'The Solace Of Quantum' .. Or .. Recovering Expenditure Incurred Post-Breach But Before Proceedings — Damages Or Costs?

Your business is the victim of a breach of contract that

requires immediate action to deal with the consequences: a fuel

leak necessitates a clean-up operation, or defective machinery

needs repairs. Health and safety issues may arise. Claims may

be brought by third parties against your business as a result

of the breach, even though your company is not at fault. You

may need to engage professionals, technical experts or allocate

company staff to manage the situation. Lawyers may be

instructed to defend the business against third parties, while

getting ready to bring the company's own claim against the

ultimate wrongdoer.

This articles focuses on recovering expenditure incurred in

the aftermath of a breach, but before proceedings are

commenced. The law offers two ways for the innocent party to

recover what it has spent: a claim for damages, or seeking an

award of costs. As we will see, the principles applying to

these heads of claim differ quite considerably. An assessment

of costs will usually not lead to a complete indemnity, while

an award of damages is more likely to give a full recovery.

This should be borne in mind when considering how to make a

claim: there is a "grey area" where damages and costs

overlap.

Damages or costs?

Before looking at the principles that govern recovery of

costs and damages, we consider first how different types of

expenditure or costs are categorised in law.

Company employees assigned to manage the problem

Company employees may need to spend a significant amount of

time dealing with the aftermath of a breach, being unable to

carry out their day-to-day tasks. In principle, a claim for

damages is possible here. However, it will be difficult to

recover an employee's salary as this is payable in any

event, irrespective of the breach1.

It will not be enough to point to the employee carrying out

unusual tasks at the expense of his normal "job

description". The Court of Appeal has emphasised that it

is necessary to show that the company's resources engaged

in dealing with the breach led to a "significant

disruption in ... business or any loss of profit or increased

expenditure"2. In that case, a claim for

out-of-pocket expenses in respect of a prolonged stay in

Vietnam succeeded. This kind of outlay is much easier to

recover on the basis that it would not have been incurred

"but for" the breach.

You may therefore be in a better position if you engage

additional resources to deal with the problem

(perhaps on a temporary basis), because it will not be possible

to argue that this expenditure would have been incurred in any

event.

Managerial time

In reality, it may be impossible to point to only a single

employee engaged in managing the consequences of the breach.

Can a company claim damages for lost "managerial

time" on a more general basis? Again, the answer is yes,

in principle. The issue arose in Tate & Lyle v Greater

London Council [1981] 3 All ER 716 at 720 and 721. Tate

& Lyle sued the GLC because continuous dredging operations

to remove silt were carried out near its jetty, which affected

deliveries of raw sugar to its refinery. The Court commented on

a claim for managerial time as follows:

" I have no doubt that the expenditure of managerial

time in remedying an actionable wrong done to a trading

concern can properly form the subject matter of a head of

special damage. In a case such as this it would be wholly

unrealistic to assume that no such additional managerial time

was in fact expended. I would also accept that it must be

extremely difficult to quantify. But modern office

arrangements permit of the recording of the time spent by

managerial staff on particular projects. I do not believe

that it would have been impossible for the plaintiffs in this

case to have kept some record to show the extent to which

their trading routine was disturbed by the necessity for

continual dredging sessions..."

Again, the real obstacle to such a claim succeeding will be

proof. Despite the Judge's readiness to assume that

managerial time would be lost, the claimant must put forward

some evidence as to what the loss in fact amounts to. As we

will see, when awarding damages (but not costs), the Court will

not refuse to quantify damages simply because there cannot be

absolute certainty, but it will not engage in idle speculation

if the claimant cannot prove any actual loss at all. Following

the judge's advice and getting management to keep

timesheets is likely to be a considerable help in this

regard.

Expert and professional assistance

The costs of engaging experts or professional advisers in

the immediate aftermath of a breach of contract are also

claimable, either as costs or damages — depending on the

purpose of their work. If the main purpose of the expert's

work was to assist the claimant with dealing with the breach,

then the cost may be claimed as damages3. However, a

report which goes beyond merely establishing the cause of the

problem and seeks to allocate responsibility may be too closely

connected with contemplated litigation — and so must be

claimed as "costs" in any subsequent proceedings. The

distinction was explained by the Court of Appeal in Bolton

v Mahadeva [1972] 2 All ER 1322 as follows (at 1327):

" So far as the defendant's claim in respect of

fees for the report which he obtained from his expert is

concerned, it seems to me clear that that report was obtained

in view of a dispute which had arisen and with a view to

being used in evidence if proceedings did become necessary,

and in the hope that it would assist in the settlement of the

dispute without proceedings being started. In those

circumstances, I think that the judge was right in reaching

the conclusion that that report was something the fees for

which, if recoverable at all, would be recoverable only under

an order for costs."

In the same way as the work of experts can become too

closely connected with legal proceedings, it is also possible

for work by company employees to take on the mantle of costs if

done in connection with pending litigation. Next, we will

consider some examples of expenditure that can only be claimed

as costs (if at all), and this includes help by company staff

with a claim or litigation.

Legal costs incurred before proceedings

Legal fees incurred in connection with a claim cannot be

claimed as damages from the opposing party. They fall within

the Court's sole jurisdiction (and discretion) to award

costs if litigation ensues — as further discussed

below4. However, it is well established that legal

costs incurred before an action has been commenced can be

recoverable in the subsequent litigation. In Ross v

Caunters [1980] Ch. 297 at page 323, the Court noted

that:

" The statement of claim also claims the legal

expenses of investigating the plaintiff's claim up to the

date of the issue of the writ .... . ... at present I doubt

whether any sum is recoverable under this head. If an order

for costs is made in favour of the plaintiff, then some of

these legal expenses of investigation may fall within that

order as being "costs of or incidental to" these

proceedings, and so of course could not be claimed as

damages."

Provided they are "costs incidental to

proceedings", pre-action costs are therefore recoverable.

Whether costs are incidental depends on the circumstances: for

instance, the costs of work carried out under one of the

pre-action protocols should normally be incidental to

subsequent proceedings5.

There is, however, a potential complication. In the early

stages of a dispute, it may be thought prudent to investigate a

range of potentially relevant issues. Not all of these issues

may feature in a subsequent claim. In Re Gibson's

Settlement Trusts [1981] 1 All ER 233, the Vice-Chancellor

expressed the following view (239 to 240):

" Obviously the test cannot be simply whether the

materials in question...