This recent High Court decision serves as a reminder to claimants to check the terms and scope of their retainer with professionals when considering whether or not to pursue a professional negligence recovery. In order to be successful, claimants will need to demonstrate that the professional’s conduct fell below the standard of care that could reasonably be expected for that area of expertise. In this case, it was held that the Claimant failed to satisfy this test and the Defendant had neither breached its retainer nor was negligent.

Background

Mr Richard Armstrong and Mr Rudolph de Mendonca were holders of convertible loan notes (“CLNs”) issued by the Claimant company in or around May 2006. The terms of the CLNs allowed Mr Armstrong and Mr de Mendonca to require the Claimant to convert their loan capital into share capital before a deadline of 31 December 2011.

In June 2008, the Claimant was approached by Jurby Corporation (“Jurby”). Jurby wished to acquire a substantial interest in Almas International JSC (“Almas”), a Kazakhstan oil trading and exploration company, but in order to do so needed to raise US$54,000,000. To achieve this objective Jurby sought to gain control of the Claimant and acquire 95.7% of its issued share capital.

It is against this background that the Defendant was subsequently instructed by the Claimant to draft an agreement (the “Framework Agreement”) that provided for Jurby’s acquisition of the Claimant.

The Framework Agreement was executed and approved by the Claimant on 31 July 2008. Inter alia, it provided that Mr Armstrong and Mr de Mendonca would irrevocably undertake not to convert any of their CLNs. In return, the Claimant undertook to pay £20,000 each to Mr Arsmtrong and Mr de Mendonca within seven days of raising new capital, but in any event within 12 months of the date of the agreement (so by 31 July 2009).

As a result of the Framework Agreement, on 31 July 2008 Jurby acquired the 95% stake in the Claimant that it required. However, the Claimant failed to raise the funds needed to proceed with the Almas venture and, despite having the funds to do so and in breach of its undertaking, the Claimant did not pay the sum of £20,000 to either Mr Armstrong or Mr de Mendonca.

In September 2009, Jurby wrote to the Claimant and informed it that it had decided to sell its shares in the Claimant to a company known as Advice Capital Management AG (“Advice”). That same day, Mr Armstrong wrote to the Defendant attaching a draft letter to the Claimant, which informed them that Mr Armstrong and Mr de Mendonca intended to convert their CLNs.

In April 2010, Mr Armstrong and Mr de Mendonca met with the Defendant in their capacity as two of the holders of the Claimant’s outstanding CLNs. The Defendant suggested that it believed, notwithstanding the terms of the undertaking, the CLNs were now convertible given 12 months had elapsed.

Later that month, Mr de Mendonca wrote to the Claimant offering it the opportunity to purchase his CLNs at a discounted rate. Subsequently, in May 2010, Mr de Mendonca wrote again to the Claimant stating that it was his understanding that the Claimant had received legal advice to the effect that the purchase of the CLNs at a discounted rate in the sum of £1,450,000 was in the Claimant’s best interests.

The Claimant subsequently commenced proceedings in respect of this advice.

The Allegations

Central to the case against the Defendant were the undertakings given by Mr Armstrong and Mr de Mendonca. On their face, they were expressed to be irrevocable and the Claimant alleged:

(1) The Defendant acted in breach of retainer and negligently in advising in May 2010 that the undertakings were no longer irrevocable and that it was therefore in the Claimant’s best interests to compromise with Mr Armstrong and Mr de Mendonca in the sum of £1,450,000 (the “Primary Case”); and

(2) If contrary to the Primary Case, the undertakings had become revocable, then the Defendant acted in breach of retainer and negligently in:

a. Drafting undertakings in such terms that failed to accord with the Claimant’s intention – i.e. that the undertakings were to be irrevocable (the “First Alternative Case”); and/or

b. Failing to advise the Board of the Claimant in or about July 2008 that an aggregate £40,000 was required to be paid to Mr Armstrong and Mr de Mendonca prior to 31 July 2009 in order to prevent them from exercising their conversion rights (the “Second Alternative Case”).

The High Court’s Decision

In respect of the Primary Case, the Court held that the Defendant had not acted in breach of retainer or negligently in advising that the undertakings were no longer irrevocable. The Court held that central to this issue was the true construction of the undertakings and that construction of documents can be a notoriously difficult area. The Court held that an error in interpreting documents is unlikely to constitute negligence, so long as the interpretation is one which a reasonably competent solicitor (with expertise in that area) could arrive at. On the specific facts of this case and the evidence before the Court, it was held that there was at least a highly tenable argument that the undertakings could be construed in such a way that they were no longer irrevocable as at 31 July 2009. On this basis, Mr Armstrong and Mr de Mendonca were entitled to exercise their conversion rights.

In respect of the First Alternative Case, the Claimant argued that it was contrary to their intention to be bound by undertakings which were in fact revocable should they fail to honour them. It was again held by the Court that, on the facts of this case (which included email correspondence between the Claimant and Messrs Armstrong and de Mendonca relating to when payment would be due under the undertakings) it was never actually intended that the undertakings should be truly irrevocable. Accordingly, the Defendant did not act negligently or in breach of retainer in the drafting of the undertaking.

Finally, in respect of the Second Alternative Case, the Court held that the Defendant did not have a duty to draw the provisions of the undertaking requiring the payment of £40,000 to the new Board of the Claimant in or around July 2008 (appointed on the Jurby acquisition). The Court held that, at the time of the drafting of the Framework Agreement, Jurby would have had its own independent legal advice and there was an adverse conflict of interest between the interests of the Claimant and Jurby. On this basis, the Defendant was entitled to leave it to Jurby’s legal representatives to give the appropriate advice.

As a result, the Defendant was not found to have acted below the standard of a reasonably competent solicitor.

Commentary

Although the Defendant was found not liable, claimants should remember that this was a highly technical, fact specific case that concerned issues of construction and the subjective intention of the parties. It should remind claimants of the importance of seeking legal advice regarding the scope of a professional’s duty before any action is taken. Conversely, it also serves as a reminder to claimants to ensure that its agreements are properly drafted to accord with its intentions, thereby eliminating the need to litigate over the interpretation of the agreement.

For further information, please contact Georgina Squire or the Partner with whom you usually deal.