The High Court recently found in a solicitors negligence claim that a claimant acted unreasonably in (1) settling an arbitration and then (2) refusing to waive privilege such that the Court could assess the reasonableness of the settlement.

On 12 September 2014 the High Court handed down a judgment in Rentokil Initial 1927 PLC v Goodman Derrick LLP [2014] EWHC 2994 (Ch).

Background

The defendant law firm was instructed to draft contracts for the sale of Rentokil House to a developer, Taylor Wimpey, to be converted into flats. Taylor Wimpey refused to complete and the parties started arbitration proceedings which were settled a few days before the trial, at a lower sum than agreed under the contract. The claimant alleged the law firm was negligent in drafting the contracts in such a way as to allow Taylor Wimpey to avoid completing the contracts. It estimated its loss at around £1.88 million.

Judgment

The Judge found that the firm was not negligent - that the drafting did not expose the claimant to unnecessary risks and that Taylor Wimpey would not have agreed to purchase the property on different terms.

It also concluded that Taylor Wimpey would have lost the arbitration on its construction of the relevant clauses and that the main concern in the claimant's settlement of the dispute was not the poor drafting but the financial situation of Taylor Wimpey.

RPC says...

Interestingly, the Judge criticised the claimant for not revealing the privileged advice it was given by its legal team in relation to the merits and prospects of success in the arbitration. The failure to waive privilege meant that the Judge had no evidence to analyse whether the claimant has acted reasonably in settling the arbitration.

The traditional burden of proving failure to mitigate is on the defendant (Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452). On the face of it, the Judge effectively reversed that burden by requiring the claimant to prove that it had analysed the risks of the arbitration and reasonably concluded that instead it should settle the dispute.

In fact, on the basis of the evidence which was before him, the Judge concluded that the arbitration would have been successful. That meant that in practice the burden was effectively reversed and the claimant had to prove why it settled at a considerable discount what would have been a successful arbitration. The claimant was unable to prove this because it refused to waive privilege.

Defendants should take note of this judgment and use it to put claimants to proof that they have acted reasonably in settling or pursuing legal proceedings. This may well require claimants to waive privilege in the advice they have received.