Time is money

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Submitting bills for wasted staff time in pursuance of an initial claim are common enough, but a landmark case means insurers should be alive to a potential upsurge in rates, say Jane Howard and Daniel Hemming

A recent case has significant implications for insurers that may end up footing higher bills for wasted management time. This follows a series of cases that left negligent companies and their insurers paying for the staff and management costs required as a result of their negligence and which established 'business disruption' as a recognised head of damage. The latest case constitutes a departure from other case law in this area, with its particular facts permitting recovery at an increased rate.

In standard claims for business disruption, the cost of wasted staff time spent on the investigation or mitigation of a defendant's breach of duty is recoverable, irrespective of a claimant's inability to prove any additional expenditure or loss of profits. The burden remains on claimants to prove that staff have been diverted from normal activities and that this diversion has caused significant disruption to their business. Once this is established, courts are willing to infer that diverted staff would have generated revenue at least equal to the cost of employing them and quantify the claimant's damages accordingly.

Recent cases have indicated a slight relaxation of the evidential requirements and recovery has been allowed in a situation where it was obvious that the claimant's business would have been disrupted, even though they failed to produce any evidence to that effect.

In the case, 4 Eng v Roger Harper & Another (2008), the claimant initially included a claim for damages for business disruption as part of the relief sought. The defendant had sold a company, Excel Engineering, to the claimant on the basis that it supplied services to Mars UK. It later emerged that the defendant had bribed employees of Mars to pay falsified invoices tendered by Excel. Two directors of the claimant spent a considerable amount of time investigating and unravelling the defendant's fraud. Accordingly, the claimant sought damages for business disruption, calculated on the basis of the directors' salaries, for a total of £279,879.

Revision

However, the claimant later amended its claim after a board resolution was located that provided for the two directors to receive separate remuneration at an increased rate for work undertaken in respect of the defendant's fraud. Accordingly, the claim for business disruption was abandoned to be substituted for a claim for compensation for this additional liability incurred by the claimant to its directors. This claim was for an increased sum of £711,200. The court agreed that the claimant was entitled to be compensated for this liability and eventually awarded £624,888 of the amount claimed.

There is nothing novel about damages being awarded for a liability incurred in consequence of a defendant's actions. However, the defendant argued that this was an attempt by the claimants to increase the damages sought and that to allow recovery would create a situation whereby those in control of a potential claimant could always vote themselves additional remuneration and then seek to recover it as damages. Although the court was not persuaded by these submissions, they raise important concerns.

Claimants may attempt to exploit this mechanism, using separate retainers with staff to increase the size of claims and, in consequence, their likely nuisance and negotiation values. Although claimants will argue that the use of internal staff on separate retainers is preferable to incurring the cost of hiring external consultants - which would also be recoverable - the fear remains that some may use such retainers as sham devices. Bearing in mind the vast, in-house technical and legal resources that many large institutions have, there is a potential to create substantial additional liabilities, which may eventually have to be satisfied by defendants.

It will be interesting to see the judicial consideration that this aspect of the decision in 4 Eng receives. It is important to note that there were a number of factors in the case that would have influenced the court's decision to allow recovery for the directors' remuneration at the increased rate. This includes the fact that time spent by the directors in investigating the fraud was largely outside of their normal working hours and the fact that investigative work of this kind did not fall within their normal duties.

Further, the claimant had not been able to afford to employ external consultants to carry out the investigation, so it was necessary for the directors to do so. The claimant was able to show precisely the hours that the directors had spent on the investigation - as timesheets had been prepared at the time - and that the claim was for deceit rather than negligence, which may have encouraged a more permissive approach to the assessment of damages.

Despite the defendant's representations to the contrary, it seems that, in 4 Eng, the separate retainers were not a device to extract money from the defendant and were necessary if the investigation were to take place. The separate retainers reflected the fact that the investigation was not part of the normal course of the directors' employment.

Defendant professionals and their insurers need to be alive to the possibility of claimants seeking to exploit this mechanism and should seek to distinguish their situation from the particular facts of 4 Eng. It seems unlikely that attempts by large institutions to set up separate retainers with their own in-house staff would attract the sympathy of the courts. It is hoped that the courts will scrutinise any such claim carefully in the context of a professional liability and not tolerate the artificial exacerbation of claims.

- Jane Howard is a partner, and Daniel Hemming a trainee solicitor, with City law firm Reynolds Porter Chamberlain.

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