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.
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 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.
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.