| Date | 14 February 2007 |
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| Judgment | Aerospace Publishing Limited v Thames Water Utilities Limited, CA, 11 January 2007 |
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| The Issue | Whether the employment costs of staff are recoverable as damages. |
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| Implication |
Such costs are potentially recoverable, but it is important to be able to establish the extent to which they have been diverted from their normal activities. |
printIn 2001 a water main owned by Thames Water burst, flooding the basement of premises in Hammersmith that were occupied by Aerospace Publishing Limited. Aerospace, and its sister company Midsummer Books Limited, were specialist publishers in the fields of aviation and military history, and their archive of photographic art and reference materials was located in the basement and was extensively damaged by the flooding. These archives were a core asset of the businesses, containing the information required to efficiently produce and illustrate the high standard publications for which Aerospace was well known. As such it was not disputed that this private archive was probably unique in the world. Thames Water admitted liability in tort for the consequences of the burst pipe but disputed the level of damages claimed by Aerospace, meaning that the case came to trial in October 2005. The main issue in dispute between the parties was whether Aerospace’s damages should be calculated by reference to the cost of reinstating the damaged archive or by reference to its reduction in value as a consequence of the damage. The financial difference between these two approaches was significant, and the judge held that it was proper to asses the damages by reference to the more expensive option, being the cost of reinstating the damaged archive. In Thames Water’s view the judge gave insufficient reasons for reaching this conclusion, and so it sought leave to appeal, which was given. As it was the claimed insufficiency of the judge’s reasons that gave rise to the appeal, a full re-hearing was required based upon the documents used in the original hearing and transcripts of the evidence heard. Whilst the main point in issue at appeal was obviously the principle to be applied to the calculation of damages, and the Court of Appeal held that the approach originally adopted by the trial judge was correct, Thames Water also took the opportunity to air a separate issue concerning the treatment of staff costs within Aerospace’s claim for damages. Whilst this claim was brought in tort, the principles discussed and applied by the court would apply equally to claims for damages for breach of contract. Thames Water’s main objection to paying Aerospace’s staff costs in respect of time spent salvaging archive materials and undertaking various reorganisational tasks in the light of the flood was that as these staff costs would have been incurred by Aerospace in any event they were not additional and should not therefore be considered as damages. Of course, arguments such as this are often put forward in relation to claims for head office costs within building contract claims, and it is easy to see how they might equally well be applied to site staff and other resources. Aerospace’s response to this was that, were it not for the fact of their staff being engaged on these additional, flood related works, they would have been engaged upon their proper work – namely undertaking revenue generating activities. As a result, Aerospace’s claim was really in respect of this loss of opportunity to gain revenue. Again, this is an argument commonly made by contractors in relation to their claims, to which clients frequently respond by inviting the contractor to prove the income generating opportunities it had actually lost. After reviewing the authorities (including Tate & Lyle v GLC), Lord Justice Wilson identified three propositions that should be applied in determining whether staff costs can be treated as damages in such circumstances. Firstly, it is necessary to establish the fact that diversion of staff resources has actually occurred. Where evidence which it would be reasonable for a claimant to produce has not been provided, then it is at risk of a finding that the diversion of resources has not been established. Secondly, it is necessary for the claimant to establish that the diversion of resources has caused a significant disruption to its business. Thirdly, whilst (strictly) the claim should be presented in terms of the loss of revenue that is attributable to the diversion of staff time, it would normally be reasonable for the court to infer that the diverted staff would have generated revenue at least equal to the costs of employing them during that time, although it was always open to the defendant to establish to the contrary. In this particular case the court considered that Aerospace had sufficiently established that the time of a significant number of its employees, including senior employees, had been diverted such that there could be no serious challenge to the conclusion that its business had been disrupted. In such circumstances Aerospace was entitled to recover the employment costs incurred. The only exception to this general conclusion was in relation to two temporary staff whose costs had been claimed as damages but who, from the evidence presented to the court, actually appeared to have been involved in preparing the claim and writing witness statements. The judge considered these sums were not recoverable as damages but should be treated as costs in the action. This decision accords with common practice in relation to construction claims, and is a timely reminder to all concerned of the importance of establishing that particular resources were reallocated or retained as a consequence of the matters giving rise to the claim.
CJ-0706
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