Paul Richards & Anor. v Speechly Bircham LLP & Anor.

A solicitor advising on a private-equity transaction must identify significant legal risks created by the drafting within the scope of the retainer. The solicitor need not predict every unlikely factual chain or provide general commercial advice. However, the commercial origin of a term does not remove the duty to examine its legal interaction with other provisions. In assessing negligence, the court applies the circumstances known at the time and avoids hindsight. Where negligent advice causes a lost transactional opportunity, the claimant must prove on the balance of probabilities what he would have done. The prospects of a beneficial outcome dependent on a third party are then assessed as a real or substantial chance. A professional defendant is liable only for loss falling within the scope of the duty, including litigation costs directly connected with the legal risk identified.

The claimants were founders of a technology business who sold their shares to a private-equity-backed company while retaining substantial C-share interests and employment positions. The defendants acted as their solicitors on the transaction and its articles of association.

The claimants alleged that the solicitors failed to identify a significant risk that the redemption premium provision could affect the market value of their shares if they became leavers. They claimed the lost value of an alternative transaction and the costs of earlier litigation concerning their leaver status and share valuation. The court also had to determine the proper construction of article 18.4.1, causation, loss of chance, recoverability of legal costs and contributory fault.

1. The claim succeeded in part. The defendants were negligent in failing to identify and address the significant risk that article 18.4.1 could be construed so that the redemption premium affected the valuation of the claimants’ shares. The defendants’ retainer included negotiating and reviewing the articles. The fact that the redemption premium originated in commercial negotiations did not answer the legal drafting issue.

2. The court rejected the wider allegation that the defendants should have warned against the entire chain of events leading to wrongful dismissal, Good Leaver status and nominal value. That allegation depended too heavily on hindsight. The relevant duty was to identify and advise upon the legal risk created by the wording of the articles.

3. Article 18.4.1 required a hypothetical sale of the entire issued share capital to a willing buyer. The valuation was not an actual sale or a distribution of sale proceeds. The redemption premium, which regulated distribution between different classes of shareholder, therefore did not reduce the market value of the leaver’s shares. The earlier Quantum Judgment had misconstrued the article.

4. Applying the loss-of-chance principles, the claimants proved that they would have required the risk to be removed or would have abandoned the transaction. They failed to prove a real or substantial chance that the existing investor would have agreed to amend the articles. They did prove a 75% chance of concluding an alternative transaction at the assessed value. The capital loss was therefore assessed by reference to that chance.

5. The defendants were liable for 75% of the reasonable costs relating to the earlier litigation on the valuation issue, because those costs had a direct nexus with the drafting negligence. They were not liable for the costs of determining whether the claimants were Bad or Good Leavers, nor for any uplift under a conditional fee agreement.

6. The claimants’ alleged contributory fault was rejected. The earlier finding that their dismissal was wrongful could not be re-litigated. Their arguments on construction before the earlier judge were clear and substantial, and did not amount to a failure to mitigate.

7. Damages were awarded in the combined sum of £1.454 million.

First-instance judgment following a six-day trial. The judgment records earlier litigation concerning the claimants’ employment and share valuation, but that litigation was compromised before the present claim.