It is increasingly common in IT implementation disputes for the claimant to seek damages for wasted management time as a head of loss. Usually, the claim is asserted, unconvincingly, in the barest fashion. The claimant simply says that the defendant’s conduct has caused it to waste management time and that details will follow at some unspecified later date. They often do not.
It is only very rarely that the claimant explains how the defendant’s conduct has caused time to be wasted, by whom, to what extent and how this has affected its business. However, as the courts show themselves more willing to award large sums in compensation for wasted management time where the claim is properly constructed, it is important for IT suppliers and their lawyers to be aware of the principles involved.
The Principle
The principle that staff time spent dealing with the effect of a breach of contract could be recovered as a head of loss was established in the case of Tate & Lyle Fruit and Distribution Limited v Greater London Council and another [1981]All ER 716. In that case the plaintiff alleged that the defendant was in breach of contract by failing to dredge away silt from a river-bed. The plaintiff claimed for the cost of dredging the bed itself and for the management time and resources expended in doing so. It was held that in principle the cost of wasted management time was recoverable. However, the court refused simply to apply a rule of thumb in awarding damages. In fact, in the absence of contemporaneous records of time spent, and even though there was evidence that management had spent time on the remedial works, the claim for wasted management time failed.
Salvage Association v CAP
The first reported instance of a wasted management time claim succeeding in an IT context was Salvage Association v CAP Financial Services Limited [1995] FSR 654. Here, the plaintiff succeeded in recovering damages for wasted time by relying on some contemporaneous records and some estimates of time spent remedying defects in the system supplied by the defendant. However, the case also established another important principle. The plaintiff was a non-profit-making organisation. The defendant argued that, as a result, the staff time could not otherwise have been put to profitable use and the plaintiff had therefore suffered no loss. The court disagreed, holding that it was not necessary to show that the staff time concerned would otherwise have generated a profit. It was enough that the time would have been put to productive use and contributed to the efficient management of the organisation.
Pegler v Wang
Pegler Limited v Wang (UK) Limited [2000] ITCLR 617, the claim for wasted management time was in two parts. The claimant had maintained contemporaneous time sheets for time spent implementing a new system and, although the claimant’s right to recover the cost of the new system was challenged, there was no real dispute over this time. However, the claimant did not have contemporaneous records of time spent on the implementation of the system the defendant had contracted to provide and in carrying out urgent remedial work when the implementation failed. Instead, it had carried out a detailed reconstruction exercise with as many of the personnel involved as possible, cross-checking their recollections to the project documentation.
HHJ Bowsher QC made a number of important findings. He rejected the ‘no records, no recovery’ approach, and also held that there was no basis for distinguishing between management in the traditional sense and other staff such as white collar office workers and computer programmers. He readily inferred that the additional work had diverted time that would otherwise have been of value to the claimant and accepted specific evidence from employees that other work had suffered, even though there was no evidence of any quantifiable effect of this on the claimant’s business. However, he also found that employees had worked ‘beyond the call of duty’ and held that the claimant could not recover for hours worked in excess of contractual requirements where overtime had not been paid. He adopted a broad-brush approach to quantum, roughly halving the claim to reflect the uncertainties about the true cost of the wasted time to the claimant. It is important to note, however, that the reduced award was still £534,000.
Horace Holman v Sherwood
More recently, HHJ Bowsher QC has again been called upon to consider a similar claim, in Horace Holman Group Limited v Sherwood International Group Limited (
The judge rejected any distinction between short and long periods of time wasted, or between time wasted by senior as opposed to less senior personnel, or by profit-makers as opposed to back-office support staff. He also noted that an employee has a value to his or her employer in excess of what the employee is paid. The claimant had lost that value, but only to the extent employees had been sorting out problems arising from the failed implementation; they would not otherwise have done nothing. In addition, in what might be seen as a mild departure from his ‘no recovery for unpaid overtime’ comments in Pegler, he thought that productivity would suffer where employees had to work and were deprived of leisure time in the evenings or at weekends.
HHJ
Conclusions
It has long been established that where a supplier fails to deliver under a contract, the purchaser may source its requirements elsewhere and may claim the additional costs of doing so from the defaulting supplier. Compensating the purchaser for the cost of using additional inhouse resource in connection with software development or system implementation is merely the flip side of that same coin – and is now a fact of commercial life which IT suppliers and their lawyers need to be ready to address. The important question is: how do they do this?
The starting point is the contract itself. Although wasted staff time could conceivable constitute an indirect loss, it will in most cases be a direct consequence of a contractual failure to perform. For example, staff may spend more time than planned on implementing a new system, or developing workarounds or using manual procedures where the system fails to deliver. Suppliers should therefore factor their potential liability for this into their negotiations over the allocation of risk under the contract. It is likely to be difficult to reflect this risk in an increased price, but it should be a factor when considering the extent of any exclusion and limitation of liability clauses.
IT suppliers should also ensure that likely project resource for both parties is as clearly defined as possible in advance of work beginning and that any widening of scope under change control procedures also addresses any increased manpower requirements. Careful and conservative forecasting, if possible written into the contract, of the staff time the purchaser will commit to a project will help the supplier to understand the extent to which the purchaser may incur wasted staff time in the event of breach of contract and is also a vital part of defending wasted management time claims. For example, if the supplier had forecast to spend ten man-days, and the purchaser six, on implementing a particular module, it may be difficult to argue in principle with a claim for 16 man-days spent implementing a replacement module. However, the potential cost of that claim will at least be known at the time the contract is concluded.
Another reason for determining likely project resources at the outset is that a purchaser will, if its claim is based around the benefits it expected the new system to bring (rather than its wasted expenditure), have to give credit against the claim for the time that would have been spent on the project had the contract been performed. The alternative to contemporaneous forecasts is expert evidence, which can produce wildly diverging views and lead to the parties falling in behind their expert’s views rather than seeking early resolution of disputes.
Finally, the Pegler and Holman cases show that it is not always necessary to have contemporaneous records to recover for wasted management time and that the true cost of wasted time to the purchaser’s business may remain obscure. However, particular aspects of the principle espoused in Tate & Lyle remain important; the purchaser has the burden of proving the amount of time wasted as a result of the breach or breaches complained of, as well as the fact that time has been wasted. In defending claims for wasted management time, therefore, the starting point is to ask for the time records relied on. If there are none, the reasons why not should be explored and any time reconstruction process should be carefully critiqued by reference to the personnel involved and the underlying project documentation. It should also be borne in mind that the courts are less likely to be sympathetic to lack of records in professional organisations where you would expect contemporaneous time recording to be the norm.
Tim Strong is a Partner of Barlow, Lyde & Gilbert.
