The recent High Court decision in Hawksford Trustees Jersey Limited v Halliwells LLP (In Liquidation)[1] clarifies the Court's approach to the quantification of legal costs claimed as damages. The decision is also a useful reminder for solicitors of the importance of properly identifying their client in the retainer letter.

Background

Halliwells acted for Hawksford (in its capacity as trustee of the Bald Eagle Trust) on a sale of shares. The primary beneficiary of the Bald Eagle Trust was a Mr Begg.

Hawksford alleged negligence and breach of contract by Halliwells in its advice on the share purchase agreement, such advice being said to have caused losses following the sale. As part of its damages claim, Hawksford sought to recover legal costs (relating to an application for an injunction) said to have been incurred in mitigation of potential losses caused as a direct result of Halliwells' breach. Halliwells sought to rely on provisions in its retainer letter, sent as an email attachment to Mr Begg, to limit the damages recoverable.

The decision

Legal costs

The Court found on the facts that the legal costs claimed were indeed incurred in mitigation of loss caused by Halliwells' negligence, and therefore considered how they should be quantified. Halliwells argued that the established position was that costs recoverable as damages should be calculated as if assessed on the standard basis[2]

Hawksford, on the other hand, invited the Court to depart from that position and award costs as if assessed on the indemnity basis[3]. They argued that awarding costs as if on the standard basis would be inconsistent with the general principle that a claimant can recover losses and expenses reasonably incurred when trying to mitigate its loss. Hawksford submitted that the introduction of the CPR in 1999 had fundamentally changed the meaning of assessment on the standard basis as costs would not necessarily be recoverable even if shown to be reasonably incurred.

Finding for Hawksford, HHJ Pelling QC held that the old rationale for limiting recoverability to the standard basis (that is to say that this was equivalent to the basis of assessment between a solicitor and its own client under the former regime) ceased to apply when the CPR came into force.  Accordingly he found that Hawksford was entitled to recover its costs as if assessed on the indemnity basis. This shows the level of scrutiny that the courts will exercise over mitigation costs claimed as damages (that is to say they are unlikely to simply award the full costs paid by a claimant even if the mitigation itself was reasonable), albeit that the more generous basis of assessment makes the approach more advantageous to claimants than formerly.

Limit of liability

The Court found that Halliwells was not entitled to rely upon the liability-limiting provisions of its retainer letter. That letter (which was unsigned) had been sent to the primary beneficiary of the trust but not to the trustee. HHJ Pelling QC concluded that as beneficiary, Mr Begg did not have authority to instruct Halliwells or to bind the trust to the proposed terms even though he had significant direct contact with Halliwells and a clear financial interest in the transaction.  He did not pass the letter on to Hawksford as trustee, and Hawksford was not therefore aware of the provisions, which were not incorporated into its retainer with Halliwells.

Analysis

The legal costs decision is logical and consistent with the changes to the costs regime since the introduction of the CPR. It is a useful reminder for solicitors and their professional indemnity insurers of the potentially significant exposure to mitigation costs. This case emphasises the importance, where possible, of insurers taking a proactive role at an early stage in a claimant's attempts to mitigate its loss and to scrutinise the associated costs as they are incurred. Given the difficulties in later arguing to reduce them when claimed as damages, this is likely to be the most cost-effective way of addressing those costs in the long term.

The Court's finding that the retainer letter did not bind Hawksford does not change the existing line of authorities but is a practical illustration of the importance of solicitors understanding the identity of their client. Solicitors must give careful thought to the legal basis for each retainer, and ensure that this is properly documented and communicated to the - correct - client.