Solicitor’s negligence – Loss – Measure of damages – Appellant buying out minority shareholder – Respondent solicitor changing draft contractual documents – Appellant claiming damages for negligence – High Court finding respondent liable in negligence but awarding limited damages – Appellant challenging quantum – Respondent cross-appealing on liability – Cross-appeal allowed
The appellant company was controlled by A and used as a vehicle to purchase a football club. The respondent firm of solicitors acted on the appellant’s behalf in connection with the acquisition. The club was owned by a father and son (the vendors) but, in order to survive and prosper, it required further funding, which A agreed to provide.
The parties entered into a complicated deal under which, essentially, the appellant and the vendors took 75% and 25% of the shares respectively in a new company (Leisure), while A agreed to provide the funds. The documentation protected the vendors, as minority shareholders, by preventing their shareholding from being diluted without their consent or participation.
The appellant contended that the documentation gave the vendors too much protection. It argued that once it had invested £60m in the club, it should have been free to take more shares so that if the vendors were unable to take or subscribe for shares proportionately, their shareholding would be diluted and most of their protection would disappear. However, the appellant maintained that, owing to the respondent’s negligence, it was not in a position to dilute the vendors’ holding, since the respondent had accidentally altered the drafting and had not pointed out the consequences.
By 2002, the appellant had invested more than £60m and A wanted to inject further funds and to sell the ground. He considered that the vendors were likely to be obstructive and took the view that the documentation, as drafted, entrenched their position. The appellant therefore bought them out for £7.75m and claimed the cost of doing so from the respondent on the ground that that was the cost of putting itself in the position that it should have been in from the outset.
Mann J accepted that the drafting had the effect alleged, but held that the loss claimed was excessive and gave judgment in the sum of only £6,750: see [2006] EWHC 2017 (Ch); [2006] PLSCS 188. The appellant appealed on quantum and the respondents cross-appealed on liability, contending that the relevant wording and effect had been included with the appellant’s knowledge and consent.
Held: The cross-appeal was allowed.
The burden of proving that the respondent had acted negligently, in failing to draft clauses in the shareholders’ agreement that reflected accurately, clearly and unambiguously what had been agreed, had lain with the appellant throughout the proceedings, and that question fell to be determined on the balance of probabilities.
The judge had taken the wrong approach to the evidence when he observed that because the respondent had asserted a good reason for deleting certain clauses from the agreement, it had to prove its action on the balance of probabilities. Once the judge had accepted that the respondent’s explanation was not improbable, he ought to have approached his task on the basis that it was for the appellant to satisfy him that that explanation ought to be rejected.
A court was not compelled to choose between two theories that were equally extremely improbable. If a judge concluded that an occurrence was extremely improbable, a finding that it was nevertheless more likely to have occurred than not did not accord with common sense: Rhesa Shipping Co SA v Edmunds (The Popi M) [1985] 1 WLR 948 applied.
In the present case, it had been for the appellant to satisfy the court that the respondent had acted in an inexplicable manner. However, on the evidence, it was extremely improbable that that was what had happened. It did not become more likely just because of the improbability that a change in the position as previously agreed would not have been recorded in a contemporary note or record. Accordingly, the appellant had not discharged the burden imposed by law and had not proved its case. It followed that it was unnecessary to address the issue of quantum.
Ian Croxford QC and Mark Cannon (instructed by Kendall Freeman) appeared for the appellant; Roger Stewart QC and Graeme McPherson (instructed by Mayer, Brown Rowe & Maw LLP) appeared for the respondent.
Eileen O’Grady, barrister