Fulham Leisure Holdings Ltd v Nicholson Graham & Jones

A solicitor may be liable in professional negligence where drafting accidentally omits a material contractual right and the omission is not authorised by the client. Cost of cure can, in principle, be an appropriate measure of loss in a professional negligence claim. It is available only where the claimant proves that the expenditure represents the real loss caused by the negligence and that the cure was reasonable and proportionate in the circumstances. A transaction which secures materially broader benefits than the omitted right may not provide an identifiable cost of cure. Legal expenses incurred in investigating and responding to the consequences of negligence are recoverable only if their purpose, causation and reasonableness are sufficiently proved.

Fulham Leisure Holdings Ltd sued its solicitors, Nicholson Graham & Jones, for professional negligence arising from the acquisition of Fulham Football Club in 1997. The claimant alleged that the solicitors’ final drafting accidentally removed a provision allowing Holdings, after providing £60 million of finance, to issue further shares and dilute the minority shareholders below the 10 per cent threshold.

In 2002 Holdings bought out the minority shareholders for £7.75 million in order to proceed with a proposed sale and redevelopment transaction. It claimed that sum as the cost of restoring the position it would have occupied had the omitted right been preserved, together with legal costs. The central issues were liability, the appropriate measure of loss, the reasonableness of the buy-out, and the recoverability of the legal expenses.

1. Liability. The final documentation prevented Holdings from issuing further shares without the minority shareholders’ consent after £60 million of finance had been provided. The right to dilute had appeared in the earlier drafts. The court found that its removal on or immediately after 27 May 1997 was not requested by the minority shareholders, was not authorised by Holdings or its representatives, and was not accompanied by an appreciation of its consequences. It was an accidental and negligent drafting omission.
2. Cost of cure. The compensatory principle permits a flexible approach to the date and measure of damages. Cost of cure is not unavailable merely because the claim is one for solicitors’ negligence. However, the claimant must establish that the expenditure genuinely represents the loss caused by the breach.
3. The 2002 transaction did not merely restore the omitted right to issue shares. It terminated the Shareholders’ Agreement, removed the minority shareholders’ other rights, acquired their non-opposition to the proposed transaction, and resolved potential disputes. The court could not identify what part of the £7.75 million represented the cost of curing the drafting omission.
4. Even if the whole sum were treated as the cost of cure, it was not reasonable or proportionate. The payment secured control of a heavily insolvent football club and was substantially influenced by commercial urgency, the claimant’s negotiating choices and Mr Al Fayed’s personal preference for removing the minority shareholders’ influence. The expenditure therefore did not provide a proper measure of loss under the principles discussed in Ruxley Electronics & Construction Ltd v Forsyth [1996] AC 344.
5. Legal costs. The claimant proved only £2,250 for advice from Mr Briggs and £4,500 for advice from Mr Richards. The remaining fees were insufficiently particularised or connected to the negligence. Judgment was therefore entered for £6,750.