In Hawksford Trustees v Halliwells LLP, the High Court was asked to consider the difficult question of the proper method of assessing solicitor-client costs which are claimed as damages.
Global domination
The Defendant (Halliwells) acted for the Claimant corporate trustee (Hawksford) in respect of a sale of the majority shareholding in Global Travel Group PLC (Global) by Bald Eagle Trust (the Trust) to Stella Group UK Limited (Stella).
The issues concerned whether the defendant had been negligent and in breach of contract. Two main failures were identified. Firstly, there had been a failure to ensure that loan notes given as consideration for the sale had been in a form which would have allowed the transfer. Secondly, there had been no draft provision requiring the trustee’s consent to any merger between Global and Stella.
Professional negligence allegations
The claimant made the following allegations:
- The defendant had negligently caused or permitted a reference to Financial Reporting Standard 3 (FRS3) to be qualified or limited by reference to paragraph 20 of FRS3 (the sale price was to have been calculated as a multiple of Global’s earnings before interest, tax depreciation and amortisation (EBITA) excluding any exceptional items within the meaning of FRS3).
- The defendant had failed to advise that the loan notes could not be borrowed against.
- The defendant had acted negligently in failing to advise the claimant that, following an amendment to the wording of the Sale and Purchase Agreement (SPA), it did not retain veto power over the taking of various steps relating to the control of Global’s business.
- The defendant had been negligent in drafting a clause which effectively allowed Stella to ‘block’ the provision of information to the claimant.
- Drafting errors had given rise to disputes for which the claimant incurred legal costs.
Finally, an issue arose over whether the defendant could rely on its exclusion clause, which was contained within an unsigned retainer letter and the standard terms which accompanied it. These documents were, however, sent only to the principal beneficiary of the trust and not to the claimant.
Decision
HHJ Pelling QC awarded damages of over £3 million. In relation to each allegation, the judge held that:
- The relevant clause had been drafted by the principal beneficiary, after the relevant partner of the defendant firm had made clear that he was not able to, and would not be, providing any advice on the wording of the clause.
- Had the claimant been properly advised, transferability of the loan notes could have been obtained, such that the notes could have been borrowed against.
- The defendant had acted in breach of duty by failing to give advice regarding the veto power. Had the claimant been properly advised, the principal beneficiary of the trust would not have gone ahead with the amended SPA. The costs of injuncting Global’s CEO from allowing the merger would not have occurred had the claimant been advised properly.
- The defendant’s partner had not acted negligently because there was no prospect that Global would have consented to unconditional access to its books, records and other information.
- The claimant had not proved its loss in relation to mistakes that had given rise to disputes which incurred legal costs.
- The exclusion clause had not been incorporated into the retainer between the defendant and the claimant.
Recovery of costs as damages
The judge decided to follow the approach in Herrmann v Withers LLP, as opposed to that in British Racing Drivers’ Club Limited v Hextall Erskine and company, and therefore awarded costs as damages on the indemnity basis (as opposed to the standard basis advised in British Racing Drivers).
He considered that the British Racing Drivers approach was out of step with the modern CPR costs regime, which provides for the detailed assessment of costs as between solicitor and client to be conducted on the indemnity basis (CPR 46.9(3)). Furthermore, he considered that the British Racing Drivers rule had been established because:
“the costs allowed under the standard basis of taxation that applied in 1996 were the equivalent of solicitor and own client costs under the regime that had applied previously … there was [therefore] no basis for an additional claim by way of damages”.
Now that the costs rules had changed, the rules for the assessment of damages ought to follow suit.
Analysis
This decision is to be welcomed. As McGregor has cogently argued in McGregor on Damages, there would otherwise be no ‘substantial equivalence between costs incurred and costs recoverable’; the British Racing Drivers approach would leave a claimant out of pocket, having not been made whole.
It is correct to say that since the British Racing Drivers decision the rules on the recovery of costs have substantially changed, in particular by the introduction of the requirement of proportionality into the standard basis by the CPR (a point made by Sir Anthony Colman in National Westminster Bank v Rabobank Nederland, at paragraph 19: “the component of proportionality into the definition of the standard basis calls into question the perpetuation of the conceptual basis of decisions such as British Racing Drivers…”).
Moreover, there appear to be no convincing policy justifications for leaving the claimant out of pocket. Although HHJ Behrens in Redbus LMDS v Geoffrey Green & Russell referred to the fact that “the steadily increasing amount of legal costs is a matter of real public concern”, as Sir Anthony Colman emphasised in National Westminster, it is at least highly doubtful that any such public policy justification which might exist justifies depriving the claimant of full compensation (to similar effect, see McGregor on Damages, at 20-009).
In the absence of any directly applicable Court of Appeal authority, this full review by HHJ Pelling QC provides a welcome measure of clarity as to the basis on which costs will be assessed as damages. It is respectfully suggested that the judge’s approach to this issue was correct.
