Business being what it is today, it always carries the risk of contracts not being fulfilled. As a result, directors and key staff are often drawn into managing and remedying issues arising out of contractual breaches or delictual situations. Given that this can result in key personnel being distracted from their strategic and, ultimately, business objectives, what can a business do to alleviate its losses? To some extent the answer lies in how the court will deal with a claim for recovery of the costs involved in management time and whether, in particular, it is foreseeable that a business may have to expend a considerable amount of its managerial and staff resources in an effort to alleviate its losses. How then does the court approach the matter?
REMOTENESS OF DAMAGES
When an action that includes a claim for management time is raised, the defender will often try to argue that this head of loss is too remote. The well-known English case Hadley v Baxendale[1854] is a leading authority in Scotland when courts are asked to deal with remoteness of damages. The court has developed a two-part test for determining whether or not there is a direct link between the loss suffered and the breach of contract. Under this test, a party can claim for loss where it can fairly and reasonably be considered that the loss arose naturally from the breach itself, or (where it can reasonably be supposed to have been in the contemplation of both parties at the time at which the contract was agreed) as a probable result of the breach. To put it another way, and in accordance with the dictum of Lord Kinloch in the case of Allan v Barclay [1864]:
‘The grand rule on the subject of damages is that none can be claimed except such as naturally and directly arise out of the wrong done; and such therefore as may reasonably be supposed to have been in the view of the wrongdoer.’
Under these long-established cases, where the cost of management time arises naturally from the wrong and is reasonably foreseeable, it should be covered by damages. There are, however, obvious challenges in the pursuit of costs for management time. Businesses must always pay their staff and so incur management time costs irrespective of whether they are dealing with a breach of contract. Where staff time has been devoted to remedying a wrong, businesses might find proving loss that results from the wrong problematic. A wrongdoer may argue that this overhead is neither a loss nor directly attributable to the wrong. Given these issues, what do the Scots cases say on the subject?
RECENT SCOTTISH AUTHORITY ON MANAGEMENT TIME CLAIMS
Scottish authority suggests that management time costs are recoverable in an action for breach of contract or delict. In Euro Pools Plc v Clydeside Steel Fabrications Ltd [2003] the contractors responsible for the installation of swimming pool water management systems raised an action of damages against the suppliers of faulty filter tanks installed at two leisure centres. The terms of the installation contracts obliged the pursuers to rectify the defects. The pursuers’ claim was based on the cost of time spent by their managing director and employees in rectifying the problem. The defenders purported to argue that a claim for disruption to the pursuers’ business had to be linked to an identifiable loss such as additional costs incurred in completing contracts with third parties.
In finding that the loss sustained in a claim for disruption of business included additional work required to be performed in consequence of the breach, Lord Drummond Young explained that:
‘A managing director will normally be expected to devote the whole of his working time and effort to the affairs of his employer… The tasks of a managing director are obviously very variable, but they will almost invariably include the strategic planning of the company’s business and, at a strategic level, the search for new markets and the development of new products. Those tasks are critical to the development of the business; indeed, in modern conditions, they are usually critical to its very survival… If one of the company’s suppliers commits a breach of contract, and in consequence, the managing director requires to spend a significant amount of time supervising remedial measures, that time is lost to the other tasks that the managing director is obliged to perform. That in my opinion clearly represents a loss to the company.’
The defenders argued that the disruption had been caused by contractual obligations undertaken by the pursuers to the main contractors and was not a natural consequence of a contract for sale of goods, so fell foul of the two-part test set down in Hadley. Lord Drummond Young responded that:
‘In a contract for the sale of goods where it is known that the purchaser will use those goods to perform a contract with a third party, the fact that the purchaser may require to perform remedial works under the latter contract is a matter arising “according to the usual course of things” to use the words of Alderson J in Hadley v Baxendale.’
The competency of management time claims was also recognised in the earlier case of Lomond Assured Properties Ltd v McGrigor Donald [1999], which concerned a contract between a property development company and a firm of builders for the construction of three houses. For tax reasons, the purchase price for the houses was paid before completion and the builders then granted standard securities in favour of the developer. It transpired that these securities were postponed to other securities as a result of the developer’s solicitors’ negligence. When the builders went into receivership, the developer was unable to recover any sums from the builders and had to instruct another firm to complete the houses at additional cost. Damages were sought for losses, including the time spent by the developer’s directors in dealing with the problems that had arisen as a result of the solicitors’ negligence.
The developer submitted that the directors were paid on a time basis to deal with the company’s problems, resulting in a total cost of £58,000; a cost unnecessarily incurred because, had everything gone to plan, the expense would have been avoided given that it was not equivalent to salary payable.
It was argued for McGrigor that, although in principle managerial time is a competent claim, the number of hours worked, the reasonableness of charges or whether the work related to issues caused by McGrigor’s fault could not be established and therefore could not be quantified.
The court held that the time spent by directors dealing with the problems that had arisen was a recoverable head of loss, but the time spent in preparation for litigation was not. Lord Johnston stated that although there was ‘much force in counsel for the defenders’ position’ it was ‘too stringent’ on the basis that, but for the negligence, the directors’ involvement in the development would not have been necessary. In their assessment of time spent mitigating their loss, the pursuers had made a discount for preparation for litigation.
The Inner House of the Court of Session has taken a different view where the claim concerned the costs of employment of specialist personnel as a result of breach of contract. In Johnston v WH Brown Construction (Dundee) Ltd [1999], builders constructed an office block for an employer whereby any defects appearing in the building during the year after completion were to be specified by the employer in a schedule of defects to be delivered to the builders, and were then to be made good by the builders at their expense. The employer instructed architects to prepare such a schedule, showing defects allegedly arising out of breach of contract, and delivered it to the builders who remedied the defects. The employer then raised an action against the builders claiming the costs of preparing the schedule. The action was dismissed by the judge and the employers reclaimed for architects’ costs.
The court found that this claim was not competent for two reasons: firstly, the contract itself provided its own remedy and secondly, the employer had entered the contract as his own supervisor and any costs incurred in employing a third party had to be at his own expense. The court stated that the contract:
‘… appears to contain its own remedy… the remedy is for the employer to give instructions to the contractor to remedy such defects. If they are duly remedied there is no further redress for the employer under [the contract].’
The court further stated:
‘If an employer chooses to enter into a building contract without employing an architect to design the building and to supervise its construction, he must be taken to be acting as his own supervisor of the works. If he chooses to employ a third party to examine the building to see if there are any defects then, in our view, he must do so at his own expense and not at the expense of the contractor, even though some defects may have been found… we are satisfied that the cost of preparing a schedule of defects by a third party is not truly consequential loss as that term is understood in Hadley.’
THE SUCCESS OF MANAGEMENT TIME CLAIMS IN SCOTLAND
In view of the outcome of these cases, it is possible to draw out some worthwhile points as follows:
- There has to have been loss and that loss must be attributable to the wrong. Analysis of the above cases suggests that in order for a business to establish a successful claim for management time, it will have to be demonstrated that time has been spent on remedial work causing a disruption to business activities, in other words, loss, which is a direct consequence of the breach or the delict.
- There have to be adequate records of time spent mitigating loss so that the loss can be quantified. Meticulous records of time spent on problems caused to a business by breach of contract or delict will certainly be of great assistance in a claim for the cost of managerial time although in Lomond the claim for cost of time was deemed to be legitimate in principle despite the fact that records were not ‘entirely satisfactory’. However, consideration of these cases does show that, in defending management time claims, parties are inclined to challenge the adequacy of records detailing time spent remedying a wrong.
- The cost of preparation of litigation is not covered by damages. Businesses should be aware that there is a distinction between the cost of managerial time, which is recoverable, and the cost of preparation for litigation, which is not.
- Where a party has chosen to contract as its own supervisor, it cannot then claim for costs paid to a third party in connection with the breach.
In conclusion, while all businesses will wish to avoid having to accrue management time on breach issues, they should not lose sight of this being a valuable head of claim which can go some way to alleviating the disruption faced by those placed in these unfortunate situations.