The recovery of management costs

Resolving disputes on construction contracts is costly and time consuming. In certain cases, the time that management devotes to the dispute may also be severely disruptive to the ongoing business. The parties will therefore want to take into account the recoverability of the cost of its management and employees in connection with the dispute resolution process.
In December 2002 I reported the case of Amec Process & Energy -v- Stork Engineers & Contractors, which dealt with whether management time could be recovered as costs in arbitration or litigation proceedings. It was always thought that the successful parties' direct costs incurred in using its own employed staff to prepare material for the case would not be recoverable as costs in the proceedings.
However, that case appeared to indicate a softening of the court's attitude in awarding costs to a successful litigant. Judge Thornton clearly felt that the Civil Procedure Rules allowed him to widen the category of employees that could be reimbursed in the event of a successful litigation. This included Amec's own personnel and agency staff, which had been engaged to undertake much of the work involved in collating, analysing and presenting the primary and supporting evidence to be used by the expert witnesses.
Contract breaches
An alternative to recovering management costs as costs of the proceedings would be to seek to recover such costs as a head of damages for breach of contract. This issue was examined in April 2003 in the case of Phee Farrar Jones -v- Connaught Mason.
Phee is a recruitment consultancy that had engaged Connaught to carry out some refurbishment works on its office premises. During the
carrying out of those works, a flood occurred, causing extensive damage to the building. Connaught admitted liability for the flood, which caused a significant delay to the completion of the refurbishment works. As part of its claim against Connaught, Phee included a claim for 90 hours of a manager's time expended in organising a move to alternative accommodation.
It would normally be thought that managerial expenses such as this could be claimed as damages if the claimant was able to establish that, as a consequence of the other party's breach, the claimant's trading was disturbed in a way that led to the expense being incurred. In a decision that appeared to show a more restrictive approach, Judge Toulmin rejected Phee's claim. There was no evidence that income generating opportunities were lost as a consequence of the manager being required to organise the move to alternative accommodation and Phee had not demonstrated that the manager's costs were discrete expenses that would not otherwise have been incurred.
Turning point
This decision appears to have been in stark contrast to the approach of Lord Drummond Young in the Court of Session in Scotland two months earlier in the case of Euro Pools -v- Clydeside Steel Fabrications.
Euro Pools designed and installed machinery and pipework for the circulation, pumping, heating, filtering and treating of water in swimming pools. It had been engaged to install filtration systems for swimming pools being constructed at leisure centres in Burntisland in Fife and East Molesey in Surrey, and had subcontracted with Clydeside to fabricate and supply the filtration tanks required for each installation.
These were expected to have a working life of up to 40 years and, critically, were to be lined internally with high build epoxy as an anti-corrosive lining. Shortly after installation it was discovered that the tank linings had failed and that the walls of the tanks were suffering widespread corrosion.
Euro Pools claimed the costs of remedial works carried out by specialist contractors it brought in, and also claimed that some of the work involved in investigating, decommissioning, and recommissioning the filters had been carried out by its own employees, who were diverted from other contracts for this purpose.
This included the time and travel costs of one of its site engineers and its managing director, both of whom were claimed on daywork rates.
Euro Pools argued that had these employees not been engaged in the rectification works, they would have been able to earn income at higher charge-out rates.
Clydeside countered that any such losses must be traced through to identifiable financial loss such as the additional cost of completing other contracts. For example, in relation to the managing director, there was no suggestion that he had been deflected from other remunerative activity.
His salary would have been paid by Euro Pools whatever he did, with the result that the company incurred no extra costs simply because he had to work harder.
Lord Drummond Young rejected these arguments. He was satisfied that, if employees are required to perform additional work in consequence of a breach of contract, the work in itself represents a loss to their employer. It was quite wrong to confuse establishing that loss with the quantification of the loss. The claimant was being deprived of services that its employees were otherwise engaged to carry out, and that was sufficient to establish the existence of a loss.
Objective approach
As to the quantification of that loss, an objectively reasonable approach was to be taken. The employer was entitled to make a charge that reflected both employment costs and overheads such as a daywork rate. Subject to providing evidence of those costs, Euro Pools was entitled to reimbursement on this basis.