The High Court has recently considered a claim for professional negligence brought against a firm of solicitors for misdrafting a limited liability partnership agreement.

Facts

Wellesley Partners LLP (the “Claimant”) was an executive search consultancy, or headhunter, which had a particular focus on the investment banking sector.

The Claimant sought to admit a number of new partners into the partnership, including, in particular, Addax Bank BSC (“Addax”). It was agreed between the Claimant and Addax that Addax would make significant capital contributions to the partnership. This required the drafting of a new limited liability partnership (“LLP”) agreement.

At the relevant time, the Claimant partnership was almost wholly owned by Mr Channing. Mr Channing and Addax agreed that Addax should have an option to withdraw half its capital contribution.

The Claimant instructed Withers LLP (the “Defendant”) to draft the new LLP agreement (the “Agreement”). As executed, the Agreement gave Addax the option to withdraw half its capital contribution, exercisable at any time within the first 41 months of the date of execution.

Addax exercised that option in May 2009. This was very unwelcome to Mr Channing and caused the Claimant a number of problems.

The Proceedings

In this case, the Claimant brought proceedings against the Defendant, on grounds that Mr Channing’s instructions to the Defendant were that Addax’s option should only be exercisable after 42 months (as an earlier draft prepared by the Defendant had provided) and that, in the course of drafting the agreement, the Defendant altered the provision to an option exercisable by Addax during the first 41 months of the Agreement, without instructions from the Claimant to do so.

The Claimant further submitted that the Defendant had been negligent in:

failing to explain the drafting error it had made;
failing to correct the drafting error;
failing to advise the Claimant to seek alternative advice; and if it understood that the change to the option was drafted on the Claimant’s instructions, failing to explain this to the Claimant.
The Defendant contended that if negligence was found, the Claimant had been contributorily negligent due to Mr Channing’s failure to review the draft Agreement and note the change to the clause allowing Addax the option to withdraw half its capital contribution.

The loss sought by the Claimant included:

the loss of diversion of Mr Channing’s time away from that of generating revenue;
legal costs incurred in dealing with Addax; and loss of profit that the Claimant would have earned had it been in a position to expand its business in the United States.

With regard to the Claimant’s claim for loss of profit, it was asserted by the Claimant that Nomura (a Japanese Bank), having taken over Lehman’s operations in the UK and Europe, was looking to build a business in the United States which would have involved a large-scale recruitment exercise. The Claimant submitted that it would have benefitted greatly from this had it been in a position to expand its business in the United States itself.

The Decision

In the circumstances, Nugee J found that there was “no conceivable reason” why Mr Channing would have initiated a change to the option clause exercisable by Addax to allow it to withdraw half its capital contribution within the first 41 months of the Agreement. Having considered the evidence, Nugee J considered the Defendant to have misremembered its instructions. The Defendant was therefore found to have been negligent in drafting the change to the option clause without being instructed to do so. Nugee J did not, however, find the Defendant to be negligent or in breach of duty in relation to the further four allegations made by the Claimant.

With regard to the Defendant’s submission that the Claimant had been contributorily negligent in failing to read the draft Agreement before signing, Nugee J found that it was not “unreasonable for Mr Channing to assume that it was not necessary to read through the agreement again”. Accordingly, the Defendant was unsuccessful in its attempt to establish that the Claimant had been contributorily negligent.

Nugee J further found that if Addax had not withdrawn its capital, the Claimant would have expanded its business in the United States. Accordingly, as part of the award made by Nugee J, the Claimant successfully recovered £1,487,313 in damages for loss of profits (£1,057,290 attributed to the loss of profits that the Claimant would have made in the United States). The Claimant was also awarded £125,000 for the diversion of Mr Channing’s time. Nugee J acceded that the legal costs of dealing with Addax should be referred to a costs judge for assessment, if not agreed.

Conclusion

This is a welcome decision for claimants and for lenders, who will not be contributorily negligent if they rely on their solicitors to draft documents properly and to flag any material changes before final versions are signed.

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