Can you recover all your legal costs of mitigating a loss?
In a professional negligence claim, a claimant has a duty to try to mitigate (or limit) his loss before seeking to claim any damages against a professional. But how far should you go and will you be able recover the costs of mitigating your loss?
The last thing you want is to spend a lot of money on legal costs trying to mitigate your loss and then find you can't recover those costs. The recent case of Herrmann v Withers LLP provides useful guidance.
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. They 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. The solicitor in question was negligent. She should have advised Mr and Mrs Herrmann that the position regarding use of the communal garden was not clear cut. Mr and Mrs Herrmann told the court that if they had known this, they would not have bought the property at all 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. Withers successfully argued that Mr and Mrs Herrmann had failed to mitigate their losses 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 on the indemnity basis, rather than on the standard basis, ie they would recover nearly all their costs and not just approximately 65/70% of them. In addition, they were entitled to a small award for loss of amenity and disappointment of £2,000 (rather than the £50,000 they claimed).
This case is a timely reminder to claimants that, whilst they 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.
Claimants would be advised therefore, to consult a lawyer before undertaking expensive steps to mitigate a loss if they want to be confident of being able to recover these costs in a future claim against a professional.
This case however, also brings good news for claimants as it confirms that legal costs reasonably incurred to mitigate a loss, will be recoverable on an indemnity basis now, which puts a claimant in a far better position that had previously been the case.