ADVISING ABOUT THE RISKS OF LITIGATION: YOU DON’T PAY ME TO TELL YOU WHAT YOU WANT TO HEAR: PROFESSIONAL NEGLIGENCE ACTION AGAINST SOLICITORS DISMISSED
In Seery -v- Leathes Prior (a firm)  EWHC80 (QB) Sir David Eady dismissed a claim for negligence against a firm of solicitors. One of the issues considered was whether the claimant should have been encouraged to litigate. The claim against the solicitors was dismissed. The solicitors wrote, what is to my mind, a model letter about the risks of litigation.
“Please don’t misunderstand me – I (and my firm) will be more than happy to fight this all the way. However, I have a duty to ensure that you (and your family) are fully aware of what you are getting yourselves into. I don’t want to be walking out of the High Court in 2 years time, telling you that whilst we have won the total damages you are able to recover from FWA amount to zero since the company has gone into liquidation, and then handing you my firm’s bill for 70k, at which point you might wish you had accepted the 310k on offer! You would not be too pleased with me, either, if I had not have advised (sic) you to accept that 310k! And then I would be getting sued for negligence!”
“… you don’t pay me to tell you what you want to hear, but what I would advise”
- A solicitor was not negligent in not giving “greater encouragement” in pursuing litigation.
- If a client alleges that he did not understand advice the test is whether the solicitor reasonably appears to him to understand that advice.
- Litigation would have been a “huge gamble” and against the client’s inclinations.
- There was no evidence that litigation would have led to a better outcome than the negotiated settlement that was obtained.
The claimant instructed the defendant firm of solicitors in relation to a dispute with former business associates. That claim was settled on the advice of the solicitors. The claimant then sued the solicitors alleging he could have done better. One of the criticisms made of the solicitors was that they did not encourage litigation. One of the allegations made was that the defendant solicitors had been too timid and have encouraged the claimant to litigate. The judge held that they had correctly assessed the risks of litigation. The advice received was perfectly sound and the claimant had received good advice.
The judge considered whether the claimant should have been advised to litigate.
Should Mr Chapman have encouraged the Claimant to litigate?
There is no doubt that Mr Chapman addressed the possibility of litigation of various kinds. He did not believe this would have been in his client’s best interests at that time and thought it appropriate to advise him accordingly. One possibility was to petition in accordance with the provisions of s.459 of the Companies Act 1985 on grounds of “unfair prejudice” and to seek an order for the sale of his shares. (These had in fact been replaced by the corresponding provisions in s.994 of the 2006 Act with effect from 1 October 2007.) This was a matter on which Mr Shaw had been asked to advise, although in the specific context of the proposed general meeting. It had, however, been considered more generally and, so far as Mr Chapman was concerned, rejected – not least because such litigation would have given rise to “a costly, acrimonious, long drawn out fight”. This was exactly what the Claimant wished to avoid.
Furthermore, it is clear that in a detailed letter of 14 August the Claimant had been advised by SJ Berwin inter alia of the availability of a claim under s.459 and that the court had “a general discretion to order whatever relief it sees fit”, including an order for the purchase of a minority shareholder’s shares. This was not a passing reference: a whole page of the letter was devoted to s.459 and “unfair prejudice”. Further advice was given in a letter of 12 September. The concept was never far from anyone’s thoughts in the coming weeks.
Mr Chapman was, however, right to be cautious. Proceedings based on “unfair prejudice” would not have been by any means straightforward: there were a number of potential hurdles for the Claimant to surmount. There was likely to be an issue, for example, as to whether he wished to leave FWA, anyway, in order to pursue his plans with Macklow. There was the possibility that an apparently independent witness (Mr Karup of Haslers) would have given unfavourable evidence in this context. Furthermore, it could have been argued that the Claimant had received an offer for his shares at a reasonable price (about £100,000) as part of a proposed deal the previous April (referred to as the “Meridian deal”). The relevance of this is that the court may treat exclusion from the management of a company as not being unfair in such circumstances.
There is the additional factor that the Claimant is now alleging that he was physically excluded from FWA premises in the summer of 2007. That is despite the absence of any contemporaneous document showing that he had raised any complaint about that, and the omission of anything to that effect in his witness statement for these proceedings. This could have undermined his credibility in any such litigation at that time, as in Mr Asquith’s submission it tends to undermine it now.
Another possible tactic would have been to take proceedings in reliance upon s.994, but only to pursue them as far as obtaining an order for disclosure of documents (which Mr Aylwin thought might take six to eight weeks, although Mr Asquith regards that estimate as over-optimistic). It is possible that taking such a course would have been characterised as an abuse of process, but I leave that aside for present purposes. Mr Chapman in his evidence voiced concerns about this proposal for a variety of reasons. It might or might not succeed; Messrs Boswell and Causer would probably place every difficulty in the way, thus causing delay and increased cost; they might not comply with an order or might at least find some way of avoiding it; moreover, the Claimant might then not be able to extricate himself from the proceedings without adverse costs consequences.
Another route canvassed was that of a winding up petition based, once he had resigned his directorship, on the sum owed him on the director’s loan loan. In the view of Mr Chapman, this was likely to be strongly resisted by Messrs Boswell and Causer. The outcome was uncertain and likely to eat up costs. (It is true that on or about 29 November the Claimant was feeling more bullish on this option, and suggested the threat to start such proceedings but he added, “I am account – to the extent that it was undisputed. ssuming that we can stop it if we want”. Yet it could not be assumed that there would be no costs penalty.) In any event, Mr Aylwin places no reliance on this aspect of the case as evidence of negligence.
There was also the option, it was suggested, of pursuing his common law right as a director to call for company documents. There were two problems with that. First, it was only available for the purposes of carrying out the director’s duties to the company: Oxford Legal Services Group Ltd v Sibbasbridge Services Ltd  Bus LR 1244, CA, at ; see also Conway v Petronius  1 WLR 72, 89-90 (Slade J).
It is true that the appellate decision in Oxford Legal Services post-dated the events in question, and that the first instance judgment of Kitchin J coincided with Mr Chapman’s initial instructions, but the law seems nonetheless to have been clear in this respect. Mr Aylwin expressed the ratio as being that a director cannot inspect documents for an “improper purpose”. Yet it is important to have in mind how that terminology was construed by Sir John Chadwick in the Court of Appeal, ibid: “… for a director to invoke the right to inspect for some purpose other than that of carrying out his duties as a director is to seek to use the right for an improper purpose”. Hughes and Toulson LJJ (as they then were) agreed with all that Sir John had said. It is interesting to note, however, that Hughes LJ added, in relation to the facts of that case, that there was “clear reason to say that the purpose of inspection might be other than qua director”. He referred to the obtaining of a “collateral advantage” in parallel litigation. So here, it seems also to be clear that the Claimant could not have prayed in aid the director’s right to inspect documents for the purpose of his own private litigation.
A point taken in cross-examination of Mr Chapman was that he had advised the Claimant to make a claim in the employment tribunal (albeit in his view “worthless in real terms”) – so why not in the Chancery Division? Mr Chapman’s response was that tribunal proceedings were much cheaper and, at that time, did not carry a risk of an adverse costs order. Also, it would be easier to terminate them if it became necessary. Furthermore, there were in his view certain tactical advantages, in that the Claimant’s adversaries would be more likely to take his claims seriously and make an acceptable offer. The proceedings were launched on 27 November. Mr Chapman expressed the view that this was a tactic which had proved successful. He described it as a “game changer” which “made them take us seriously”.
The cost and risk of litigation were matters on which Mr Chapman plainly advised by way almost of a leitmotiv. The Claimant could be in no doubt as to his views – or Mr Chapman as to his client‘s. He had in mind, throughout, the limited funds available and the tactics prescribed by the Claimant both to SJ Berwin and to him; that is to say, to achieve a reasonable deal as quickly as possible while avoiding expensive and acrimonious litigation. He sent an email on 10 December 2007, for example, which was the subject of criticism by Mr Aylwin in cross-examination. It is too long to set out in full, but it was thorough and comprehensive. The following extract gives the flavour:
“… I have a strong feeling that we might be at the end of the road in these negotiations; I know my counterpart feels that his clients are also being ’emotive’ about the dispute and thus perspective is being lost. He feels also there is not likely to be any more movement from his clients, rightly or wrongly.
So I suggest you discuss the current offer – which totals 310k with 210k being paid up-front (I think we should be able to reallocate the figures to get it all net, so assume this for the time being) and the remaining 100k paid over 18 mths with interest – with your wife tonight. It seems to me a huge financial decision for you and your family; if we reject this now I think we will be tied down to litigation for sometime. We will need to fight the Tribunal claim, issue winding up petitions and, to gain any real value (since the Tribunal claim is worthless in real terms), issue (and succeed on) a High Court unfair prejudice claim. The costs will be enormous (not by SJ Berwin standards, of course, but huge nonetheless) and no guarantee of any return whatsoever if FWA go bust in the meantime (or manage to reallocate their assets). So take some time to seriously consider your options, and check that you and your wife are comfortable with where we are going – as I say, my very strong hunch (and I am usually right on these things) is that their offer is now their final offer. Of course, that doesn’t make it right or mean you should accept it – but I need to advise you of the consequences of rejecting what might well be their final offer. As experienced litigators, we tend to have a feel for how these sort of cases pan out, and you don’t pay me to tell you what you want to hear, but what I would advise. In this particular case, if it were me then I would accept the offer, bank the cash (as galling as it undoubtedly is to you) and get on with my life. But it is not me who is living this case, and I shall do whatever you instruct me to do!
Please don’t misunderstand me – I (and my firm) will be more than happy to fight this all the way. However, I have a duty to ensure that you (and your family) are fully aware of what you are getting yourselves into. I don’t want to be walking out of the High Court in 2 years time, telling you that whilst we have won the total damages you are able to recover from FWA amount to zero since the company has gone into liquidation, and then handing you my firm’s bill for 70k, at which point you might wish you had accepted the 310k on offer! You would not be too pleased with me, either, if I had not have advised (sic) you to accept that 310k! And then I would be getting sued for negligence!”
Mr Aylwin criticised this advice as not being sufficiently neutral or balanced. He suggests there should have been greater encouragement to think about pursuing litigation and thereby achieving a higher level of compensation. Mr Chapman, on the other hand, stands by what he wrote and would give the same advice today (in the light of his knowledge and his instructions at the time).
The matter was explored in cross-examination and the Claimant appeared to accept that he would not have been interested, at least by that time, in spending money on litigation. Mr Aylwin suggested that this was simply because he had “folded” because, by then, it was too late – “through no fault of his own”. I do not believe that the evidence bears this out, since it was Mr Chapman’s impression from the outset that he was reluctant to become involved in expensive and risky litigation. In those circumstances, there would be no reason for a competent solicitor to seek to persuade him to “go for it” (save perhaps in a case where the merits were “all one way”, and the relevant client was only concerned about a perceived risk which truly could be discounted).
THE ALLEGATION THAT THE CLIENT WAS STRESSED
One allegation was that the claimant was too stressed to take the advice in fully.
The Claimant has suggested from time to time in the witness box that he was at times so stressed out that he was unable to take in the legal advice he was given and, in particular, that which he received from SJ Berwin. There are at least four points to bear in mind. First, he did not tell Mr Chapman at the time that he did not understand the advice (although he had produced sick notes to excuse non-attendance at work). Secondly, much of the advice was in writing and could be reread at any time when the stress subsided. Thirdly, if true, this tends to confirm the wisdom of Mr Chapman’s advice that uncertain and stressful litigation was probably not in his best interests. Fourthly, a solicitor “… will have fulfilled his duty if he gives an explanation in terms the client reasonably appears to him to be able to understand, and to have understood, even if the client later alleges that he did not in fact understand what was said“: Kandola v Mirza Solicitors LLP  EWHC 460 (Ch), at , per HHJ David Cooke. Although Mr Aylwin submits that this principle cannot apply in the present case, because the facts are different, I do not accept this. What matters is Mr Chapman’s impression of the Claimant’s comprehension of the advice he was being given. Unless he was told by the Claimant that he had failed to understand some or all of the advice he had been given by SJ Berwin, there is no reason why Mr Chapman should have made any such assumption. The Claimant should have made clear that he would have to start from scratch and explain everything afresh – if that was the true position. I am not persuaded that it was.
“I am well aware of the fact in s.459 cases they are in every bit like an acrimonious divorce case between people whose marriages fail. They are one of the instances in life where frankly bloody-mindedness takes over and people are capable at least of acting in a way of doing the other side down and getting pleasure from doing the other side rather than by acting in accordance with strict, rational forms of behaviour for their own long-term interests and certainly the long-term interests of the company.”
THE SITUATION FACING THE SOLICITOR
The judge considered the position facing the solicitor.
It is necessary, in any event, to keep in mind the overall combination of circumstances confronting Mr Chapman, at the relevant times, when judging whether his conduct fell short of the standards which the Claimant could reasonably expect of him. In particular, in December 2007 he was acting for a client who:
(i) still had relatively “little funds”, even allowing for the re-mortgage;
(ii) had significant commitments in respect of outstanding loans;
(iii) wished/needed to use the re-mortgage loan for the purpose of investing in a new business;
(iv) felt under pressure of time and needed to get on with his life and his new business;
(v) was confronted by two hostile and apparently “dodgy” adversaries;
(vi) lacked up to date information as to FWA’s finances and medium term prospects;
(vii) might find his conduct subjected to detailed but unknown criticisms in court;
(viii) might have to overcome significant hurdles in establishing “unfair prejudice”;
(ix) could well be unable to recover any monetary award if FWA went into liquidation;
(x) did not want to be embroiled in costly and acrimonious litigation if it could be avoided.
THE SETTLEMENT THAT WAS REACHED WAS NOT NEGLIGENT
The judge concluded that the settlement that was reached was not negligent.
There would also have been real problems for the Claimant on causation. Even if Mr Chapman had been more “neutral” or “balanced” on the merits of costly and acrimonious litigation in November or December (over and above the commencement of tribunal proceedings), I see no evidence to suggest that the Claimant would then have opted to take that course. There was no way that Mr Chapman was ever going to make a positive recommendation to sue. (I do not believe that Mr Aylwin goes so far as to submit that he should have done so.) Without that, I do not believe that the Claimant would have overcome his reluctance, or willingly embraced the risks that had been pointed out to him throughout in no uncertain terms. It would still have been a huge gamble and contrary to his personal inclinations, as hitherto clearly expressed. There was certainly no rational basis for reversing his instructions at that time. I would proceed on the basis that there is no way that he would have changed his spots and chosen to spend money litigating for six months or a year in the High Court – even if he could afford it.
Nor is there any evidence on which I could safely conclude on a balance of probabilities that he would thereby have achieved, overall, a significantly better outcome than Mr Chapman had negotiated. It would be mere speculation. If some of the company documents had been sought more vigorously, and they had been disclosed, what would they have revealed? By how much would they have increased the Claimant’s chance of extracting a more generous offer from Messrs Boswell and Causer? Even by the time of the trial, there was no evidence before the court to show what the documents in question would have contained.