Successful Professional Negligence Claim against Solicitors
Problem: Professional negligence claim against City law firm for failing to advise on sale agreement
Outcome: £1.5m plus costs by way of Court judgment in favour of claimant.
The Case
City law firm Charles Russell Speechlys (CRS) has been ordered to pay two former clients nearly £1.5m plus costs after a High Court found the law firm’s advice on the sale of a company had been negligent.
Paul Richard & Keith Purves v (1) Speechly Bircham LLP & (2) Charles Russell Speechly [2022] EWHC 935 (Comm)
The former clients, Mr Richard and Mr Purves started a professional negligence claim against their former solicitors (1) Speechly Bircham LLP and (2) Charles Russell Speechly in respect of losses said to have been suffered by them on the sale of a 42.95% equity stakes in a cloud-based communications technology company, IP Solutions UK Limited in December 2014. The law firm acted for Mr Richard and Mr Purves in relation to the transaction.
The former clients allege that the law firm was negligent in failing to advise them in relation to their financial exposure in the event of them subsequently leaving the employment of IP Solutions Group Limited (the newly incorporated company which acquired their shareholdings in IPS UK) and in which they each acquired a 30% holding of C Class Shares and became CEO and Sales Director respectively.
The principal complaint is that the law firm failed to warn Mr Richard and Mr Purves that the terms of the sale agreement to sell their shares were such that even if they were subsequently wrongfully dismissed from their employment, they would be classed as “Good Leavers” for the purposes of the resulting sale of their shareholdings, they would receive zero or little value for their shareholding. That is because the company’s articles contained a Redemption Premium Provision (“the RPP”) on the determination of the “Market Value” of their shareholdings.
Mr Richard and Mr Purves argued that had they been made aware of this risk, they would have either (1) negotiated a carve-out in the articles, such that the RPP did not apply to the determination of Market Value; or (2) concluded an agreement with an alternative investor. Either way, they say that they have each suffered a loss of between £1.7 and £1.9 million. Mr Richard and Mr Purves also sued for the legal fees spent on the wrongful dismissal litigation.
Decision
His Honour Judge Russen QC, sitting as a High Court judge, said the law firm “fell short of the standard of care required of a reasonably competent solicitor practising in the field of private equity transactions”. The Court found that the law firm was liable to pay £1.45m in damages to the clients, plus legal costs.
Finding for the claimants, the judge said it was “no answer” for the law firm to say the RPP was the result of commercial negotiations. The Court held that “The firm was responsible for negotiating and reviewing the draft articles to ensure that the legal provisions were fully aligned with the claimants’ understanding that the RPP applied to an ‘exit’ involving Livingbridge and to consider whether the provisions could be read as having a wider impact.”
The judge accepted the claimants’ evidence that they repeatedly raised with CRS their concern that their equity should be protected. This should have prompted “careful consideration” of the language of the articles as it evolved during the retainer.
Concluding the law firm fell short of the standard of care required, HHJ Russen said: “It is one thing to say that [CRS] 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 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.”
“However, the fact is that the risk of the RPP having such impact and, crucially so far as the extent of that risk was concerned, the likely view of Livingbridge on the point, were not brought to the claimants’ attention by the firm. A significant risk went unspotted.”
Legal Costs
Paul Richard & Keith Purves v Speechly Bircham LLP [2022] EWHC 1512 (Comm)
The former clients also sought to recover their legal costs from the negligent law firm on the indemnity basis – this typically means that you would be able to recover a greater proportion of the costs claimed because of the losing party’s conduct.
The Court found that the law firm’s refusals to mediate the negligence claim following 4 offered from the clients between December 2018 and December 2020 was “unreasonable” and that “any concern about the need for some disclosure to shed light on certain aspects of the case… could have been explored in preparation for mediation or inquired into at a mediation”.
Further, the Court found that the law firm made “certain assumptions” about the former clients’ motivations for and expectations of the litigation – which meant it felt mediation was most unlikely to succeed – and these were “just the kind of matters which a mediator would have explored”.
However, the Court held that the law firm should only pay costs on the standard basis – that is to say that the costs have to be both reasonable and proportionate whereas on the indemnity basis the costs do not need to be proportionate. The law firm was ordered to make an interim payment of £713,000 to the former clients towards the costs pending a formal detailed assessment of those costs.
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