Recovery of management and staff costs

In a decision which has provided valuable guidance in resolving an area of legal uncertainty, the Court of Appeal has clarified the conditions which need to be fulfilled for payments made towards management and staff costs to be recoverable as damages. It was held in Aerospace Publishing Limited & Another v Thames Water Utilities Limited [2007] EWCA Civ 3 that where the claimant could properly establish that staff had been diverted from their regular activities in order to manage the consequences of a tortious act, and such diversion caused a significant disruption to the business, then it would be reasonable to infer from the disruption that had their time not been diverted in this way, staff would have concentrated on conventional business activities which would have generated revenue for the claimant in an amount at least equal to the cost of employing them during that time.

The Aerospace case looked at damages caused to a photographic, picture and publications archive through flooding which resulted from a burst water pipe. Thames Water admitted liability for the flood but disputed the amount of damages claimed. Aerospace Publishing claimed (as a head of special damages) certain staff costs incurred by seven employees in salvaging and reorganizing works in the archive. Thames Water objected to their recovery. Aerospace Publishing contended that these employees had been diverted from their usual activities, out of which it would have made money. Thames Water contended that Aerospace Publishing would have spent the same sum on the employees regardless of the flood, since they were in full-time employment.

Wilson LJ considered the current status of the law in this area in order to clarify what has become a somewhat confused position. He reviewed a line of authorities commencing with Tate and Lyle Food and Distribution Ltd v Greater London Council [1982] 1WLR 149, which decided that expenditure of management time in remedying an actionable wrong could properly form a head of special damages, although the claim was not made out on the facts due to insufficient records of the disruption to trading. He sought to resolve the differences between two more recent, first-instance decisions: Admiral Management Services Ltd v Para-Protect Europe Ltd [2002] EWHC 233 and R+V Versicherung AG v Risk Insurance Solutions SA [2006] EWHC 42. In Admiral Management Services, Stanley Burnton J held that any claim for staff costs should be formulated as a claim for loss of revenue resulting from the diversion of staff time. However, in R+V Versicherung, Gloster J held that a head of loss of the cost of wasted staff time could be recovered even though no additional expenditure loss or loss of revenue or profit could be shown. To be recoverable, it had to be "demonstrated with sufficient certainty that the wasted time was indeed spent on investigating and/or mitigating the relevant tort".

The Court of Appeal in Aerospace Publishing followed the approach of Gloster J., which it considered was more consonant with the earlier Court of Appeal decision in Standard Chartered Bank v Pakistan National Shipping Corporation [2001] EWCA Civ 55. Wilson LJ's analysis of the earlier authorities resulted in the clarification of the following propositions:

• The fact and, if so, the extent of the diversion of staff time have to be properly established and, if in that regard evidence which it would have been reasonable for the claimant to adduce is not adduced, he is at risk of a finding that they have not been established.
• The claimant also has to establish that the diversion caused significant disruption to its business.
• Even though it may well be that strictly the claim should be cast in terms of a loss of revenue attributable to the diversion of staff time, nevertheless in the ordinary case, and unless the defendant can establish the contrary, it is reasonable for the court to infer from the disruption that, had their time not been thus diverted, staff would have applied it to activities which would, directly or indirectly, have generated revenue for the claimant in an amount at least equal to the costs of employing them during that time.

This judgment has provided important guidance regarding the thresholds to be passed for a successful claim for wasted staff costs and the practical steps which need to be taken to evidence the claim, if a business finds itself having to remedy the effects of a tort or breach of contract. The key points to remember are the need for detailed records of the time spent by each member of staff on the measures being taken and of how and why the staff are diverted from their regular work activities. Evidence will have to be adduced which shows that the diversion has caused significant disruption to the business. These records will need to be sufficiently clear and precise so that a court will have no difficulty understanding them, if necessary at a hearing a number of years after the events took place