Solicitor negligence – partnership agreement – drafting error – loss of chance to make profits – lost profits – wasted management time – negligent solicitors – Wellesley Partners LLP v Withers LLP [2014] EWHC 556 (Ch).
In a judgement handed down earlier this month, the High Court ordered a firm of solicitors to pay its former client £1.6m in compensation for lost profits.
The case concerned a claim for damages for professional negligence against a firm of solicitors for misdrafting a partnership agreement.
The Claimant, Wellesley Partners LLP (“the Client”) was an executive search consultancy, or headhunter, particularly in the investment banking sector. The Defendant, Withers LLP (“the Solicitors”), is a well-known firm of solicitors.
In 2008 the Client agreed that a number of new partners could join its partnership, including a Middle Eastern Bank, Addax Bank BSC (“the Bank”) which was to make a large financial contribution (about £2.5m) in return for which it would get a 25% interest in the partnership. The plan was to use the £2.5m to fund expansion of the business in the Middle East, North America and London.
The Client and the Bank also agreed that the Bank could withdraw half of its investment in certain circumstances.
The arrangement meant that a new partnership agreement was required, which was drafted by the Solicitors and completed in May 2008. The agreement gave the Bank the option to withdraw its investment any time in the first 41 months of the agreement.
As it happened, the Bank exercised the option after 12 months, as a result of an unexpected need to raise money after suffering losses caused by the global financial crisis, which caused a number of problems for the Client:
- Most significantly, it was unable to fund the opening of an office in New York or expand its London operation. This in turn made it more difficult for it win a lucrative contract in the U.S. with a Japanese bank, Nomura, which had taken over part of Lehman’s business in UK and Europe. The Client had previously been a preferred supplier to Lehman.
- It did not expand its London team as had been planned.
- It faced legal action by the Bank to recover the investment and incurred liabilities for its own and the Bank’s litigation costs.
- Instead of generating revenue as a recruitment consultant, a key figure in the Client’s business was required to spend some of his time dealing with problems arising from the contractual dispute with the Bank.
In the court action against the Solicitors, the Client’s case was that its instructions to the Solicitors were that the Bank’s option should only be exercisable after 42 months (as an earlier draft agreement had provided) and that in the course of drafting the agreement the Solicitors altered this to an option exercisable during the first 41 months without any instructions to do so.
Defending the claim, the Solicitors argued that the change was made at the Client’s instructions.
The unfavorable wording had been added to the agreement after one of several conversations between the Solicitors and the Client that particular day. As can sometimes happen in high pressure transactions, no clear note of the conversation was made. The Court was therefore left to speculate as to the most likely explanation for what happened. There was no evidence that the Client and the Bank had renegotiated the term as drafted. Nor did the Court find any conceivable reason why the Client would change the clause. It concluded that the Solicitors must have either misunderstood the instruction, or noted it down wrong, or when redrafting the clause, misremembered what had been instructed.
The Solicitors’ mistake need not have been fatal if it had been picked up by the Client, who was sent several drafts containing the unfavourable clause. Unfortunately, the Client did not check these, and more unfortunately for the Solicitors, the Court lay blame fully with the Solicitors.
As a result of the Solicitors’ negligence the Client lost the chance to make profits on the various ventures it had planned, for which it was awarded just short of £1.5m, together with £125,000 as compensation for wasted staff time and an amount, yet to be quantified, by way of reimbursement of the costs of resolving the litigation brought by the Bank. Once the Client’s legal costs are paid, the total bill for the drafting error will easily total over £2m.
The case is a salutary lesson for solicitors, illustrating how easily serious consequences can flow from a simple drafting mistake and how unwilling the Courts are to apportion blame to Clients even where they fail to check documents.
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