Milford Investments Limited v Lanyon Bowdler LLP

The Claimant sued its solicitors for professional negligence arising from the Defendants' handling of a joint-venture property development. The key contention was that the Defendant failed to ensure the limited liability partnership ('the LLP') was incorporated before a suite of documents (notably the Development Agreement) were executed, creating a foreseeable risk that those pre-incorporation agreements would be arguable or unenforceable. The court considered the construction and application of section 5(2) of the Limited Liability Partnerships Act 2000 and related company law on pre-incorporation contracts, found legitimate uncertainty as to the legal effect of pre-incorporation agreements, and held that a reasonably competent solicitor should have either ensured incorporation first or warned the client of the risk.

The judge found breach of duty, that the breach created the relevant risk of loss and that causation was established on a loss-of-a-chance basis: an overall 32% chance that the Claimant would have realised the development profit but for the negligence. Quantum was addressed by reference to agreed valuation and cost evidence and the court set out the method for calculating damages (profit less development costs and appropriate discounts). The claim therefore succeeds and judgment was given for the Claimant, with further procedural steps listed to settle detailed quantification.

Background and parties: The Claimant, a property developer controlled by Mr Christopher Shaw, and certain landowners (the Owners) proposed a joint-venture development of land. Both the Claimant and the Owners instructed the Defendant solicitors to prepare an LLP Agreement, Development Agreement and ancillary documents (the "Agreements"). The Agreements were executed in March 2016 before Companies House recorded the LLP's incorporation on 25 March 2016. The Owners later refused to complete a planning-related Section 106 agreement and sold the land to a third party, prompting this negligence claim.

Nature of the claim / relief sought: The Claimant sought damages for negligence, alleging the Defendant should have ensured the LLP was incorporated before execution or warned that execution beforehand risked unenforceability of the Agreements.

Issues framed by the court:

• whether the pleadings allowed the Claimant to rely on an argument that the pre-incorporation Agreements were arguably unenforceable as opposed to strictly unenforceable;
• whether the Other Agreements were in fact unenforceable, including construction of s.5(2) Limited Liability Partnerships Act 2000 and the application of company pre-incorporation rules;
• whether the Defendant breached its duty of care;
• causation, mitigation and whether the Claimant lost the chance to realise development profit; and
• quantum and the methodology for valuing the lost opportunity.

Court’s reasoning and disposition: The court held the Reply did not impermissibly introduce a new head of claim and the Defendant had adequate notice of the arguable-enforceability case. The judge analysed s.5(2) of the LLP Act and related company law, concluded there was genuine uncertainty whether pre-incorporation agreements would give rise to enforceable rights for the LLP, and held a reasonably competent solicitor should have avoided or warned of the obvious risk created by executing the documents in the wrong sequence. The Defendant therefore breached the retainer. On causation the court applied the loss-of-a-chance approach: factual questions about the Claimant’s actions were assessed on the balance of probabilities, while the Owners’ likely conduct was evaluated as a lost chance. Considering funding risk and the Owners’ evident reluctance to proceed, the court assessed an 80% chance the Claimant could have funded its obligations and a 40% chance the Owners would have proceeded, producing an overall 32% chance of realising the profit. The court ruled the Claimant succeeded in principle and set out the approach to quantification; further hearing steps were ordered to finalise arithmetic and consequential matters.

Judgment for the Claimant. The court held the Defendant breached its duty by failing to ensure incorporation of the LLP before execution of the Other Agreements or to warn of the obvious risk created by executing them in the wrong order. The breach was a cause of the Claimant's loss in that it created the foreseeable risk (and resulted in the lost chance) that the development would not proceed; the lost chance was assessed at 32% of the hypothetical development profit. The court ordered judgment for the Claimant and directed further procedural steps to determine the detailed quantum.