Wednesday, 1 December 2010

Tim Martin Interiors Ltd v Akin Gump LLP [2010] EWHC 2951 (Ch): costs

Lord Justice Jackson has just produced a mammoth report on the future of litigation.  The biggest issue is costs.  Legal proceedings can become gigantically expensive.  Although the very first part of the Civil Procedure Rules beseeches the Court to keep an eye on proportionality, it is still an expensive step to issue Court proceedings, or defend them.  Especially when there’s an inequality of financial arms.

A classic case that illustrates the problems of costs is the TMI case.  When you lose a case, normally you have to pay the other side’s costs; if you think the costs are too high, you can have them assessed by a specialist costs judge (back in the day it was called “taxation” which confused the layman royally).  Usually about a third gets knocked off.

The problem TMI had was that it had not lost a case – it had lost its business.  Almost.  TMI had taken out a mortgage, which it could not pay, so its bank took legal action.  A director paid off the outstanding loan, and extra charges imposed by the bank.  Thing is, one of the conditions of the mortgage was that TMI had to pay the bank's costs of enforcement, so the bank's final bill included £110k of legal costs the bank had paid to its solicitors, Akin Gump.

TMI thought this bill was excessive.  So it applied to have the costs assessed.  Which it is entitled to do; third parties can get someone else’s legal costs checked, if they end up paying, thanks to section 71  of the Solicitors Act 1974.  And they got one heck of a result.  The costs judge reduced the bill from £110k to £30k.  Which was not only a swingeing reduction, it came quite close to carrying professional consequences as well for Akin Gump for overcharging clients.

Akin Gump therefore appealed.  With good reason.  The main reason why the bill was so high was because Akin Gump are a huge firm with City offices that carry a large expense.  Their hourly rate is therefore larger than your average provincial solicitor’s.  And those rates had been agreed by the bank.  You can challenge your own solicitor's bill, but not because the hourly rates are too high; after all, you agreed those at the start.  TMI, of course, had not agreed those rates, but had had those rates imposed on it.

The costs judge had decided that it was inappropriate to charge City rates for mortgage repossession proceedings.  On appeal, the High Court took a different view.  The bank had made the decision to use a big firm, it had taken the risk of paying those more expensive costs, and that decision had not been challenged by TMI.  The Court therefore decided that TMI could not challenge those agreed rates.  For the purposes of challenging the bill, TMI had to stand in the shoes of the bank.  In other words, it was taken to have agreed what the bank had agreed.  Including the hourly rates.  The Court does have jurisdiction to mess around with such hourly rates, but only in very narrow circumstances.  As the bank had not been involved in the costs assessment, the Court could not look at such matters.

A harsh decision on TMI; the work against them was worth £30k, but because the bank had chosen expensive solicitors they had to pay a premium for the bank’s choice.  The provisions for assessment are quite technical and there is some suggestion in the judgment that the Court thought that, perhaps, TMI had not chosen the correct route (it should have sued the bank, not challenged Akin Gump), so there may be grounds for a further appeal, should TMI want to risk further cost. 

One point that does not seem to have been addressed is whether the mortgage contract between TMI and the bank could be used to help.  It is unlikely that the mortgage deal contract would have set out the costs of legal action.  When a price is not agreed under a contract, the law steps in and imposes a “reasonable” price, which is what the costs judge was effectively trying to do.  Could that have been applied here?  On the basis that it is not reasonable for the bank to have chosen an expensive, international, City firm, with expensive, international, City charge-out rates, for a fairly standard piece of law?  Could TMI even argue that the bank was in breach of contract – or at least the fiduciary relationship between contracting parties – by going large with the legal costs? 

1 comment:

  1. This case has recently gone to appeal ([2011] EWCA Civ 1574) - although the Court upheld the verdict of the court below, it suggested that a way around the difficulty of assessment would be to seek an account of the mortgage. That would lead to an assessment as to what was due, and via that a backdoor costs assessment.