The High Court recently ruled in Wellesley Partners LLP v Withers LLP [2014] EWHC 556 (Ch) that Withers pay £1.6m in damages to Wellesley for an error in a limited liability partnership agreement.

Interesting aspects of the case include the Court's observations on solicitors' liability for losses following the misunderstanding of a client's instructions and its assessment of loss of a chance relating to future trading losses.

Stop Press: Whilst the Court found in favour of Wellesley on the principal head of loss, Wellesley now plans to appeal part of the finding.

Background

In 2008, Withers acted for Wellesley, an executive search consultancy firm, in connection with the admission of a number of partners, including a Bahraini bank called Addax.  Addax agreed to make a £2.5m capital contribution to Wellesley in order to acquire a 25% interest in the partnership.

Withers was instructed to draft a new LLP agreement and it was agreed with Mr Channing, the founder of Wellesley, that the agreement would contain an option for Addax to withdraw 50% of its capital contribution.

In 2009, following the collapse of Lehman Brothers, Addax exercised its option to withdraw. This came as a surprise to Mr Channing who believed that the option could only be exercised after 3 ½ years and not before. It was then discovered that contrary to commercial sense the option was drafted so as to be only exercisable in the first 3 ½ years. Addax removed its capital causing significant difficulties for Wellesley.

Wellesley brought proceedings against Withers for negligence. It was alleged that:

  • Mr Channing had instructed Withers that Addax`s option should be exercised after 42 months and that in the course of drafting, Withers altered this to reflect an option exercisable during the first 42 months without any instructions to do so
  • Addax should not have been entitled to repayment in US dollars but in Sterling
  • No express provision was made for how Addax`s interest in the partnership should be redistributed if the option were exercised and
  • Withers failed to advise Wellesley of its options in 2009 when Addax first made its intention clear that it would be exercising the option.

Court`s Findings

Mr Justice Nugee found that Withers had been negligent in drafting the agreement and that they had altered the option clause without any instruction to do so.  All the other allegations of negligence were dismissed.

In reaching his decision on liability in respect of the main head of loss, Nugee J found that the lawyer at Withers either misunderstood or wrongly noted down his instructions. He ruled that where instructions were unclear, there was a duty to obtain clarification.

The aspect of the decision which Wellesley is now looking to appeal is the finding that once Withers discovered that it had drafted the clause, it did not owe its client an obligation to correct its earlier incorrect statement that the disputed clause had been inserted by Addax. This was because the solicitor (who had no memory of the change) had, according to Mr Justice Nugee, made the original statement in passing and once the true position was discovered the solicitor thought that the clause must have been inserted on instructions from the client.

Causation and Loss of a Chance

In assessing causation, the Court had to decide whether (if Addax had not exercised its option so soon) Wellesley would have opened an office in New York and, if it had, whether it would have obtained a profitable mandate from the Japanese bank, Nomura.  Given that the assessment depended upon the actions of a third party, the Court applied the test set out in Allied Maples Group Ltd v Simmons & Simmons [1995] 1WLR 1602 and decided:

  • on the balance of probabilities, Wellesley would have opened an office in New York and
  • Wellesley had a real and substantial chance of obtaining the benefit of the mandate from Nomura (a 15% chance of a sole mandate and a 45% chance of a shared mandate).

The Court then calculated quantum on the basis of the anticipated net profits of either a sole or shared mandate multiplied by the loss of a chance percentages (resulting in substantially lower quantum figures).

The Court also had to deal with lost profits of the London operation.  It decided that these were not contingent on the actions of a third party (such as Nomura) so it assessed causation on the balance of probabilities.  It followed the law as set out in the cases of Parabola Investments Ltd v Browallia [2010] EWCA CIV 486 and Vasiliou v Hajigeorgiou [2010] EWCA CIV 1475 by making a realistic assessment of what would have happened based on a variety of scenarios of what might have happened.

Comments

This case highlights the importance of seeking clarification of a client's instructions where they are unclear and also gives a clear reminder of the caselaw on loss of a chance, remoteness and assessment of quantum in cases involving hypothetical trading losses.

The judgment draws a clear line between causation and quantum and reminds us that some heads of loss need to be dealt with differently especially where they relate to a lost opportunity of obtaining a benefit which is contingent on the actions of a third party.