UK: Scope Of Duty In Solicitors’ Negligence Cases - The Winners And Losers In 2006

The Court in Football League v edge ellison (2006) found that the solicitor advising the Football League on the sale of its broadcast rights to ITV Digital in 2000 did not have an implied duty to advise the League to consider seeking guarantees from ITV Digital’s ultimate parents, Carlton and Granada, in respect of the £315million payable under the contract.

The Court reached this conclusion on the basis that consideration of the parental guarantee issue was well within the competence of the individuals at the League. In doing so, the Court upheld the principles that (i) there is no such thing as a general retainer, and that (ii) only in limited circumstances will a solicitor’s duties go beyond the express terms of his or her retainer. This decision is covered in more detail in our briefing note which is available at www.blg.co.uk.

Since Football League, there have been a number of other solicitors’ negligence cases which illustrate and support the principles discussed in Football League as well as examining other key issues such as the availability of cost of cure in solicitors’ negligence cases.We examine them below.

Shortly after the decision in Football League, the Court of Appeal in Regent Leisuretime Ltd v Skerrett (2006), which concerned conduct of litigation, confirmed that there is no general duty on a solicitor to consider all aspects of a client’s needs. Additionally, it provides useful clarification of when a solicitor is entitled to rely on counsel’s advice.

The claimants - a company and its directors and shareholders, aMr Amos andMr Barton ("the Directors") - alleged that the defendant solicitor was negligent in failing to advise that the company be joined as an additional claimant to proceedings brought by the Directors before they became statute-barred.

The proceedings concerned a claim for damages for deceit by the company’s bankers, following valuation of properties owned by the company. From the outset, the claim was a difficult one: under the principle laid down in Prudential Assurance v Newman Industries Ltd (No2) (1982), there was a risk that the Court would find that the Directors could not claim damages for diminution in the value of their shareholding that was due to reduction in value of the company’s assets - any such claim had to be brought by the company. However, in practice the company could not raise the funds to bring a claim.

In the event, the Directors succeeded on liability, but recovered only nominal damages (their position in the meantime not being helped by the House of Lords’ decision in Johnson v GoreWood (2002)), having been too late to join the company to the proceedings.

The Court of Appeal concluded that the solicitors had not been negligent and had been entitled to rely on the advice of specialist counsel, who had advised pursuing the claim but had not advocated joinder of the company. In doing so, the Court took into account the fact that the Directors were experienced businessmen who were well aware of the practical problems in bringing a claim through the company and the legal risks of pursuing their claim. In view of the experience of specialist counsel, who had been retained for several years before the solicitor came on board, the difficult area of law under consideration, and absence of anything to suggest that the advice was obviously wrong, the solicitor had discharged his duty and was not obliged to question counsel’s advice.

In Marplace (Number 512) Ltd v Chaffe Street (2006), the defendant solicitors were retained to deal with the legal aspects of an agreement to acquire a clothing company as part of a team which included accountants and corporate finance advisers. Due to the way the deal was structured, it was critical for the claimants to ensure that the company would continue to receive payments for certain clothing stock post-completion. However, after the agreement had been exchanged, the claimant learned that the company had entered into a deal to have payments which would have been paid postcompletion instead paid pre-completion. As a result, the agreement fell through.

Although the agreement had been project managed by the corporate finance advisers, the claimants sought damages from the solicitors for negligent failure to ensure that the payments could not be brought forward under the agreement or to advise on remedies.

Drawing on the line of cases on scope of duty ending with Football League, the Court rejected the claim, concluding that the claim was designed to "shift blame" onto the solicitors for a commercial failure by the clients and the corporate finance advisers. The solicitors were not asked to advise on the financial terms which were the responsibility of the corporate finance advisers and were not made aware of the critical importance of cash flow. As such, the solicitors were entitled to take the view that their clients were experienced businessmen who would have asked for advice if needed, and that the corporate finance advisers were responsible for the financial structuring of the transaction and overall project management.

Football raised its head again in Fulham Leisure Holdings v Nicholson Graham & Jones (2006), where the solicitors again acted in a complex deal for a sophisticated client. The main point of interest in this decision lies in the conclusion reached on whether cost of cure is available as damages in solicitors’ negligence claims.

The defendant solicitors acted for Mr Al- Fayed in connection with his deal to acquire a controlling stake-holding in Fulham Football Club in 1997. Under the deal, Mr Al Fayed obtained a 75 per cent shareholding and the vendors of the club retained 25 per cent. However, the deal was also intended to ensure that, although the vendors’ minority shareholding was to be protected from dilution up to a certain level of investment, once Mr Al Fayed had invested over £60million, this protection would cease ("the Provision"). The defendant solicitors did not include the Provision in the final agreement.

Five years later, Mr Al Fayed’s injection of funds into the club had exceeded £60million but he was unable to dilute the vendors’ holding below 10 per cent. Mr Al Fayed alleged that, as a result of the omission of the Provision, he was forced to buy the vendors out entirely for £7.75million in 2002. He claimed this sum from the defendants on the basis that that this is what it had cost him to obtain the position he would have been in from the outset had the defendants not acted negligently in drafting the agreement.

The defendants argued that Mr Al Fayed had known that the Provision was not included in the final deal and was happy with this. However, the judge found that the Provision had been omitted accidentally and negligently.

However, the decision is not all bad for solicitors as Mr Al Fayed was unable to persuade the court to award him damages on a cost of cure basis. Although the court held that, in principle, cost of cure could be allowed in solicitors’ negligence cases as an alternative to the normal rule of difference in value, this was subject to a reasonableness limit and the court concluded that this had not been satisfied here. In reaching this conclusion, the court took into account the fact that by buying the vendors out, Mr Al Fayed had obtained benefits beyond the ability to dilute their shareholding: the judge described the deal as "a horse-trade in which matters other than the missing right were firmly in play". The claimant had therefore not proved the true cost of curing the defect in the agreement. Due to the way the claim had been pleaded, Mr Al Fayed also recovered only a small amount in respect of legal costs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.