The critical difference between being “right” or “wrong” and being negligent- Richards v Speechly Bircham LLP  EWHC 935 (Comm)May 2022
Mr Richards and Mr Purves (“the Claimants”) owned a successful IP business. In early 2014 they decided to take on external investment to grow the business with them retaining both shares and management positions in the business, whilst at the same time reducing their risk exposure by realising some capital. They appointed a third-party company called Knight Corporate Finance Limited (“Knight”) to advise them on the sale process and the key commercial terms of the proposed transaction (“the Transaction”). The Claimants subsequently entered negotiations with a private equity house and an offer was proposed. The proposed offer included terms that each of the Claimants would receive £2,297,950 in cash on the sale of their shares in their IP business as well as acquiring a 30% holding of C class shares in the newly incorporated company, IP Solutions Group Limited (“the Company”). In addition, the Claimants would become the CEO and Sales Director respectively of the Company. The proposed offer also included terms as to what would happen to any rollover equity should the Claimants leave the business (“the Leaver Provisions”). This would depend upon the “class” of leaver. For example, a person wrongfully dismissed would be a “good leaver” and receive market value for their shares, but a person who was dismissed or resigned as a “bad leaver” would receive only £1.
The Claimants appointed solicitors, Charles Russell Speechlys (instructed as Speechly Bircham, before it merged with Charles Russell – “the Solicitors”), to advise them on the proposed terms. The Transaction completed on 3 December 2014. However, just months after the sale, the Claimants were dismissed and required to transfer their shareholdings for £1 as ‘bad leavers’. The Claimants sued the Company for wrongful dismissal in the High Court. The High Court determined that the Claimants had been wrongfully dismissed which meant that they should have been categorised as ‘good leavers’. On that basis they claimed to be entitled to receive market value for their shares. However, by a further judgment on quantum, the High Court held that the Claimants were in fact only entitled to receive a nominal sum for their shares (the “Quantum Judgment”). This was due to the impact of something called the Redemption Premium Provision (“the RPP”) on the determination of the “market value” of their shareholdings, upon them leaving the Company, in accordance with the Company’s Articles of Association (“the Relevant Article”). The Company argued, and the High Court agreed, that the Relevant Article meant that the RPP would apply to the market value even in a good leaver situation. Therefore, as a result of the RPP, the Claimant’s shares were denuded of value, just as if they had been bad leavers.
The Claimants sued the Solicitors for breach of duty in failing to warn them that the terms of the Transaction were such that even if they were wrongfully dismissed from the Company and classed as ‘good leavers’, they would receive no or only nominal value for their shareholding due to the operation of the RPP. In this respect, the Claimants argued that a reasonably competent solicitor would have sought to include language within the draft Articles that the RPP would not apply in the calculation of market value for a good leaver. Had the Claimants been properly advised this is what they would have sought in their negotiations and they claimed to have suffered losses in the amount of £1.9m as a result. In the alternative, the Claimants argued that had they not reached agreement on this, they would not have completed the Transaction and would have agreed terms with alternative investors for the sale of their shares. In this alternative, they claimed they suffered losses in the amount of £1.7m.
On breach, the Solicitors argued that the RPP reflected a commercial agreement reached by the Claimants and Knight without the involvement of the Solicitors (i.e. the RRP was negotiated before the Solicitors had been instructed and it had been presented to them as a concluded deal). The Solicitors argued that the Quantum Judgment was wrong and the RPP did not, on the proper construction of the Articles, apply in the determination of market value for a good leaver. As such, the risk complained of was so small, the Solicitors were not obliged to warn the Claimants about it. Causation and quantum were also disputed.
Interestingly, the Court agreed with the Solicitors that the Judge in the Quantum Judgment misconstrued the meaning of the Relevant Article in holding that the RRP applied in the determination of market value for a good leaver. However, the Court found regardless that the Solicitors had still breached their duty of care in failing even to identify the risk and to advise that the RPP could potentially be considered as impacting upon the market value of their shares. As the Court found, “a significant risk went unspotted.”
In reaching its conclusions in this respect, the Court held:
- The risk was created by the language of the Relevant Article and the Solicitors were responsible for reviewing and negotiating the draft Articles, within the wider class of Leaver Provisions under which the Claimants were looking for protection.
- The language of the Relevant Article was not standard and was already under scrutiny by the Solicitors for other reasons.
- Although the Claimants and Solicitors did not at the time believe that any of the good leaver events happening were likely, that does not mean that the legal risk, contained within a provision designed to come into operation if they did, is one that is be treated as insignificant. The risk was significant, and the Claimants had made repeated requests to the Solicitors to focus upon the potential downsides of the Transaction. It was reasonable to expect the Solicitors to advise upon the risk that the relevant RRP provision could be construed in a way which operated to their very significant financial detriment. The Court stated:
“It is one thing to say that it cannot reasonably have been expected to predict a future misalignment of the stars. It would be quite another to conclude that it would be imposing an unduly onerous and unwarranted duty of care upon a firm to say that it should have undertaken a cross-check upon the meaning and effect of a provision on which it had drafting input.”
In dealing with causation, the Court concluded that for the advice given by the Solicitors to have been non-negligent it would have had to have identified the risk as being a significant one, carrying with it a potential impact across all good leaver situations. The Court held that if that non-negligent advice had been given, it was satisfied that the Claimants would have insisted that the Relevant Article was disapplied to the Transaction. The Court did not believe however that the private equity house would have agreed to amend the Relevant Article. In that scenario it was satisfied the Claimants would have walked away from the Transaction and agreed a sale of their shares with alternative investors. The chance of the Claimants finding a buyer of their shares at a price of £8m was assessed at 75% and the Court awarded damages in favour of the Claimants in the combined net sum of £1.454m.
The most significant impact of the judgment is in relation to the Court’s findings on breach of duty of care, as to which the Court observed, “it is the duty of the lawyer to anticipate the unthinkable but predictable”. It serves as an important reminder to professionals that when they are giving advice, even if the risk of an outcome happening is unlikely, if its effects would nonetheless be significant, then they have a duty of care to warn their client.
This judgment is one of a spate of recent decisions which makes clear that there is a critical distinction between whether any legal advice was right or wrong and whether the same was negligent. For example, in the recent case of Percy v Merriman (see our article here) although the underlying judgment against the barrister’s client supported an argument that the advice given was with hindsight wrong, the Court of Appeal stated that it did not automatically follow that the advice was negligent (and the contribution claimant’s failure to prove this was fatal to its case). Conversely, as is demonstrated in this case, even when the court disagrees with an earlier finding of liability against a solicitor or barrister’s client, it does not necessarily follow that their advice was not negligent. This is because the nature of legal advice is that it requires an exercise of judgment, as the course and choices available are rarely black and white. Therefore, in establishing negligence, the question is not whether the advice turned out to be right or wrong, but whether the advice was within the range of advice which could be given by a reasonably competent solicitor or barrister.Download PDF