COSTS CLAIMED AS DAMAGES 2: THE CASE LAW IN DETAIL
I am grateful to P.J.Kirby Q.C. for responding to the previous post on costs claimed as damages. The situation is far more complex than the passage cited in the Rentokil case suggests.
P.J. asked whether the case of British Racing Club Drivers’ Club Ltd -v- Hextall Erskine & Co  PNLR 523 had been cited. The answer to that question is if it was it was not mentioned in the report. (These were obiter parts of the judgment in any event).
[I am not sure whether people read the comments section of the blog. There is a useful comment by Tim which gives further case lawRedbus v Jeffrey Green Russell  EWHC 2938 (Ch)].
THE CASE LAW
The issues raised by the case law are summarised in the judgment of Mr Justice Newey in Herrmann & Hermann -v- Withers LLP  EWHC 1492 (Ch)
- The damages awarded for a wrong can potentially, of course, take account of expenses that the claimant has incurred in attempting to mitigate his loss. The principle is summarised in these terms in McGregor on Damages (18th. edition) (at paragraph 7-005):
“where the claimant does take reasonable steps to mitigate the loss to him consequent upon the defendant’s wrong, he can recover for loss incurred in so doing; this is so even though the resulting damage is in the event greater than it would have been had the mitigating steps not been taken. Put shortly, the claimant can recover for loss incurred in reasonable attempts to avoid loss”.
- In the present case, it was plainly reasonable for the Herrmanns to instruct Thrings Townsend to advise them in relation to access to the Garden. In general terms, it seems fair to regard the costs of employing Thring Townsend (and Mr Harpum) up to the end of May 2009 as attributable to Withers’ negligence.
- However, there is an issue between the parties as to whether the Thring Townsend costs should be subject to assessment on the standard basis. Mr Pooles contended that they should. Mr Seitler, in contrast, submitted that costs should be paid on the indemnity basis.
- Before the 1980s, it was well-established that, if the victim of a wrong had reasonably incurred legal costs in previous proceedings against third parties, he could recover the costs as damages to the extent that he was unable to recover them from another party to those proceedings (see McGregor on Damages, 18th. edition, at paragraphs 17-002 and 17-003). In Pearce v European Reinsurance Consultants and Run-Off Ltd  EWHC 1493,  PNLR 8, Hart J explained (at paragraph 23):
“At one time the rule clearly was that where costs incurred by a claimant incurred in other proceedings are recoverable in damages the amount recoverable would be his costs taxed as between solicitor and client less his costs taxed as between party and party recovered by him in the earlier proceedings”.
- In 1986, however, changes were made in the rules relating to the taxation of costs. One of the bases of taxation mentioned by Hart J (party and party) ceased to exist, and standard costs were introduced. As is explained in McGregor (at paragraph 17-004):
“The then RSC Ord.62 on costs was entirely recast to enable the successful party in litigation to recover costs either on what was termed the standard basis, which allows costs reasonably incurred and reasonable in amount, or on what was termed the indemnity basis, which allows costs except where unreasonable in amount or unreasonably incurred, standard costs being the norm in civil litigation”.
- In The Tiburon  2 Lloyd’s Rep. 26, the Court of Appeal observed that the standard basis of taxation provided for the recovery of all costs shown to have been reasonably incurred. Parker LJ said:
“[P]arty and party costs only permitted the recovery of costs necessarily incurred and there was a wide margin between such costs and costs reasonably incurred. This difference has now been alleviated and enables the successful party who is awarded costs on a standard basis to recover a reasonable amount in respect of all costs reasonably incurred. The only difference between that and the indemnity basis being that on the standard basis the burden of proof is upon the receiving party, whereas on the indemnity basis the burden is upon the paying party.”
Scott LJ said:
“The standard basis formula … corresponds closely, in my opinion, to the yardstick that would have to be applied to a contractual or tortious damages claim”.
- The implications of the 1986 rule changes for the assessment of costs claimed as damages were considered in British Racing Drivers’ Club Ltd v Hextall Erskine & Co  PNLR 523. In that case, the plaintiffs had incurred legal fees in attempting to mitigate loss caused by negligence on the part of the defendant solicitors. Carnwath J decided that, to the extent that the sums related to litigation, the plaintiffs were entitled to no more than would be recoverable on the standard basis of taxation. Carnwath J summarised his conclusions as follows (at 552-553):
“The expenditure on the professional fees of solicitors … was, as I have held, expenditure incurred by the plaintiffs in reasonably mitigating their loss. Prima facie therefore, it is claimable under the ordinary rules relating to mitigation. However, litigation costs have traditionally been subject to special rules for policy reasons. Prior to the change in the taxation rules there was an established distinction between such costs incurred in proceedings between the same parties, and those incurred in proceedings against third parties. This was anomalous, given that similar policy considerations applied in each case. The most recent cases show that the position must be re-considered in the light of the changes to the taxation rules. This enables the anomaly to be resolved. Under the new dispensation, taxation on the standard basis is to be regarded as equivalent to the solicitor and client basis referred to by McGregor [on Damages]. Accordingly, where costs on the standard basis have been recovered from the defendant in other proceedings, there is no basis for an additional claim by way of damages”.
- British Racing Drivers’ Club Ltd v Hextall Erskine & Co has been followed on a number of occasions. Evans-Lombe J did so “willingly” in Mahme Trust Reg v Lloyds TSB Bank plc  EWHC 1321 (Ch) (see paragraph 68). Certain other judges have considered that they should follow the British Racing Drivers’ Club decision as a matter of comity, but have expressed doubts about it. In Yudt v Leonard Ross & Craig (1998) 1 ITELR 531, for example, Ferris J said that he was impressed by criticism of the case in McGregor on Damages (see 584). In Dadourian Group International Inc v Simms  EWHC 454 (Ch), Warren J said this (at paragraph 38):
“Like Ferris J, I see considerable force in some, at least, of the criticism of British Racing Drivers Club Ltd in McGregor. There are serious policy issues here which would benefit from consideration by a higher court. For my part, were this a case on the ordinary measure of damages where foreseeability was in issue, I would follow Carnwath J, and the other judges who have felt constrained to follow him. I would not do so, however, with the same enthusiasm as did Evans-Lombe J”.
- By the date of the Dadourian case, the Civil Procedure Rules had been introduced and, with them, significant changes in the rules relating to costs. In particular, standard costs must now be “proportionate” as well as reasonable. This is apparent from CPR 44.4(2), which is in these terms:
“Where the amount of costs is to be assessed on the standard basis, the court will-
(a) only allow costs which are proportionate to the matters in issue; and
(b) resolve any doubt which it may have as to whether costs were reasonably incurred or reasonable and proportionate in amount in favour of the paying party”.
In contrast, where costs are assessed on the indemnity basis, “the court will resolve any doubt which it may have as to whether costs were reasonably incurred or were reasonable in amount in favour of the receiving party” (see CPR 44.4(3)).
- In National Westminster Bank plc v Rabobank Nederland (No 3)  EWHC 3163 (Comm),  1 All ER (Comm) 266, Sir Anthony Colman expressed the view that the changes to the costs rules had undermined British Racing Drivers’ Club Ltd v Hextall Erskine & Co and the cases following it. The introduction of the component of proportionality into the definition of the standard basis had, he said, called into question the “conceptual basis” of the cases (paragraph 19). He observed that, since “the concept of costs proportionately incurred and proportionate in amount is distinct from the concept of costs reasonably incurred and reasonable in amount”, “costs reasonably incurred and reasonable in amount may not be proportionately incurred or proportionate in amount” (paragraph 19). In the same vein, he said this (in paragraph 26):
“The component of proportionality in the standard costs basis of assessment clearly introduces discretionary elements of assessment which are to be superimposed on the reasonableness tests and therefore may be extraneous to the failure to mitigate tests. They operate to reduce recoverable costs by reference to CPR policy considerations which are not necessarily relevant to the failure to mitigate tests. The introduction of this component, in my judgment, displaces the basis of the argument in The Tiburon  2 Lloyd’s Rep 26, Lonrho plc v Fayed (No 5)  1 All ER 188,  1 WLR 1489 and the British Racing Drivers’ Club case that there was substantial equivalence between the standard basis and the indemnity basis of assessment”.
Sir Anthony Colman also expressed “serious doubt” as to whether the reasoning in British Racing Drivers’ Club Ltd v Hextall Erskine & Co could be supported on public policy grounds (paragraph 25).
- As Warren J said in Dadourian, there are issues here which would benefit from consideration by a higher Court. However, I have myself been persuaded that the approach that Carnwath J adopted inBritish Racing Drivers’ Club Ltd v Hextall Erskine & Co is no longer appropriate. I agree with Sir Anthony Colman that the changes to standard basis costs are significant. They mean that such costs do not correspond as closely to “the yardstick that would have to be applied to a contractual or tortious damages claim” as they did when The Tiburon was decided. It can no longer be said (as Parker LJ did in The Tiburon) that the “only difference” between the standard basis and the indemnity basis is that “on the standard basis the burden of proof is upon the receiving party, whereas on the indemnity basis the burden is upon the paying party”. Nowadays, costs will not necessarily be recoverable on the standard basis even if shown to have been reasonably incurred. That result 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 to me that there is a sufficient basis in public policy for continuing to restrict a claimant to standard costs. As McGregor observes, “[t]here is nothing anomalous in allowing the now claimant, provided he has acted reasonably, to be made whole in relation to the action into which he has been forced by the now defendant’s breach of contract of tort” (paragraph 17-019); “Lord Blackburn’s age-old principle” is to the effect that “the party suffering the wrong is to be put into the position he would have been in had he not suffered the wrong”.
- In the circumstances, I accept Mr Seitler’s submission that the relevant costs should be paid on the indemnity basis.”
HAS THIS BEEN DECIDED IN A HIGHER COURT?
So far as I can tell this is a case where judges are agreeing to differ. There is no guidance from the Court of Appeal. The differing arguments are set out above and remain unresolved.
See also Redbus v Jeffrey Green Russell  EWHC 2938 (Ch). For what my view is worth, such costs should not fall to be reduced by reference to bases of assessment, for the simple reason that they are damages (not costs). There might nevertheless be an argument about a failure to mitigate if the claimant had incurred huge costs where the circumstances did not justify that.