UK: Time Is Money: Recovering The Cost Of Wasted Management Time

Last Updated: 25 October 2006
Article by Andrew Howell

Internal investigations can eat up company resources. Andrew Howell and Catriona Aves of Barlow Lyde & Gilbert highlight recent cases of companies that have recovered the costs.

Major internal investigations in businesses rarely seem to be out of the headlines, especially very costly ones in response to pressure from regulators. Kroll and Deloitte’s expensive investigation into an alleged fraud at advertising giant WPP is just one example.

With the current emphasis in litigation on preparing cases upfront, huge sums can be spent on internal reviews before proceedings even begin. In cases where an investigation leads to litigation, to what extent can businesses recover internal review costs? Can, for example, an action be justified solely to recover investigation costs and nothing more?

In principle, so-called wasted management costs are recoverable, but there have been relatively few successful cases. There has been uncertainty as to whether a claimant needs to prove some additional expenditure or loss of revenue or profit to succeed, or whether the fact that the time has been spent is of itself sufficient.

The R&V Case

Two recent High Court decisions in R+V Verischerung AG v Risk Insurance & Reinsurance Solutions SA & Others [2006] have, however, revisited this topic. The first decision, in January 2006, made it clear that lost management time is, in principle, a distinct head of damage and that costs can be recovered even if no loss of profit or revenue or additional expenditure is shown. The second decision, in July 2006, related to the practicalities of putting together a claim.

R+V was a case about contracts of reinsurance; specifically the negotiation and operation of binding authorities under which R+V authorised the defendant, Risk Insurance & Reinsurance Solutions, to write contracts of reinsurance on its behalf. The defendants concluded various additional agreements under the binders which entitled them to receive very significant commissions, without R+V’s knowledge.

The court found the defendants guilty of dishonest conspiracy. R+V spent a great deal of time investigating and seeking to mitigate the effects of this conspiracy, as well as handling claims made under the contracts for reinsurance. R+V sought compensation for all of this investigation time.

By allowing R+V’s claim in January 2006, in principle, Mrs Justice Gloster rejected the argument that it was only the loss due to the diversion of resources as a result of the conspiracy which could be claimed. This was because the effect of time spent on the investigation deprived the employer of the resource of their employees. Therefore, a claimant need not show loss of profit or business as a remit of the investigation (so this does not exclude non-profit making organisations from claiming).

The court went on to state that it could see no difference in principle for recovery between (a) the time spent by employees working in a department specifically set up to investigate and mitigate breaches, and (b) where there is no such department but employees nonetheless spent time pursuing such investigations (a distinction drawn in Admiral Management v Para-Protect [2002]).

Quantifying The Recovery

However, the hearing in January 2006 did not deal with the actual amounts R+V could recover. This was dealt with at a separate hearing in July 2006 (R+V Verischerung AG v Risk Insurance & Reinsurance Solutions and Others [2006]), where Mr Justice Tomlinson endorsed the approach of Mrs Justice Gloster, making it clear however that it required proof "with sufficient particularity" that there had been "some significant disruption" to the business. Drawing upon Mrs Justice Gloster’s judgment, this means evidence of employees being "significantly diverted" from their normal activities.

In order to quantify the worth of "significant disruption", Mrs Justice Gloster’s judgment implied that the employee’s salary is the relevant benchmark by which to assess any damages due. R+V took this on board, and its evidence for the July hearing included a calculation of the gross wage of each employee and employee statements (22 in total), confirming time spent on the matter. The claim comprised employee time, internal overhead costs and fees charged by external contractors.

R+V claimed €3,328,357 and recovered €3,143,357. €185,000 was disallowed because Mr Justice Tomlinson felt that the work represented by this amount probably related to subsequent litigation rather than prior investigations.

Risk appeared not to challenge much of the evidence produced by R+V, so the minutiae of the evidence was not examined. However, Mr Justice Tomlinson appeared satisfied with the evidence, commenting that R+V had "attempted to discharge the evidential burden that lies upon it without disproportionate expense and without…descending into a high degree of particularity." It seems, therefore, that the court was prepared to take a realistic approach to the evidence required, although this may have been influenced by the dishonesty allegations in this case.

Record Keeping Critical

R+V’s successful recovery undoubtedly rests upon the records it was able to produce. The importance of records for a successful claim is well established and exemplified by Tate & Lyle Food and Distribution Limited and Another v Greater London Council and Another [1982]. Here, the principle of recovery for wasted management time as a result of breach of contract was accepted, but the claim failed because the claimant didn’t provide any contemporaneous records.

Since Tate & Lyle, though, the courts have relented somewhat and allowed claims where records have not been contemporaneous, but reconstructed, as was the case for the successful claimants in both Pegler Limited v Wang (UK) Limited [2000] and Horace Holman Group v Sherwood International Group Limited [2001].

However, the court acknowledged in Pegler that this is likely to be an exercise containing "discrepancies, exaggerations and errors". The amount recovered was less than that claimed and no doubt less than if contemporaneous documents had been available. In R+V, although there appear to have been contemporaneous records (underwriting and claims files), a lot of work had to be done to justify the claimed figures.

To ensure the opportunity to recover internal costs is not lost, it is helpful to adopt a system that accurately records all of the time spent by employees (in addition to professional costs). Records need to identify the particular task being carried out, so as to constitute a meaningful record against which the court can assess losses. Equally, evidence that an internal investigation causes disruption to other parts of the business (which commonly proves to be the case) needs to be collated contemporaneously.

Questions Of Disclosure

If investigation costs are to be claimed in subsequent litigation, all records of that initial review are potentially disclosable. Thought needs to be given to how to maintain a division between privileged documents which relate to the merits of the investigation but which a claimant wouldn’t want to disclose, and documents which record the work done which a claimant has to disclose to recover its costs.

The distinction is often not an easy one to draw. In a recent case involving Barlow Lyde & Gilbert, a court order was obtained to hive-off the calculation of the investigation costs precisely to avoid concerns about disclosing privileged documents before the substantive issues in the claim had been resolved.

The R+V decisions, then, clarify the principle that wasted management and staff time costs in relation to investigations can be recouped, if supported by evidence and that the court will take a pragmatic approach, accepting both contemporaneous and reconstructed records.

This surely makes sense. The reluctance to draw a distinction between established investigatory departments and ad hoc investigative work by employees is also helpful recognition of the realities of the burdens placed upon organisations facing such investigations. It is a cost burden which is only likely to increase.

Internal Costs Of Litigation

By contrast, internal costs incurred in relation to management time spent on litigation itself are not generally recoverable as exemplified by the €185,000 that R+V were not entitled to recover. Similarly, if an organisation expends costs investigating a claim to defend what turns out to be an unfounded court action, is there any reason logically why it should not be able to recover those costs as well as its legal expenses? As matters stand, these investigation costs aren’t usually recoverable either, probably for reasons of pragmatism to stem further disputes about the costs of litigation.

Nonetheless, for a potential claimant embroiled in internal investigations which could easily expand into litigation, the message from R+V is clear: investigation costs are recoverable but internal procedures may need to be revised to ensure lost time doesn’t always mean (still more) lost money.

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.

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