Petrocapital Resources Plc v Morrison & Foerster (UK) LLP

A solicitor is not negligent merely because the court later prefers another construction of a commercial document. The advice is competent if the construction adopted is tenable in the circumstances. Construction requires an objective assessment of the words, commercial context and factual background, without elevating commercial common sense above the language used.

Where a contract requires payment “in any event” by a specified date, time may be of the essence, particularly where the underlying rights concern fluctuating share values. Directors acting in good faith may decide that a settlement promotes the company’s success, even if the court might have preferred another decision with hindsight. A company’s business is ordinarily for its directors, not its general meeting.

Petrocapital claimed damages for breach of retainer and professional negligence against its former solicitors, Morrison & Foerster (UK) LLP. The claim concerned advice given about convertible loan notes and undertakings given in connection with the acquisition of control of Petrocapital by Jurby Corporation.

The undertakings required Petrocapital to redeem the remaining loan notes for £40,000 within seven days of raising new capital and, in any event, within 12 months. Petrocapital did not make the payments by 31 July 2009. In May 2010 the defendant advised that the note holders could convert and that purchasing the notes for £1.45 million was in Petrocapital’s best interests. Petrocapital entered into the settlement and later sued, alleging that the undertakings remained irrevocable, that the settlement was not in its interests, and that further advice should have been given.

The issues were whether the advice was tenable and competent, whether the directors should have summoned a general meeting, and whether the defendant owed further duties after the change of control.

1. Claim dismissed. None of Petrocapital’s contractual or negligence claims was established.
2. The relevant question was not whether the court considered the defendant’s construction to be the best construction with hindsight, but whether it was tenable for a reasonably competent commercial solicitor. The construction adopted by the defendant was highly tenable. The words “irrevocable”, the reciprocal nature of the obligations, the reference to payment “in any event within 12 months”, and the commercial context supported the view that the non-conversion obligations would cease to bind if payment was not made.
3. Alternatively, the non-payment was capable of amounting to a repudiatory breach. Time was of the essence because of the words “in any event”, the fluctuating value of the shares, and the effective option given to Petrocapital to redeem the conversion rights within 12 months. Repudiation could operate in a multi-party contract. The note holders could therefore have elected to terminate and then exercise their conversion rights. The defendant’s advice on this issue did not fall below the required standard.
4. Under section 172 of the Companies Act 2006, the directors had to act in good faith in the way they considered most likely to promote the company’s success for the benefit of its members as a whole. The directors who made the decision were entitled to consider dilution, corporate governance, litigation risk and the threatened damages claim. Their decision to settle for £1.45 million was one they were entitled to reach, and the defendant’s advice was not negligent.
5. There was no obligation to summon an extraordinary general meeting. The company’s affairs were vested in the directors unless its articles required them to follow directions from the general meeting. No such provision was relied upon.
6. The defendant was not obliged, after the change of control, to advise the new board to pay the £40,000. It was entitled to assume that Jurby’s solicitors would advise those taking control, particularly given the conflict between the former and proposed controllers. In any event, causation and loss were not proved.

First-instance decision. The judgment records that the time for applying for permission to appeal was extended pending any application to the court.