Development of the law relating to the recoverability of costs as damages and the mitigation of loss

May 2012 - Mr Justice Newey handed down judgment in Herrmann v Withers [2012] EWHC 1492 (Ch), a case in which Michael Pooles QC and Paul Mitchell represented the defendant firm of solicitors.  The case represents a significant development of the law relating to both the recoverability of costs as damages and the mitigation of loss, and illustrates a further occasion of the courts accepting that the view of the law as stated in McGregor on Damages (written by Harvey McGregor QC) was to be preferred over existing authorities.

 The claimants had in 2008 bought a property in Kensington.  The defendant advised the claimants that ownership of the property brought with it a statutory right of access to a garden square situated nearby.  Although the judge found that the defendant’s construction of the relevant statute was not wrong per se, he also considered that the defendant ought to have adverted to the possibility that there was an alternative construction which would not confer a statutory right on the claimants.  Accordingly, the court was obliged to assess what damages might be due to the claimants. 

 Shortly after acquiring the property, the claimants had become aware that the question of their access to the garden square was controversial.  They issued proceedings against the committee responsible for granting access to the garden square and the Royal Borough of Kensington and Chelsea.  In the course of that litigation, they were offered an alternative means of access to the gardens, by way of a licence.  They declined that offer, but went on to be defeated in their claim for recognition of a statutory right of access: see Herrmann v Kensington and Chelsea Royal London Borough & Anor [2010] EWHC 1706 (Ch).   

 The claimants accordingly claimed against Withers, seeking to recover not only the diminution in value of the property but also the costs of the failed claim.  

 The judge held that the claimants had unreasonably failed to mitigate their losses by refusing to accept the offer of a licence.  Against that finding of a failure to mitigate, of particular interest are the judge’s rulings on (a) the methodology of assessing damages due to a claimant who has failed to mitigate his losses (b) the assessment of the recoverable diminution in value of the property and (c) the basis on which the claimants’ costs of the failed litigation were to be assessed.

 The judge held that where a claimant has failed to mitigate, his damages are to be assessed at that sum which represents the loss he would have incurred but for his failure to mitigate.  Thus if mitigation would have involved expenditure, then that notional expenditure, together with interest on that notional sum, was to be taken into account as at the date of trial in order to determine what the claimant’s loss ought to have been; and thus what damages were to be awarded as compensation.

 As to the diminution in value of the property, the judge held that without a statutory right of access, the property would have been worth some £340,000 less than the claimants paid for it; but had they mitigated their losses by accepting a licence, it would have been worth only £65,000 less than they paid for it.  Accordingly, they were awarded £65,000 to represent the recoverable diminution in value of the property.

 Finally, the judge held that the much-criticised ruling of Mr Justice Carnwath in British Racing Drivers’ Club v Hextall Erskine [1996] PNLR 523 – that the costs of earlier proceedings sought against a defendant in later proceedings should be assessed on the standard, not the indemnity basis – no longer represented the law.  He preferred the view expressed in McGregor on Damages that such costs ought rationally to be assessed on the indemnity basis.  Accordingly, he awarded the claimants their costs of the failed litigation against the Royal Borough of Kensington & Chelsea up to the date that they ought to have accepted the offer of a licence, such costs to be assessed on the indemnity basis.”