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03 Nov 2009

Recovering damages for diversion of employees - Australia takes note of English decisions

by Fred Prickett, Peter Sise

The next step will be to see whether an Australian plaintiff will succeed in recovering damages for "wasted time".

This decade has seen several decisions from English courts on the question of whether damages can be recovered for "wasted time" spent by a plaintiff’s employees dealing with the consequences of a defendant’s wrongdoing. Before the decision of the Supreme Court of Queensland in BHP Coal Pty Ltd v O & K Orenstein & Koppel AG [2008] QSC 141, an Australian court had not referred to, let alone based a ruling on, these English authorities. Now is a good time to take note of this head of damages, not only because of its potential value to any employer who becomes a claimant, but because it is likely to grow in importance if the experience in England is any guide.

BHP Coal

BHP Coal was concerned with the collapse of a giant excavator at an open-cut coal mine. The main head of damage was the cost of replacing this very expensive piece of equipment. The first plaintiff also claimed the cost of "wasted time" spent by its staff dismantling and removing the collapsed excavator. It claimed damages for the wages of staff it hired specifically for this task as well as the wages of existing staff deployed to the task. The defendants admitted that they were liable for the cost of the staff who were hired specifically for the task but argued that they should not be liable for the cost of existing staff as the first plaintiff would had to have paid their wages whether the excavator collapsed or not.

Justice McMurdo referred in detail to two decisions of the English Court of Appeal: Aerospace Publishing Ltd v Thames Water Utilities Ltd [2007] EWCA Civ 3 and Standard Chartered Bank v Pakistan National Shipping Corporation [2001] EWCA Civ 55. He also cited several other English cases which together constitute almost the entire English jurisprudence on "‘wasted time". According to Aerospace Publishing, a plaintiff does not have to establish that the diversion of its employees caused it to lose revenue or incur additional expenses provided it can show:

  • its staff were diverted from their normal duties to address the consequences of the defendant’s unlawful conduct; and
  • that this diversion caused a "significant disruption to its business".

If those two elements are made out, the court can infer that the diverted staff would have generated revenue at least equal to the costs of employing them during that time. Of course, it is still open to the defendant to establish the contrary.

Justice McMurdo concluded that the first plaintiff could not recover the wages of existing staff as it had not proven that their diversion had caused a ‘significant disruption’ to the operation of the mine.

What is a "significant disruption"?

BHP Coal makes it clear that "significant disruption" is an important element for recovery. So what amounts to a "significant disruption"?

A "significant disruption" must be likely to impact upon profits. So much was said in BHP Coal. This is consistent with the reasoning in Aerospace Publishing that a claim should strictly be for lost revenue but the court may assume lost revenue if there has been a "significant disruption".

It is also helpful to consider the other English decisions cited in BHP Coal which deal with "significant disruption". Some of these decisions suggest that the number of staff diverted and their seniority is important. In Aerospace Publishing, the court awarded damages to the plaintiff as a significant number of its employees, particularly senior employees, had been diverted. In Standard Chartered Bank, the court did not award damages for the diversion of one employee to Vietnam for four months as the employee was part of a large organisation which was not significantly disrupted by his absence.

If the point of the "significant disruption" test is to help a court infer whether revenue has been lost, the number of staff diverted should be irrelevant. Assuming that an employee generates revenue at least equal to their wages, every diversion of an employee from their usual duties equates to a loss of revenue. Perhaps a more appropriate test would be to ask whether staff have been "significantly diverted" from their usual activities. This test was used in R+V Versicherung AG v Risk Insurance and Reinsurance Solutions SA [2006] EWHC 42, Bridge UK.COM Limited v Abbey Pynford plc [2007] EWHC 728 and Verizon UK Ltd (formerly MCI WorldCom Ltd) v Swiftnet Ltd [2008] EWHC 551.

Despite what is said in R+V and Bridge UK.COM, BHP Coal still applied the test of whether there is a "significant disruption" to the plaintiff's business. If a business is large, as was the case in BHP Coal and Standard Chartered Bank, there is unlikely to be a "significant disruption" unless a large number of staff are diverted. This problem may be circumvented by engaging external personnel to address the consequences of the defendant's conduct rather than diverting existing staff. The cost of external personnel would be an additional expense to the plaintiff and hence recoverable. However, there is a risk that the plaintiff could be found to have failed to mitigate its loss by not using its current staff.

Other Australian authorities

There are four Australian cases of note which do not address the line of English authorities referred to above. These cases do not use the "significant disruption" test and take a somewhat disparate approach. First, there is NRMA Ltd v Morgan (1999) 31 ACSR 435, a decision of the NSW Supreme Court which found that an employer cannot recover unless it establishes that it paid additional or increased wages which would not have been paid but for the defendant's wrongful conduct.

On the other hand, Tesrol Joinery Pty Ltd v Cefla Scri [2005] NSWSC 528 and Orlit Pty Ltd v JF and P Consulting Engineering Pty Ltd (Unreported QCA, Davies and Shepherdson JJ, 9 August 1993) allowed an employer to recover the wages of diverted employees even though no additional or increased wages were paid simply because they were distracted from their normal, productive and profitable work.

It is also worth noting Sural Spa v Downer Edi Rail Pty Limited [2007] NSWSC 1234. In that case, employees were engaged for a set period to work on a project but were required to work for longer than expected due to the defendant's wrongdoing. The additional wages which were paid to retain the employees beyond that set period were recoverable.

What records must be kept to recover damages for "wasted time"?

It would be advisable for a plaintiff to keep precise records of staff time and activities spent addressing the consequences of a defendant's wrongdoing. There are English cases where a plaintiff has been allowed to recover in the absence of records based on a reconstruction from memory of time spent. This, however, runs the risk of being reduced by a court due to uncertainty.

Conclusion

Several English authorities regarding the recovery of damages for "wasted time" have now been recognised by an Australian judgment. The plaintiff, however, did not recover damages in that particular case. The next step will be to see whether these English authorities will be referred to in further Australian judgments and whether an Australian plaintiff will succeed in recovering damages for "wasted time".

Practical implications

  • Proven lost profits or additional expenses caused by the diversion of staff can be recovered as damages.
  • If lost profits or additional expenses cannot be established, a court may assume that the diversion of staff caused a loss of revenue equal to the cost of their wages, provided the diversion caused a "significant disruption" to the plaintiff's business.
  • It is important to keep accurate records of staff time and activities if staff are diverted.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.