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Recoverable Business Costs

27/02/2014 | Suzanne Hu

Most businesses are aware that, in the event of winning a case in court, generally they would be entitled to recover damages and the costs of their legal representation.

The subject of damages is an entire eBulletin in itself or, more correctly, several: damages can be compensatory, aggravated (another type of compensation to reflect the manner or motive of the wrong committed), restitutionary (to strip the wrongdoer of its gains), punitive, derisory, nominal, etc. Each has its own specific set of rules, and raises a plethora of issues.

However, one question which frequently arises is: can my business recover the time it has spent in dealing with the wrong committed against it? Broadly speaking, the answer is that you can if it relates to dealing with the consequence of the wrong, but not if it relates to the preparation for, or conduct of, litigation. As you might expect, it is rather more complicated than that, and businesses would be wise to familiarise themselves with the current landscape in order to maximise their chances of recovering business costs should they find themselves under attack.

Dealing with the consequence of a wrong

The case of Aerospace Publishing (1) considered previous case-law on the subject of recovery of costs for staff diverted from routine work to overcome the effects of a wrong, and confirmed that such costs can be recovered subject to three key points:

1.     The fact and extent of the diversion of staff time has to be established. If a claimant fails to adduce such evidence when it could have reasonably done so, it risks a finding that no diversion of staff time has been established.

2.     It must also be established that the diversion caused significant disruption to the business.

3.     There is a presumption that, had their time not been diverted, the staff would have applied this time to activities which would have generated revenue directly or indirectly for the business in an amount at least equal to the costs of employing them during that time.

The court confirmed that, in respect of the latter point, a defendant could rebut the presumption to reduce the damages award (for example by demonstrating that the diverted staff would not have been working to their full capacity). Presumably, this cuts both ways and a claimant could rebut the presumption to increase the damages award (for example by demonstrating that the diverted staff would have earned greater revenue for the business by carrying out their usual duties).

As a matter of practicality, therefore, businesses should ensure that their staff maintain a detailed contemporaneous record of the diverted time (both in terms of what they did and how much time they spent doing it). If that ship has already sailed, then a claimant may be able to rely on a retrospective assessment of the staff time diverted. However, it takes the risk that, at best, the court may slash the assessment to reflect the unreliability of the figures even if it considers the method used to be essentially sound (20% discount in the case of Bridge UK.com (2)); at worst, the court may find that it would have been reasonable for the claimant to have kept a record and that, in failing to do so, it has failed to establish its loss.

If possible, a better alternative to diverting staff from their usual duties would be to pay them extra to work outside of their usual hours (which the court granted in the case of 4 Eng  (3)) or hire in new staff to deal with the wrong. Whilst a claimant still has to demonstrate the time incurred (how much and on what) and the agreed rate of pay, it does not need to demonstrate the extent of the disruption to the business as there will have been no diversion.

Preparing for, or conducting, litigation

Whilst it may seem unfair, the present position is that a party cannot claim for the cost of its staff preparing for, or conducting, litigation regardless of whether they are existing staff diverted from their usual duties or working additional hours or new staff hired in. There are only two exceptions, which are:

Where the claimant – which includes a company – is acting as a litigant-in-person (but, even then, a number of restrictions apply); and
Where a member of staff is used as an expert.
Strictly speaking, these comprise the recovery of legal costs rather than damages.

Investigations

In our experience, staff time is mainly wasted in investigating the wrong. In these circumstances, it is not always easy to delineate when the aim of the investigation is to deal with the effects of the wrong or to prepare for litigation for the simple reason that, often, the investigation is for both reasons.

Unfortunately, the law is not clear in this area. The case of Avrahami (4) suggests that timing is key: in that case, the staff investigation took place around three to four years before the claim was issued and was therefore held not to have been made in the context of pending litigation. However, this is too simplistic an approach and would have been easily rebutted had there been contemporaneous proof that the investigation was solely intended to collect evidence for litigation. Whilst timing is a relevant factor, it is likely that a court would look at all the evidence and attempt to determine the main purpose of the investigation; if split between both reasons, the court would probably try to allocate time between the two, for example by drawing a line in time when litigation became a probability rather than a mere possibility, or by taking an overview of the time spent for each purpose in percentage terms.

A court is likely to place a great deal of weight on contemporaneous records as to intention. If staff are requested to spend time investigating the wrong in order to identify what happened, what are the effects, what can be done to remedy the effects in both the short- and long-term, etc, then these reasons should also be noted to improve the chances of recovering these costs.

This bulletin should not be taken as definitive legal advice on any of the subjects covered.  If you require legal advice on any of the subjects covered please contact Suzanne Hu on 020 7955 1441 or suzanneh@rosenblatt-law.co.uk

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