Petrocapital Resources plc v Morrison & Foerster (UK) LLP

The claimant, Petrocapital Resources Plc, sued its solicitors Morrison & Foerster (UK) LLP for alleged professional negligence and breach of retainer arising from advice given in May 2010 and earlier work in drafting undertakings given on 31 July 2008 in connection with a takeover transaction. The key legal issues were (i) construction and effect of the 31 July 2008 "Undertakings" given by two noteholders in relation to convertible loan notes, (ii) whether time for payment was of the essence and/or whether Petrocapital was in repudiatory breach, (iii) whether the defendant solicitors fell below the standard of care in advising that the undertakings no longer prevented conversion and that a buy-out was in the company’s best interests, and (iv) whether the solicitors should have advised calling a general meeting or sought Counsel after queries from the company’s corporate adviser.

The judge held that the solicitors’ construction (and alternative repudiatory-breach analysis) were tenable: time for payment could properly be regarded as of the essence and, if unpaid, the noteholders could elect to treat the undertakings as at an end. The advice that a buy-out on the negotiated terms was within the company’s interests was held to be within a range of reasonable professional judgment when weighed against potential litigation and dilution risks. The court rejected claims that the solicitors had a duty to summon a shareholder meeting or that they negligently failed to advise payment of £40,000 in 2009. The claim was dismissed.

Background and nature of the claim:

• This was a first-instance professional negligence and breach of retainer claim by Petrocapital against its solicitors, M & F, concerning advice and drafting arising from a Framework Agreement of 31 July 2008 and associated "Undertakings" given by two holders of convertible loan notes. Petrocapital alleged it was negligently advised in May 2010 that those undertakings were no longer irrevocable and that the company should pay £1.45 million to redeem the notes, rather than preserve working capital or pay £40,000 earlier.

Parties and procedural posture:

• Claimant: Petrocapital Resources Plc. Defendant: Morrison & Foerster (UK) LLP. The claims previously named individual directors but those were not pursued. Trial occurred June 2013 before Mark Cawson QC (sitting as deputy judge). This is a first-instance judgment; appellate history: Not stated in the judgment.

Issues framed by the court:

• Construction and legal effect of the 31 July 2008 Undertakings (were they truly irrevocable or did they lapse/permit termination on non-payment by 31 July 2009?).
• Whether time for Petrocapital's payment was of the essence and, if so, whether non-payment gave the noteholders a right to treat their obligation as at an end (repudiatory breach analysis).
• Whether M & F breached the standard of care in advising (i) that the undertakings were no longer effective or could be treated as terminated, (ii) that redemption on negotiated terms was in the company’s best interests, or (iii) in failing to advise payment earlier, to call a shareholders' meeting or to obtain Counsel when Fisher raised concerns.

Court’s reasoning and conclusions:

• Construction: the term "irrevocable" did not inevitably mean the noteholders’ undertakings remained absolute for all time; contextual background and contemporaneous communications supported a tenable interpretation that the obligation to redeem within 12 months was material and that non-payment could operate to release the noteholders. The court held there was a tenable alternative analysis that non-payment made time of the essence and permitted termination for repudiatory breach; in practical effect both analyses produced similar outcomes.
• Standard of care and advice: the judge found that the defendant’s advice was within the range of reasonable professional opinion. The solicitors had reasonably concluded that redemption could be lawful and that a negotiated buy-out could be in Petrocapital’s interests given dilution risk, likely internal disruption, and the realistic prospect of substantial damage claims and litigation costs. The court accepted the directors who authorised the payment acted in good faith and relied on legal advice.
• Other allegations: no duty was found on the solicitors to summon a shareholders' meeting; nor had they acted negligently in failing to procure earlier £40,000 payments (the solicitors were entitled to assume incoming controllers had their own advisers), nor to seek Counsel before the payment in the particular circumstances.

Result: Petrocapital’s professional negligence and breach of retainer claims were dismissed.

The claim is dismissed. The court found that the solicitors’ construction of the undertakings and their alternative repudiatory-breach analysis were tenable; their advice that a settlement buying out the convertible loan notes could be in Petrocapital’s best interests, when balanced against dilution, litigation and directors’ assessments, did not fall below the standard of care. There was no duty to advise convening a shareholder meeting or to have sought Counsel as required, and the pleaded allegations of negligence were not established.