Summary

Where the costs of litigation were sought to be recovered as damages in a negligence action, the appropriate method of assessment was the amount that would be awarded on assessment by a costs judge on the standard basis.

Facts

The claimant (R) brought a claim in negligence against the defendant solicitors (J). R had two groups of shareholders and directors. The first group provided the finance to develop a machine to detonate land mines; the second group included the inventor of the machine. R's articles were designed to create deadlock in the company if the two groups fell out. The intellectual property rights in the machine were assigned to a company (X) set up by the inventor. In 1999, R and X entered into a licence agreement whereby X granted R a licence in relation to those rights. It was intended that the licence would be for a period of 10 years and that R would be entitled to create a sub-licence without X's consent. However, J, who were R's solicitors, negligently failed to spot errors in the drafting of the licence agreement that made it arguable that X had the right to terminate the licence on six months' notice and that R would not be able to create a sub-licence without X's consent. The two groups within R fell into disagreement in 2004 and R became deadlocked. In an attempt to resolve the deadlock, the first group of directors purported to grant a sub-licence to a wholly owned subsidiary of R's majority shareholder without obtaining X's consent. That led to the purported termination of the licence by X and to the commencement of three sets of proceedings (the machine recovery action, the licence action and the patent action) between R and X and the latter's directors. The actions were consolidated and R was largely, but not wholly, successful at trial. It succeeded on the two drafting issues. In relation to the licence and patent actions, the judge gave a discount for the costs that had been incurred in relation to issues on which R had lost and ordered X to pay 65 per cent of R's costs. However, X went into liquidation and the costs remained unpaid. R obtained a default costs certificate. In the instant action, it sought to recover all of the costs that it had incurred on a full solicitor and client basis in relation to the drafting issues. Such costs exceeded the amount referred to in the default costs certificate by some £93,000. Whilst J admitted negligence in relation to the drafting errors, it argued that (1) it had no liability to R, as the effective cause of R's loss was the fact that the first group of directors had granted the 2004 sub-licence to a connected company without the consent of the shareholders in general meeting in breach of the Companies Act 1985 s.320 ; (2) alternatively, if R was able to establish causation, it was only entitled to recover costs on the standard basis, so that the default costs certificate was good evidence of the costs recoverable.

Held

(1) J's negligence had enabled X to take the drafting points in the trial. The points were taken and they had caused loss. It could not be said that the chain of causation had been broken by the granting of the sub-licence, whether or not that grant involved a breach of s.320. Accordingly, R's loss had been caused by J's breach of duty. (2) Judicial comity required the court to follow authorities that established that where the costs of litigation were sought to be recovered as damages, the appropriate method of assessment was the amount that would be awarded on assessment by a costs judge on the standard basis, British Racing Drivers Club Ltd v Hextall Erskine (1996) 3 All ER 667 , Yudt v Leonard Ross & Craig (A Firm) Independent, October 5, 1998 and Mahme Trust Reg v Lloyds TSB Bank Plc (2006) EWHC 1321 (Ch) followed. There were strong policy reasons to support that proposition. The steadily increasing amount of legal costs was a matter of real public concern. Further, it was extremely difficult for a third party not involved in the litigation to be able to challenge the costs. If the burden of establishing unreasonableness was thrown on the third party not involved in the litigation, he would face an almost impossible task in having to show that individual items were unreasonable. In the circumstances, the costs of the licence and patent actions for the purposes of the damages claim against J were to be assessed at the amount claimed in the default costs certificate. The percentage of those actions attributable to the issues on which R succeeded was 75 per cent. Similarly, the percentage of those issues attributable to the drafting issues was 75 per cent. Damages were awarded on that basis.

Judgment for claimant.