2. A party must be able to show that its employees had been diverted from their normal activities because the business was “substantially disrupted” as a result of the problems leading to the dispute;
3. The party must be able to show a significant diversion from normal activities.  This will usually mean providing records of the staff members’ activities.  Contemporaneous records are useful but not necessary to prove the claim if other evidence is available (witness statements for example).  ;
4. Finally the business must be able to show it has been substantially disrupted as a result of the other party’s wrongdoing.   To date the Courts have required there to be a high level of disruption prior to recovery.

So how will the Court assess these damages?  Essentially it appears that it will award damages with reference to the staff member’s wages less a percentage (20% to date) for the uncertainty of this type of calculation. 

It is not necessary to show an actual loss of revenue to recover it in damages.  However, generally the Courts have awarded damages equal to the wasted management costs rather than an actual loss of profit.  Accordingly if the wasted management costs are proved, the Court will normally accept that the employee would have generated revenue equal to the costs of his time.   

Naomi Stafford Associate

Pinsent Masons LLP  

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