DMC Category Rating: Confirmed and Developed

Case Note contributed by Jim Leighton, BSc (Hons) (University of Plymouth), LLM (Maritime Law) (University of Southampton) and Claims Consultant

Background
This case was concerned with certain issues of principle relating to the quantum of R+V’s damages, following a judgment on liability in R+V’s favour: see [2004] EWHC 2682 (Comm). The judgment on liability found that there had been a dishonest conspiracy between one of R+V’s employees and one of Risk’s employees, concerning two binders granting Risk authority to accept business on behalf of R+V on certain terms. The judgment on liability held that R+V was entitled to terminate the two binders and claim damages for conspiracy. This case note is concerned with the recoverability of one particular head of damages, namely internal costs and expenses.

V+R sought to recover its internal overheads and the internal expenses of its managerial and staff time used to investigate and mitigate the conspiracy and for running-off (cancelled or not renewed) business and handling claims. V+R had not however kept thorough records of the managerial and staff time used, so it relied upon estimates provided by its employees. It did not now wish to embark on a further investigation to prove specific loss of profit (for example, increased staff expenditure because of greater overtime). The internal expenses and overheads claimed amounted to €3,528,357.

R+V argued "the management and staff time engaged in seeking to remedy and/or mitigate the wrong, and/or handle claims, caused a significant disruption to its business and that, but for the wrong, the staff in question would otherwise have been engaged on other matters", so – as a result – "R+V may recover for the expense of managerial and staff time spent in investigating and mitigating the conspiracy (and/or breach of contract) and handling the claims, without the need to show any specific loss of profit." Risk however contended "R+V can only recover as damages internal management and staff time and internal overheads to the extent that it has suffered a loss due to the diversion of resources as a result of the conspiracy."

Judgment
The issue at stake was the recoverability of internal overheads and management and staff time expenses, in circumstances where the claimant could not prove that it had suffered a loss of profits due to the diversion of resources resulting from the actionable wrong. The judge highlighted that the decisions referred to by the parties were not easy to reconcile.

The first case considered by Gloster J was that of British Motor Trade Association v Salvadori [1949] Ch 556 (see Roxburgh LJ at p569) where the claimant was held to be entitled to recover as damages for conspiracy the costs of maintaining its investigation department insofar as they were attributable to "unravelling and detecting the unlawful machinations of the defendants", even though these costs were not specifically referable to a particular claim and even though no lost "profit" could be shown. Gloster J concluded "it is clear from this case (and, indeed, others) that in conspiracy, damages are at large and that the court is not over-concerned to require the plaintiff to prove precise quantification of its losses. Whilst … the case does not go so far as to show that in any isolated case overheads can be claimed as loss without proving that the incurring of the overhead expenditure was directly attributable to the conspiracy, the case does show that it is not necessary to show a loss of profit that would otherwise have been made."

This approach was, in Gloster J’s view, confirmed in another context by Tate & Lyle Distribution v Greater London Council [1982] 1 WLR 149 (see Forbes J at p.152E-F) where the claimant claimed damages in respect of managerial time (which might otherwise have been engaged in the claimant company’s trading activities) which had to be spent dealing with the initiation and supervision of remedial work – the GLC having caused silting in the River Thames preventing access to the claimant’s barge mooring. Gloster J stated "what is clear is that Forbes J was referring to expenditure of time and not additional expenditure or loss of profit. Although he refused to award any sum in respect of management time because the time wasted had not been sufficiently particularised or proved … the point that such overheads were recoverable as damages was clearly argued and I do not regard Forbes J’s conclusion on the point as obiter as his decision on the point was a stage in his reasoning."

Gloster J next considered the case of Lonrho v Fayed (No 5) [1993] 1 WLR 1489, 1497, where Dillon LJ (Stuart-Smith and Evans LJ agreeing) approved British Motor Trade Association v Salvadori and accepted that time spent investigating or mitigating a conspiracy was recoverable in principle.

The next case reviewed was that of Standard Chartered Bank v Pakistan National Shipping [2001] EWCA Civ 55, which referred to Tate & Lyle v GLC. It concerned an award that had permitted a claim in respect of a proportion of the salary of an employee, who had been sent to work in Vietnam as a result of the fraud and was diverted from his normal duties. The claim was limited to some US$30,000. Potter LJ, at para 49,¹ rejected the claimant’s claim. Commenting on this case, Gloster J said that it "appears to require a claimant to show a significant disruption to its business, if no loss of profit or increased expenditure can be shown". While remarking that the Court of Appeal in Standard Chartered Bank did not appear to have been referred to British Motor Trade v Salvadori or Lonrho v Fayed (No 5), Gloster J noted that, in the case before her, R+V was alleging that the conspiracy had indeed caused significant disruption to its business (to be proven as a fact at a later hearing, if not agreed between the parties).

The judge notef that in Holman Group v Sherwood (TCC 2001), the claimant suffered damages for the wasted time spent by managers and staff in fixing a negligently installed computer system. In Holman, HHJ Bowsher QC, at paras 72-78, accepted as a general principle that a claimant should be compensated for the cost of managerial time wasted. The only reservation recognised was that, in order to recover, the claimant must present acceptable evidence of the wasted time. Having been satisfied that the Holman Group had sufficient evidence to support the claim, HHJ Bowsher QC allowed all the heads of claim under the "Wasted Time of Directors and Staff" section of the claim. The disruption to the business in Holman was also clearly substantial. Gloster J noted that, significantly, "HHJ Bowsher expressly held [at para 78] that it was irrelevant for the purpose of a wasted time claim whether or not an employee was profit making or non-profit making." Gloster J held that "in not distinguishing between profit makers and non-profit makers, the judge was implicitly allowing a claim for wasted time that was not based on lost revenue (or lost expenditure) but simply on the value of the employees’ work." She considered this to be a useful authority because "clearly there was some argument directed at whether a claimant has to show that such an employee was profit making."

The judge observed that in Admiral Management Services Limited v Para-Protect Europe Limited [2002] 1 WLR 2722, Stanley Burnton J had to decide, as a preliminary issue, whether the cost of work done by in-house computer experts, who were the claimant’s employees, investigating and obtaining evidence of the defendants’ torts was recoverable as damages. The claimant did not pay overtime to its staff who carried out the work, and did not engage additional staff. Stanley Burnton J held that the expense of managerial time could not be recovered if the claimant would have spent the money in any event. Stanley Burnton J held that it was necessary to show either additional expense or a loss of revenue. Admiral did not however consider SCB v PNS or Holman v Sherwood and while the judge in Admiral had sought to distinguish British Motor Trade v Salvadori, Gloster J had some reservation over such a distinction.

Gloster J concluded: "such head of loss (that is, 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. However, this is subject to the proviso that it has to be demonstrated with sufficient certainty that the wasted time was indeed spent on investigating and/or mitigating the relevant tort; that is, that the expenditure was directly attributable to the tort – see per Roxburgh LJ in British Motor Trades Association at 569. This is perhaps simply another way of putting what Potter LJ said in Standard Chartered, namely that to be able to recover one has to show some significant disruption to the business; in other words that staff have been significantly diverted from their usual activities. Otherwise the alleged wasted expenditure on wages cannot be said to be ‘directly attributable’ to the tort."

Comment
Tomlinson J, the judge in the later trial concerning proof of the managerial and staff costs claim, agreed with Gloster J’s decision as regards the principles of law to be applied in such a case – (see [2006] EWHC 1705 (Comm), at [3]), which he neatly summarised and restated at [2]. He noted that her decision appeared to be in line with how the matter is put in the leading textbook – McGregor on Damages (17th Ed), para 40.008.

The justification for the principles of law applicable to the recovery of internal employment expenses and overheads ("internal resources") is that to prove actual expenditure, revenue or profit loss due to the diversion of internal resources on an individual and detailed basis would generally be very difficult, costly and time-consuming, if not unrealistic or impossible in respect of some resources. However there is clearly a loss of some sort caused by the diversion of internal resources, even though it may not be exactly quantifiable, because the employer derives value from the employee’s normal activities or duties, whether profit generating or not, and from the normal or intended use of other company resources.

From a practical point of view it is entirely right that a claimant should be able to recover some form or measure of damages for the use of internal resources where their use amounts to a significant disruption or diversion of those resources from their normal or intended use. It would be unreasonable to limit recovery solely to the expense of bringing in external professionals and experts, because the size of the problem could be extremely expensive to manage with external resources, with no guarantee that those expenses would be recoverable as damages from the defendant. Furthermore, the claimant itself is often best placed to piece together efficiently what has happened and to mitigate the fall out, without necessarily duplicating any work to be done by any external assistance that is reasonably required.