Whose time is it anyway?

W hen disputes arise on construction contracts, both parties will undoubtedly incur a significant amount of management time in obtaining a resolution of the dispute. It could be claimed this time spent might harm ongoing business and affect the company’s profitability. Therefore parties will always be interested in whether internal management costs can be recovered.

If the dispute moves towards arbitration or litigation, the parties must consider whether the cost of management time will be recovered as costs of the legal cost, or if such costs could be claimed as a head of damage within the claim itself.

In general the successful party is entitled to recover the reasonable costs it incurs in pursuing its case. These costs are assessed by the court or arbitrator, but they would normally include the reasonable cost of lawyers or external advisors conducting the case. For a long time it was thought the recovery of the successful party’s own staff employed to prepare material for the case would not be recoverable as part of the costs in the proceedings. The only exception to that rule was where the party’s own employees were acting as expert witnesses.

This position was reconsidered in the case of Amec Process & Energy vs. Stork Engineers & Contractors (2002). Here, Judge Thornton felt that the Civil Procedure Rules allowed him to widen the category of employees that could be reimbursed in the event of a successful litigation. In this case Amec’s own personnel and agency staff had been engaged to undertake much of the work involved in organising the evidence to be used by the expert witnesses.

The alternative to recovering management costs as costs in litigation would be to seek to recover such costs as a head of damage for breach of contract. This issue was re-examined in the recent case of R+V Versicherung (R+V) vs. Risk Insurance and Reinsurance (RI&R).

The case related to insurance but involved certain issues of principle in relation to the quantum of the claims. One of the issues was the recoverability of wasted staff costs. As part of its claim, R+V sought to recover, as damages, its internal management and staff time and internal overheads. While R+V said it could, if necessary, also establish loss of profit, it suggested there was no need for it to do so because it would be expensive and artificial.

R+V also argued it was only seeking to recover the management and staff time deployed in remedying and/or mitigating the wrongs for which RI&R had already been found liable. R+V went on to state that if it wasn’t for RI&R’s breach of contract the staff in question would have been engaged on other matters. Therefore it did not need to show any specific loss of profit, only that those staff had been engaged in investigating and mitigating the losses caused by the wrong.

Time keeping

RI&R suggested that R+V could only recover damages for the internal management if they had suffered an actual loss as a result of diverting the resources.

The judge decided that the costs of wasted staff time spent on the investigation and mitigation of the claim were indeed recoverable. However, it had to be demonstrated with sufficient certainty that the wasted time had been indeed spent on such investigations and the expenditure was directly attributable to the breach complained of. If adequate records were not available, then the alleged wasted expenditure on wages could not be said to be directly attributable to the breach and would not be recoverable as a head of claim. The judge noted that:

“In my judgment, as a matter of principle, such head of loss (the cost of wasted staff time spent on the investigation and/or mitigation of the tort) is recoverable, notwithstanding that no additional expenditure ‘loss’, or loss of revenue or profit can be shown. The quantification of such expenditure will, of course have to be proved with sufficient particularity.”

The upshot of all this is that the courts will recognise the cost of management time as a head of loss provided that you have good, contemporaneous records to support the quantification of your claim. If you are involved in the rectification or resolution of a claim situation and that situation impedes on your time, make sure your involvement is accurately documented; you never know who will be picking the bones from your timesheet.