Claiming head office personnel costs as part of a loss and expense or damages claim is often an uphill task. Claims are often met with the argument that the personnel would have been employed by the contractor in any event and the contractor has, therefore, not incurred any additional cost. Kevin Reeves notes that recent case law from the UK may make it easier to claim, and sets out principles that can be applied in other jurisdictions.
When making claims for loss and expense or damages, whether arising from employer delays, variations or otherwise, contractors will often want to include the cost for time spent by head office personnel. However, this is frequently rejected on the basis that the head office personnel would have been employed in any event and, therefore, no extra cost has been incurred. ‘Keating on Construction Contracts’, 8th Edition, 2006 explains compensation for employer delays as follows:
“If particular head-office costs are proved to have been increased by a contract’s delay, they are recoverable. Examples would be the cost of extra staff recruited because the particular contract was in difficulties or the cost of extra telephone calls and postage in the period of delay. But substantial claims of this kind are rarely made because most contractors are able to cope with delay on a particular contract with their existing resources whose cost is reasonably constant.”
This may not appear particularly fair to contractors, who have had to divert significant time of their managers and other head office staff to deal with a delayed project only to be told that they would have incurred those staff salaries anyway and so are not entitled to claim. Contractors may, therefore, take some comfort in the recent English Court of Appeal case of Aerospace Publishing Limited v Thames Water Utilities Limited (January 2007) and the subsequent High Court case of Bridge UK Com Ltd v Abbey Pynford Plc (April 2007).
AEROSPACE PUBLISHING
Aerospace Publishing involved a claim for damages arising from a flood. The claim included time spent by Aerospace Publishing’s staff as a result of the flood. While it is not a case involving a construction contract, it is important because it is a Court of Appeal decision that sets out principles of general application for recovery of personnel time and usefully analyses a number of previous cases.
The Court of Appeal reviewed the earlier judgement Tate and Lyle Food and Distribution Ltd v Greater London Council (1982), where the defendants were liable to the claimants for having failed to dredge silt which had built up during its construction of piers for a ferry. The claimants themselves had to dredge the silt and, as part of its claim, claimed managerial and supervisory expenses. Although the judge rejected this part of the claim, in doing so he stated:
“I have no doubt that the expenditure of managerial time in remedying an actionable wrong done to a trading concern can properly form the subject matter of a head of special damage. In a case such as this it would be wholly unrealistic to assume that no such additional managerial time was in fact expended.”
The Tate and Lyle case is important because it was the first case that gave useful guidance on recovery of management time and because it made clear that management time was in fact claimable. However, it did not address the counter-argument that where such management time is for salaried staff, the management costs would have been incurred in any event, and thus no additional costs have been incurred.
However, the Aerospace Publishing case went on to explain how such management costs may be claimed.
Aerospace Publishing owned a library and archive that was damaged by a flood from a burst pipe. Thames Water was liable to Aerospace Publishing for the loss and damage that resulted. As part of its claim, Aerospace Publishing sought to recover payments made to staff for work done in relation to, and consequent upon, the flood.
Aerospace Publishing would have always had to pay the staff salaries, whether the flood had occurred or not. The claim was, therefore, not made on the basis that, in the absence of the flood, Aerospace Publishing would not have had to pay them. Instead, the claim was made on the basis that, if not for the flood, these employees would have concentrated upon their conventional activities, out of which Aerospace Publishing would have made money. The claim was, therefore, framed in terms of loss of revenue from these other activities.
After a review of Tate and Lyle and four subsequent cases, the court in Aerospace Publishing concluded that this was a valid approach. Staff time could be included as damages where the staff had been diverted from other activities on the basis that such diversion resulted in a loss of revenue from those other activities. The court considered that the previous cases established three propositions for such a claim:
(a) The fact and extent of the diversion of staff time have to be properly established. Evidence of these should be provided, failing which the claimant is at risk of a finding that they have not been established.
(b) The claimant has to establish that the diversion caused significant disruption to its business.
(c) Strictly, the claim should be cast in terms of a loss of revenue attributable to the diversion of staff time. However, 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 diverted, staff would have been applied 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. Based on the particular facts of Aerospace Publishing, the judge then concluded that the diversion of time for a significant number of the claimants’ employees had been set out in detail and adequately established; and that there could be no sensible challenge to a conclusion that its business was thereby disrupted, indeed substantially so. The court was, therefore, entitled to draw the inference that the employees had been diverted from revenue-generating activities and to make allowance in the award of damages for the cost of the diverted employees.
BRIDGE UK
Three months after Aerospace Publishing, the Bridge UK case also had to consider a claim for staff time. In this case, a contractor was engaged to construct a slab on which a printing press was to be installed. As a result of defects in the slab, the installation of the printing press and commencement of its operation were delayed by over a month. The owner claimed damages, including a claim for management time dealing with the problems caused by the contractor.
Although the Aerospace Publishing case was not referred to in the judgment, some of the earlier case law considered in Aerospace Publishing was. The judge found that the manager had been diverted from his usual activities of selling and marketing the company and awarded damages based on the period of time that he was diverted. This is broadly consistent with Aerospace Publishing and is a useful judgment to confirm that the approach is acceptable to the courts. However, Bridge UK also went on to consider what evidence was required to support the time claimed, especially where detailed contemporary records were not available.
By reference to the earlier case of Holman Group v Sherwood (2001), the judge concluded that in the absence of records of the time actually spent by the manager, evidence in the form of a reconstruction from memory was acceptable. The manager had calculated that he was engaged for 128 hours in dealing with the problems caused by the contractor, based on his assessment of the time he spent on various matters. The assessment was made retrospectively. While the judge accepted this approach, he went on to point out that such an assessment was an approximation of the hours spent and may over-estimate or under-estimate the actual time which would have been recorded at the time. He then cut the hours by c20%, allowing 100 hours of the manager’s time as damages.
CONCLUSION
In claims for loss and expense or damages, these recent cases suggest that the time of head office staff may be claimable provided that the three ‘propositions’ set out in the Aerospace Publishing case are met. Such a claim is on the basis of loss of revenue arising from diversion of the staff time, which is calculated using the cost per hour of employing the staff.
Evidence of the time spent in the form of timesheets or other contemporary records should be provided to prove the time spent.
However, the Bridge UK case confirms that a retrospective reconstruction is allowable, but this should be treated with caution. An unconvincing reconstruction may result in that part of the claim being rejected for lack of evidence. As the judge in Tate and Lyle said when referring to management time:
“I would also accept that it must be extremely difficult to quantify. But modern office arrangements permit of the recording of the time spent by managerial staff on particular projects. I do not believe that it would have been impossible for the plaintiffs in this case to have kept some record to show the extent to which their trading routine was disturbed...”
While courts will consider reconstructions, experience confirms that keeping adequate records and being able to show what occurred will improve a party’s position.
Kevin Reeves is based at Trett Consulting’s Kuala Lumpur office.