Mental Health Issues Don't Equal Legal Incapacity | Court Criticises Ombudsman's Conflation But Upholds Decision On Poor Costs Communication

AINA KHAN LAW LTD v THE LEGAL OMBUDSMAN & ANR [2025] EWHC 1319 (Admin)

In Aina Khan Law Ltd v The Legal Ombudsman & Anr [2025] EWHC 1319 (Admin), the court addressed costs issues arising from the Legal Ombudsman’s decision requiring the claimant law firm to repay £51,192.60 to the interested party (IP). The defendant upheld the IP’s complaint, finding the claimant had failed to adequately assess her capacity and had charged excessive fees. The court scrutinised the defendant’s reasoning on costs, particularly the finding that the claimant provided insufficient and untimely cost updates. The defendant had awarded £35,500 for poor cost communication and a further £15,692.60 (20% of net fees) due to the invalid retainer stemming from the IP’s alleged lack of capacity. The court quashed the latter award, holding the defendant’s conclusion on capacity irrational, but upheld the £35,500 award for delayed cost updates, finding no irrationality in that standalone determination. The claimant was awarded 40% of its costs (£19,036) reflecting partial success and procedural failures in evidence submission. The court refused permission to appeal.

...while I am unable to accept the Claimant's broader submission that it was "irrational" for the Defendant to have concluded that the IP had in fact lacked capacity "since August 2020" - since that very proposition is a permissible interpretation, if not the only possible interpretation, of what Dr Isaacs ultimately said in his 4 December 2020 capacity certificate - I do not think that this saves the Decision from being irrational in the respects I have identified. The criticism of the Claimant in this part of the Decision relates to how the Claimant assessed the IP during September and October 2020, by reference to how she had presented in the initial meetings, the views of counsel, and the views of her own psychiatrist, Dr Dannhauser. It is important not to let hindsight colour an appropriate assessment of the rationality of that criticism.

Citations

Masterman-Lister v Brutton & Co [2002] EWCA Civ 1889 Capacity must be determined in relation to the specific legal task at hand, considering whether the client can understand issues with the assistance of competent legal advice. V v R [2011] EWHC 822 (QB) A finding of incapacity should be avoided unless truly necessary, and capacity must be presumed unless disproved by clear evidence. Meric v Navis [2025] EWHC 759 (KB) Holding delusional beliefs alone does not demonstrate a lack of capacity; it must be shown that the individual cannot use or weigh relevant information as required by the Mental Capacity Act 2005. Johnston v Financial Ombudsman Service [2025] EWCA Civ 551 Mental capacity is issue-specific and time-specific, and a person may have capacity for some decisions but lack it for others. R (Crawford) v Legal Ombudsman [2014] EWHC 182 (Admin) Ombudsman decisions must be read benevolently and will only be set aside if they fall outside the range of reasonable outcomes available. R (Williams) v Financial Ombudsman Service [2008] EWHC 2142 (Admin) Courts must respect the Ombudsman’s expertise and discretion in reaching decisions based on fairness and reasonableness, not strictly on legal principles. Options UK Personal Pensions LLP v Financial Ombudsman Service [2024] EWCA Civ 541 Even if conduct is not unlawful at common law, an ombudsman may find that it constitutes unfair or unreasonable conduct warranting redress in the context of complaints handling. R (Heather Moor & Edgecomb) v Financial Ombudsman Service [2008] Bus LR 1486 An ombudsman determines what is fair and reasonable without being limited to whether the conduct would amount to a legal cause of action. R (KP) v Secretary of State for Foreign, Commonwealth and Development Affairs [2025] EWHC 370 (Admin) Irrationality includes flawed reasoning such as logical errors or unexplained leaps that undermine the justification for a decision. R v Parliamentary Commissioner for Administration ex p. Balchin [1998] 1 PLR 1 A decision will be irrational if it contains reasoning that does not add up or lacks logic, rendering the conclusion unjustifiable. R (Wells) v Parole Board [2019] EWHC 2710 (Admin) Rationality requires that the conclusion must logically follow from the evidence without critical gaps or omitted relevant factors. Stenhouse v Legal Ombudsman [2016] EWHC 612 (Admin) The Ombudsman may exceed its jurisdiction if it bases a decision on matters unrelated to the specific complaint made by the complainant.

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Key Points

Legal Ombudsman decisions are assessed with deference to their broad statutory discretion; however, when the Ombudsman chooses to apply established legal concepts—such as contractual formation or mental capacity—the application of those concepts must be rational and not involve material legal misdirections. [60–61, 73–74]
A solicitor may be found to have rendered poor service if a costs estimate is significantly exceeded without timely and clear notification to the client, irrespective of whether underlying legal requirements (e.g., under the SRA Code) have been breached. [28(i)–(iii), 81]
An award for overcharging or poor costs communication may be made by the Legal Ombudsman on grounds of fairness and reasonableness without requiring the formal thresholds for breach of contract or breach of professional rules to be met. [60, 84–86]
The Legal Ombudsman is not bound to consider the size or financial standing of a service provider when determining a financial remedy, and failure to do so does not render the award irrational in law. [91–92]
Where a costs award includes separate elements linked to distinct findings (e.g., poor service in cost updates and inadequate client capacity assessment), only the element linked to the flawed finding is liable to be quashed; remaining elements may be preserved if not successfully challenged. [97–101]

“The Claimant on 19 November 2020 had told the IP that the costs she had incurred were already at around £65,000 plus VAT and would be likely to reach £75,000 plus VAT by the time of the December hearing. That was a significant increase from the £43,500 budget originally discussed and agreed. The Claimant knew or should have known by this point that the IP lacked capacity. These fees were not understood, agreed and accepted (§2.6). Similarly, the Claimant could not fairly rely on an instruction from the IP to "keep working" on 7 December 2020, when the IP "clearly could not make decisions on [the] costs implications of what they were instructing" (§2.10)."

Key Findings In The Case

The judge found the Legal Ombudsman acted irrationally in treating the client’s known or suspected mental health concerns—such as ADHD, amphetamine usage, and distress—as amounting to evidence of lack of capacity, without properly distinguishing between mental illness and legal incapacity under the Mental Capacity Act 2005 [73–75].
The Ombudsman’s reliance on a psychiatric capacity assessment dated 4 December 2020 to conclude that the client lacked capacity from the outset of the retainer was held to be an irrational use of hindsight, given that it failed to engage with contemporaneous evidence from earlier in the retainer showing the solicitor acted cautiously and consulted both counsel and the client’s clinician [76–79].
The solicitor had obtained information from the client’s treating psychiatrist in mid-October 2020 indicating the client did not then display signs of psychosis or incapacity; this evidence should have been addressed by the Ombudsman when assessing the reasonableness of the firm’s conduct at the time of instruction, but was irrationally dismissed or ignored [78].
The court upheld the Ombudsman’s finding that the solicitors failed to provide sufficient costs updates, noting that the firm had exceeded its original budget significantly without alerting the client until weeks later, and this amounted to poor service justifying an award of £35,500 [80–81].
The judge declined to interfere with the Ombudsman’s methodology in calculating compensation, including not adjusting the award based on the size or turnover of the law firm, finding there was no obligation on the Ombudsman to take account of such factors when determining what was fair and reasonable [91–92].

“There was no evidence that the Claimant kept the IP (or a suitable litigation friend) fully informed of the costs incurred and future costs (§2.15). The Claimant had told the Defendant that it had provided the IP with weekly telephone updates about costs, but it had not produced attendance notes proving this (§2.16). The Claimant's further contention that the IP had repeatedly told the Claimant not to discuss costs with her at such a sensitive time could not be accepted (§2.18).... "Costs reviews were carried out too late, and too infrequently. The first such review took place on 19 November 2020, by which time the costs incurred (£65,000) had already exceeded the estimate originally provided (£43,500). That was too late. The review should have taken place once the costs had reached £43,500 (i.e. on or around 7 October 2020) (§2.20). Similarly, when a subsequent costs estimate (of £75,000) was exceeded, the IP was not provided with a further costs review until the costs had already reached £89,000 (§2.21).”

Background

The case of Aina Khan Law Ltd v The Legal Ombudsman & Anr [2025] EWHC 1319 (Admin) concerned a judicial review challenge by the claimant law firm against a decision of the Legal Ombudsman dated 12 February 2024. The Ombudsman had upheld aspects of a complaint made by the Interested Party (IP), requiring the claimant to repay £51,192.60. The central issue was whether the claimant had adequately assessed the IP’s capacity when taking instructions and conducting litigation on her behalf in family proceedings.

The IP had instructed the claimant in September 2020 following the breakdown of her marriage and allegations of child abuse against her husband. The claimant’s attendance notes recorded the IP’s mental health history, including a diagnosis of ADHD and prescribed amphetamines, as well as her distress and allegations of coercive control. Over time, concerns grew about the IP’s capacity, culminating in a psychiatric report by Dr Isaacs in December 2020 confirming she lacked litigation capacity due to a paranoid psychosis. The Ombudsman’s decision criticised the claimant for failing to assess capacity adequately from the outset and for excessive costs.

Costs Issues Before the Court

The court was required to determine whether the Ombudsman’s decision on costs was rational and lawful. The key costs-related issues were:

Whether the claimant’s failure to assess the IP’s capacity properly rendered the retainer invalid, affecting the recoverability of fees.
Whether the claimant provided adequate and timely costs updates to the IP, particularly after exceeding initial estimates.
Whether the Ombudsman’s award of £51,192.60 (comprising a £35,500 refund for poor costs communication and a 20% reduction for the invalid retainer) was disproportionate or irrational.

The Parties’ Positions

Claimant’s Submissions:
The claimant argued that the Ombudsman’s decision was irrational, particularly in conflating mental health issues with a lack of capacity. It contended that the Ombudsman misconstrued Dr Isaacs’ capacity certificate, which did not conclusively state the IP lacked capacity from August 2020. The claimant also challenged the finding that costs updates were inadequate, asserting that informal updates were provided. It further argued the award was disproportionate to the firm’s turnover.

Defendant’s Submissions:
The Ombudsman maintained that its decision was rational and within its broad discretion under the Legal Services Act 2007. It emphasised that the claimant should have conducted a more thorough capacity assessment given the IP’s vulnerabilities. On costs, it defended the finding that the claimant failed to provide timely updates when estimates were exceeded, justifying the £35,500 refund. The 20% reduction was separately justified by the failure to assess capacity properly.

The Court’s Decision

The court held that the Ombudsman’s decision was irrational in part. Key findings included:

Capacity Assessment: The Ombudsman erred by conflating mental health issues with a lack of capacity and failing to consider the nuanced context of the IP’s instructions. The claimant’s consultations with counsel and the IP’s psychiatrist were reasonable steps to assess capacity. The Ombudsman’s reliance on hindsight (Dr Isaacs’ December 2020 certificate) was flawed.
Costs Updates: The Ombudsman’s finding that the claimant provided inadequate costs updates was not irrational. The claimant had failed to inform the IP promptly when costs exceeded initial estimates (£43,500 and £75,000).
Remedy: The court quashed the £15,692.60 award (20% reduction) linked to the flawed capacity finding but upheld the £35,500 refund for poor costs communication.
Costs of the Claim: The claimant was awarded 40% of its costs (£19,036), reflecting partial success and criticism of its late evidence filing.

The court refused permission to appeal, concluding the Ombudsman’s decision was irrational only in its approach to capacity, not in its broader reasoning on costs.

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