claiming costs of mitigation as damages
The recent case of Herrmann v Withers
LLP, a solicitor's negligence case, provides useful guidance
on how to assess litigation costs as damages when a mitigation
defence is successful.
the facts
In this case, Mr and Mrs Herrmann, who were
American, wanted to buy a property in Kensington, 37 Ovington
Square, for £6.8 million. The sales particulars stated that the
property had access to a communal garden, which was an important
factor to Mr and Mrs Herrmann as they wanted some green space, so
they instructed Withers LLP to act as their solicitors in the
purchase.
As part of this, enquiries were made into
access arrangements to the garden. Withers were not happy with the
sellers' response so researched the matter themselves. They
concluded that the owners of the property were entitled to access
under the Kensington Improvement Act 1851 on the basis that every
property that fronted the street in the Square was entitled to
access to the communal garden. However, the matter was not at all
clear cut and once Mr and Mrs Herrmann had moved into the property
in June 2008, objections were raised when they used the garden by
the committee who ran it.
Therefore, Mr and Mrs Herrmann instructed
solicitors in October 2008 to assert their access rights to the
garden under the 1851 Act. After several months of solicitors'
correspondence and in an attempt to avoid legal proceedings, the
committee made an offer to Mr and Mrs Herrmann of a licence to use
to garden for a fee of £25,000 for 50 years. The offer was dated 13
May 2009. Mr and Mrs Herrmann rejected this offer and commenced an
expensive legal action in an attempt to mitigate their losses. The
matter went to court in 2010 however, the court found against Mr
and Mrs Herrmann. Mr and Mrs Herrrmann then sued Withers for
professional negligence and sought to recover their losses.
These included damages for diminution in value
of the property for not having access to the garden, £25,000 for
the licence fee plus the legal costs of dealing with this, their
legal costs in taking the committee to court which were
considerable, and damages for loss of amenity and
disappointment.
the decision
The court found in the Herrmanns' favour on
the question of negligence. The solicitor should have advised Mr
and Mrs Herrmann that the position regarding use of the communal
garden was not clear cut and was in fact, arguable. Importantly,
there was a risk that a court might find that the property did not
fall within the relevant provisions of the 1851 Act. Mr and Mrs
Herrmann told the court in no uncertain terms, that if they had
known this, they would not have bought the property and the judge
accepted their evidence. They had clearly suffered a loss -
diminution in value of the property which was assessed at £65,000
plus related stamp duty and interest. Additionally, they were
entitled to the licence fee of £25,000 and the £10,000 legal costs
that would have been incurred in negotiating and agreeing the
licence.
The bone of contention in the case however,
concerned mitigation of loss and the costs of mitigation. Withers
successfully argued that Mr and Mrs Herrmann had failed to properly
mitigate their loss by not accepting the committee's offer of a
licence. Mr and Mrs Herrmann chose to litigate the dispute instead,
which incurred substantial costs rather than negotiating with the
committee. The judge said this was wrong. He concluded that they
should have accepted the committee's offer and if they had done
this, they would have been granted a licence thereby mitigating
their loss.
As a result, they were only entitled to
recover a small proportion of their legal costs up to the end of
May 2009, ie shortly after the offer of 13 May 2009 was made and
not after that. However, the judge decided that they were entitled
to recover these costs of £55,906.28 on the indemnity basis, rather
than on the standard basis. His rationale was the standard basis of
assessment approach adopted in British Racing Drivers' Club v
Hextall Erskine & Co should no longer be followed in light
of the introduction of the Civil Procedure Rules where costs will
not necessarily be recoverable on the standard basis even if they
are shown to be reasonably incurred. They must also be
proportionate. The judge concluded that as a result, the standard
basis approach now is 'not fully consistent with the general
principle that a claimant can recover for losses and expenses
reasonably incurred when trying to mitigate. Further it is not
apparent … that there is a sufficient basis in public policy for
continuing to restrict a claimant to standard basis'.
In addition, the judge decided that Mr and Mrs
Herrmann were entitled to a small Farley v Skinner award
for loss of amenity and disappointment in the sum of £2,000, rather
than the £50,000 they claimed. His reason for this was that Mr and
Mrs Herrmann had bought the property to live there and as such, had
suffered a non-pecuniary loss by the property not having access to
a garden without having to get a licence. However, such awards were
modest and in addition, Mr and Mrs Herrmann could have gained
access to the garden shortly after May 2009 but for their failure
to mitigate.
comment
This case is another timely reminder that
solicitors should be careful to caveat their advice if there is a
risk that a court may take a different view to them. They should
give the client the opportunity to decide whether to take a risk or
bow out of the deal.
It is also a reminder that whilst claimants
have an obligation to mitigate their losses, and will be entitled
to recover the reasonable costs of mitigation, these costs do not
include undertaking uncertain or risky litigation, particularly
when there is a good and reasonable offer on the table. As the
judge pointed out, to litigate when 'there was no evidence the
Herrmanns were bound to win', was not a reasonable stance
to take.
However, the most interesting aspect of this
albeit first instance decision, is the analysis of how to assess
costs as damages and the finding that legal costs reasonably
incurred to mitigate a loss, will be recoverable on an indemnity
basis, as this puts the claimant in a far better position than had
previously been the case.
