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Miskin v St John Vaughan, Court of Appeal

3 October 2002
The issues

VAT – whether Claimant should pay Defendant’s Solicitors VAT – indemnity principle.

The facts

This was a professional negligence claim brought by Miskin against the Defendant. Miskin became liable for Defendant’s costs in the sum of £55,000.00 including VAT, following their failure to beat a Part 36 Payment. The Claimants sought to avoid payment of the VAT on the basis that the Solicitors would look to the Insurer and not to the Insured for payment of costs and that therefore there was a breach of the indemnity principle. In reality, there was no doubt that the Insurer had taken over the conduct of the litigation, pursuant to its rights under the policy. The Defendant had in fact ceased business before 1989, the Solicitor and own client bills being rendered in April 1993. As the Defendants had ceased business before 1989, instructions could subsequently have come only from Insurers and not from the Partners of the former business. It was argued for the paying party, that was seeking to avoid paying the VAT, that this distinguished the case from Davies -v- Taylor and Adams -v- London Improved Motor Coach Builders, in that there was no residual liability on the part of the Insured for costs. The Solicitors could not look to the Defendants for any costs because the business was dissolved and the partners had disappeared.

The decision

1. The evidence supported the view that both Insured and Insurers were liable for the Solicitors costs. Until the bill of 1993, it was clear that the Solicitors looked to Insurers for profit costs and disbursements and to the Insured for the VAT. The Solicitors expected the costs to be met from those two sources.

2. There was nothing inconsistent in there being a co-existing obligation on the part of the Insured and its Insurers to pay the Solicitors.

3. The Master did not accept that where Insurers took over a claim and conducted it at their own expense, that this created a liability only between the Insurer and the Solicitors that was sufficient to exclude a liability on behalf of the Insured to the Solicitors.

4. Neither was there an implied liability that the Defendant was released from the liability in respect of the Solicitors costs. Until 1993, the Solicitors looked to the Insured exclusively for payment of VAT.

5. As after the point at which the Defendants ceased to be registered for VAT, the Insurers met the liability and as they were unable to re-claim this sum as input to Tax, it followed that this was a liability which the paying party must meet.

Compiled by Mark Fowles

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