For companies, the cost of dealing with a crisis can be hard to quantify, which has made it hard to make a claim against the party responsible. Until now …
In recent years there have been a number of cases in which the court has had to consider whether a claimant is able to recover a sum representing the lost time by directors and other staff in taking steps to overcome the problems caused by a defendant's breaches.
Here's the scenario. One day the supplier phones to say it will not be able to make the next delivery of components for your product, as the batch about to be supplied has an inherent defect. He is also concerned that the components supplied over the past 12 months have the same problem. What do you do?
You need to find a new supplier as a matter of urgency. You also need to contact your customers who have recently been supplied with the defective product and arrange to inspect and test it, and if necessary, replace it.
You set up a "disaster recover committee" to deal with the problem. The committee includes a director, a number of middle management and some technical and administrative staff. Those involved in the committee will not be able to carry out all their usual day-to-day tasks. Your company will have lost a large part of the services which those appointed to the committee usually provide to the company. Will you be able to recover that loss from the defendant as part of your damages?
The main problem that you may face is that your company may not be out of pocket, in that it may not have paid the committee members extra for carrying out their out-of-the-ordinary tasks. They, like many others, may not be paid overtime and are simply required to work the time that it takes to get the job done, be it evenings or weekends. As a result, the defendant may argue that you have not suffered any increased expenditure as a result of the breach and as a result there is no loss to recover.
Judge Toulmin in Phee Farrar Jones Ltd vs Connaught Mason Ltd held that managerial time could only be claimed if it could be proved that the company had lost some income, or if it resulted in a discrete payment being made by the company, for example, payment of overtime. In Phee Farrar the court failed to award any damages for lost time as there was no evidence that any income-generating opportunities were lost.
More recently, however, the court in R+V Versicherung AG vs Risk Insurance and Reinsurance Solutions SA and Others decided that a company can recover damages in relation to the diversion of internal resources caused by a defendant's breach, even if the company has not, or cannot, prove that it has suffered any loss of income as a result of the diversion.
R+V suggests that, if no loss of income can be shown, a claimant will have to show that there has been a "significant disruption" to its business. The staff must have been significantly diverted from their usual activities. The court stated that it has to be shown with "sufficient certainty" that the wasted time was spent on investigating and mitigating the breach. Or to put it another way, the lost time (and as a direct result the wasted expenditure) was "directly attributable" to the defendant's breach.
How should the loss be quantified? The previous cases make it clear that it should be done in such a way that is reasonable.
So if the member of staff has a charge-out rate, the calculation is easy. If not, it is more difficult, but still possible.
The company may be entitled to recover the cost of the salary paid to the relevant person, for the time taken in carrying out the remedial work. In addition, if the person concerned generates income for the company, it may be entitled to recover a contribution towards the company's general overheads.
The company may also be able to recover the cost of use of vehicles and other plant and machinery by its employees in carrying out the rectification work.
However, in order to be able to recover lost time, all those involved in the rectification work should be asked to keep accurate notes, recording the time spent in dealing with the rectification and how that time was spent and whether any plant or machinery was used. Without those records, the time really will be lost - although perhaps not wasted.
James Levy is an associate at Lewis Silkin. Email: firstname.lastname@example.org