Wasted management time was established as a recoverable head of loss 65 years ago (British Motor Trade Association v Salvadori ), but until relatively recently there was a considerable degree of uncertainty surrounding the circumstances in which a claim for this type of loss could be successful: tort claims were, in this context, treated differently from contract claims; there were no appellate decisions; and there was a notion that a claimant had first to prove that it had suffered some other form of pecuniary loss (Lonrho v Fayed (No 5) ). Furthermore, whilst a company could recover wasted time if it hired consultants to do this work, it could not recover by way of damages if its own employees carried out the work (Admiral Management Services Limited v Para-Protect Europe Limited ). However, there has been somewhat of a sea change over the past few years, such that, in circumstances where a claimant has a cause of action for damages, the Courts are increasingly inclined to allow the recovery of sums in respect of the cost of management time, even where that work has been done in-house. Firms of accountants who find themselves named as defendants to proceedings are therefore increasingly likely to face claims for damages recoverable in respect of the claimant's wasted management time. Equally, however, the flip side of these developments is that there are now greater opportunities for accountants to claim damages under this head of loss. It has, historically, been frustrating for accountants that, save in certain circumstances, firms cannot recover from the defeated party the cost of management time which has necessarily been devoted to dealing with legal proceedings.
Particularly galling for larger firms, who frequently take on this additional burden in-house, has been a tendency for Courts to award costs or damages under this head only in circumstances where external consultants have been brought in to do the required work. This approach may now be shifting, and this article seeks to highlight some circumstances in which recoveries can be made, either as damages or costs.
Damages claims against accountants for management time
Situations in which accountants may face claims for management time fall broadly into two categories:
Such claims might arise where negligent tax advice has led to a tax liability arising, and the former client may claim for management time spent attempting to mitigate the tax liability, for instance by alternative tax planning or setting aside trusts. Similarly mitigation costs might arise where advice has been given on a commercial transaction which it has transpired now needs to be restructured as a result of a client having relied upon negligent advice.
Investigation will, for instance, be required following an auditor's failure to identify a fraud in a company. It will be necessary to investigate the effects of negligent advice given in a whole range of other circumstances, for instance in relation to a commercial transaction where due diligence and/or modelling has been performed negligently and the client may seek to claim in respect of management time spent investigating the position.
If on the receiving end of a claim for management time as damages it is obviously advisable to press the claimant to disclose for scrutiny all available documents which should be capable of verifying any such claim (e.g. payroll slips and time sheets).
Bringing a damages claim for wasted management time
The circumstances in which such claims might be brought by an
accountant firm would include:
–– Indemnity claims (for example when an accountant sues in respect of negligent advice which has been received from a tax barrister or other external consultant upon whose advice the accountant, as well as the client, has relied)
–– Counterclaims for damages (e.g. for negligent misstatement by client companies to their accountants)
To succeed in bringing a claim for damages under this head it is necessary to demonstrate:
–– The extent to which staff has been diverted to
deal with this issue
–– That the diversion caused significant disruption to its business
If these two elements are established, there is a rebuttable
presumption that, had the staff not been diverted from their usual
work, they would have directly or indirectly
generated revenue in an amount at least equal to the cost of their employment. In other words, the claimant will be able to recover by reference to the cost of their employee's time rather than by reference to any loss of revenue suffered.
Extra hours and higher rates
It is also possible for a firm to recover damages in respect of any additional management time which has been paid for, over and above the usual remuneration of the employees concerned (for instance where employees have worked extra hours and/or at a higher hourly rate). In such circumstances it appears that it is not necessary also to demonstrate that there has been significant disruption to the business.
Investigations prior to the commencement of litigation
A distinction is conventionally drawn between investigations which are carried out by claimants prior to the commencement of proceedings (recoverable as damages) and those that were begun thereafter (irrecoverable as damages). Whilst it has long been an established principle that staff time diverted to deal with litigation in which the company/firm is involved is generally irrecoverable as damages (Cockburn v Edwards (1881), subject to the exceptions set out in the following bullet point), disallowing any claim for damages in respect of investigative or mitigation work done after the point at which proceedings are commenced is arguably a somewhat arbitrary approach and it is unclear whether it will be adopted in relation to more complex investigations which have multiple purposes.
Although the courts are increasingly adopting a more relaxed approach to the evidencing of claims for damages in respect of management time, it would be prudent to keep clear and contemporaneous records of the costs which are being claimed. It is important that anyone mounting a claim for wasted management time:
–– Identifies at an early stage which staff will be
performing the relevant tasks and justifies why this is so
–– Decides whether to respond to a 'disaster' by hiring new staff or diverting existing staff; consideration should be given to hiring new staff or paying existing staff to act outside their normal working hours for extra pay; whilst this might potentially be a more expensive option, the amounts paid will be recoverable in full without it being necessary to show that there has been disruption to the business or that existing staff have been diverted from their usual work
–– Adopts a thorough approach to documenting the cost of the work done contemporaneously or immediately after it has happened, in terms of hours spent by employees/ managers, the likely time spent going forward on remedial work if required, and the exact hourly rates claimed (ideally by producing and retaining payroll slips and time sheets); – a lack of such records may restrict recovery to nominal damages
–– If investigatory work is done, records the purpose of the investigation – it will not be recoverable if it is to prepare for litigation, but will be recoverable if it is to determine the nature/consequence of a wrong
–– Records the tasks that the employees/managers were unable to undertake (but would otherwise be performing) due to the work required to investigate or mitigate the loss
However, it is still worth bringing a claim even if contemporaneous records are not available, especially if the claim is small, as a court may accept retrospective evidence of the time which has been spent, in the form of witness and documentary evidence, as in AEW Architects and Bridge UK.COM Limited (although, as in the latter case, a discount may be applied).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.