Cutlers Holdings Limited & Anor. v Shepherd and Wedderburn LLP

The claimants sued their former solicitors for professional negligence and breach of fiduciary duty arising out of the 2013 transaction documents and subsequent litigation about ownership of Sheffield United Football Club. The court found that the firm was negligent in (i) failing in 2013 to identify and address a drafting lacuna in clause 9.1.12 of the Investment and Shareholders' Agreement (the ISA) which could, by use of permitted transfers, have created a risk that a purchaser might obtain control without triggering the property call options ("Device 1"); (ii) failing to seek client instructions before agreeing a late amendment inserting a "permitted use" assumption into the Stadium Option valuation definitions; and (iii) failing in December 2017 and after receipt of UTB's counternotice to advise the client that an own-interest conflict had arisen and that independent advice should be sought. However, the court held that those breaches did not cause compensable loss: on the facts the defendant investor would, in the relevant counterfactuals, have employed alternative means (notably the third-party direction device under clause 11.9, "Device 2") or the claimant would nevertheless have proceeded as it did; and the client representatives would have accepted the Stadium drafting in any event. The court rejected any breach of fiduciary duty in respect of the conflict point and dismissed the partner-level claims for lack of an assumed personal responsibility and, substantively, for the same reasons as the LLP claim.

Background and parties: The claimants were Sheffield United Limited (renamed Cutlers Holdings Limited) and its parent Scarborough Group International Limited (SGIL). They alleged professional negligence and breaches of fiduciary duty by Shepherd and Wedderburn LLP and two partners arising from the 2013 investment and property option package with UTB (Prince Abdullah's vehicle), the exercise of the 2017 call option, and the subsequent litigation and arbitration.

Nature of the claims and relief sought: The LLP claim alleged negligent drafting of the ISA (notably clause 9.1.12), negligent drafting of the Stadium Option valuation mechanism, negligent December 2017 advice about exercise of the call option, and failure to advise on an own-interest conflict (with a parallel fiduciary claim). The Partner claim alleged personal negligence and fiduciary breaches by two named partners. Remedies sought were damages for loss said to flow from the unsuccessful litigation and arbitration outcomes.

Issues the court framed:

• whether the firm was negligent in drafting clause 9.1.12 and/or in advising on its effect;
• whether the firm was negligent in agreeing the late insertion of the permitted-use assumption in the Stadium Option;
• whether the December 2017 advice about exercise of the call option was negligent;
• whether the firm and the partners breached duties by failing to advise on an own-interest conflict and to recommend independent advice;
• causation and quantum, including SGIL's alternative claim and any contractual limits of liability.

Court's reasoning and conclusions:

• The ISA and the Articles were a package to be read together. A reasonably competent solicitor should have noticed that the ISA drafting left open a prima facie lacuna whereby a shareholder could, by utilising permitted transfers in the Articles, frustrate the intended trigger of the property call options (Device 1). The firm therefore breached its duty by failing to identify and advise on that risk and to propose drafting to address it.
• By contrast, the court found no negligence in respect of the possibility of UTB avoiding the property obligation by directing transfers on completion under clause 11.9 (Device 2): that argument was unsustainable for the reasons identified and was not one that a competent adviser needed to caveat.
• The property partner was negligent in agreeing a late insertion of a permitted-use assumption into the Stadium Option definitions without obtaining client instructions. That amendment could reduce the Stadium purchase price under the agreed formula.
• Once UTB served its counternotice and associated devices were deployed, S+W should have recognised the significant risk that their earlier drafting/advice was defective and should have advised the client to obtain independent advice; they failed to do so and were negligent in that respect. The court rejected, however, that their conduct amounted to a conscious or deliberate breach of fiduciary duty.
• On causation, the court concluded the claimants had not proved that the negligent drafting or failures to advise caused loss. The judge found that, on the balance of probabilities, the investor would still have attempted or achieved the same result by other means (notably Device 2) or that the claimants would have acted as they did even if properly advised; and that the claimant representatives would in any event likely have accepted the Stadium amendment. Accordingly no compensable loss flowed from the breaches found.
• The partner-level claims failed for want of an assumed personal responsibility and, substantively, for the same reasons as the LLP claim. SGIL's alternative losses and limitation arguments were unnecessary to decide given the negative causation finding.

Procedural posture: This was a first-instance trial before Mrs Justice Bacon, after extended factual and expert evidence and a multi-week hearing. The judgment sets out findings of fact, assessment of witness credibility, and detailed legal analysis of professional duties, fiduciary obligations and causation.

The claims were dismissed. The court held that Shepherd and Wedderburn LLP were negligent in failing to identify and address a drafting lacuna in clause 9.1.12 of the ISA (Device 1), in failing to seek client instructions before agreeing the permitted-use assumption in the Stadium Option, and in failing to advise the client to seek independent legal advice once UTB’s counternotice raised the risk of prior negligence. However, those breaches did not cause compensable loss. The court rejected any breach of fiduciary duty in respect of the conflict point and dismissed the individual partner claims for lack of assumed personal responsibility and on the same causation grounds.