The claimant, Wellesley, was a London based executive search agency for investment banks run by Rupert Channing. In 2008 it retained Withers to draft an agreement with a Bahrain bank, Addax. Addax was to invest £2.5 million or $US5 million in exchange for a share of the business that was to be expanded in the Middle East. Wellesley's main complaints about Withers were that:
- The agreement allowed Addax to withdraw 50 per cent of its investment within 42 months rather than after 42 months.
- The investment was expressed in US dollars so that Addax had to be repaid in that currency and so Wellesley bore the risk of an unfavourable shift in exchange rates.
The agreement was completed in May 2008 just as the recession took hold. Addax exercised its right to withdraw 50 per cent of its investment in February 2009.
The main thrust of Wellesley’s claim was that it was deprived of working capital for expansion. With the failure of its project in the Middle East, Mr Channing developed an alternative strategy to expand in the US. More specifically, Wellesley was to develop its relationship there with Nomura. Nomura had acquired Lehman’s investment banking business in the US after Lehmann collapsed in September 2008. Wellesley had previously worked for Lehmann in London and asserted that it was poised to secure lucrative employment by Nomura as it rebuilt the US business but that was prevented by lack of working capital.
The judge held that the provision allowing Addax to withdraw 50 per cent of its investment within 42 months resulted from confusion by Withers over their instructions from Mr Channing. He had instructed them that Addax should only be permitted to withdraw capital in a window between 41 and 42 months after completion.
The claim in relation to the exchange control risk failed because the loan was clearly expressed in US dollars. Mr Channing was an experienced businessman and should have realised the loan would be repayable in that currency (applying familiar case law such as Pickersgill v Riley and Carradine Properties v DJ Freeman).
That left the issue of damages in relation to the first claim. Wellesley claimed lost profits both in the US and London and more specifically the failure to build a lucrative relationship with Nomura caused by the withdrawal of Addax’s capital, along with losses caused by the diversion of Mr Channing’s time away from generating income and into resolution of the dispute with Addax.
Nugee J concluded that:
- The loss of the opportunity to establish a business in the US and to trade profitably there had to be proved on the balance of probabilities and was to be assessed by “an evaluation of all the chances, great or small, involved in the trading”. It was not to be treated as the loss of a chance (see below). On the facts, Wellesley was unable to prove that it had lost this opportunity so this part of the claim failed.
- By contrast, the failure to establish a relationship with Nomura in the US was to be assessed on conventional loss of chance principles (as in Allied Maples v Simmons & Simmons). Wellesley had to establish that it had lost a valuable right (on the balance of probabilities), which was contingent on the response of a third party (Nomura). That assessment does not have to be proved on the balance of probabilities.
- It was able to do so and Nugee J assessed the chance of success at 60 per cent. Further, he assessed the chance of Wellesley securing a sole mandate from Nomura at 25 per cent and the chance of its appointment with another executive search firm at 75 per cent (in which case it would have had to share profits). On that basis, the chance of securing a sole mandate was 15 per cent (60 per cent times 25 per cent) and a joint mandate 45 per cent (60 per cent times 75 per cent). Applying these percentages to the claimed loss, the total awarded was £1,057,290 (against a claim for £3,262,552 for a sole mandate and £1,262,016 for a shared mandate). Both percentages are less than 50 per cent, so on a conventional balance of probabilities test, this part of the claim would have failed.
- The vexed question was whether arguments over remoteness of loss should be assessed on contractual principles (what was reasonably foreseeable by the parties at the date of the contract: Hadley v Baxendale) or on tortious principles (what was reasonably foreseeable at the date of the breach of duty). The difference in dates may be significant: the date of the solicitors’ retainer will precede the date of its breach (obviously) and the landscape may have changed significantly between those two dates. Despite persuasive arguments that the more restrictive contractual basis should be adopted, Nugee J concluded that since a claimant can take advantage of both contractual and tortious limitation periods, the same approach should be adopted when dealing with remoteness. Any decision on this principle would have to be decided by a higher court.
- On the facts, Withers were told of Mr Channing’s intention to expand into the US so the damages resulting from the loss of the Nomura relationship were not too remote to be recoverable.
- There had been no contributory negligence by Wellesley so the loss was not reduced on that score.
- Finally, Wellesley were also awarded damages of £430,023 as a result of loss of profits in London (again resulting from the loss of working capital) and £125,000 resulting from the diversion of Mr Channing’s time.
That is a short summary of Nugee J’s complex reasoning. His approach to loss of chance issues is reasonably conventional but the conclusion that loss of profits claims will have to be proved on the balance of probabilities and not on the less demanding basis of the loss of a chance is probably helpful to defendants and their insurers.
His conclusions on remoteness will become important if this case goes to appeal. The loss foreseeable by contracting parties at the date of their contract (the contractual test) may be a lot more restrictive than the purely objective test of the loss reasonably foreseeable at the date of breach (the tortious test). That may be particularly important where there have been intervening events – such as a sharp drop in markets in a sudden recession.
In conclusion, this case is an object lesson that insurers and those advising them need to be astute to exploit opportunities to reduce claims. Here, Wellesley’s claim started at five times the amount awarded. As Withers have commented, Wellesley might have been better advised to settle.