PROVING THINGS 252: THE SOLICITORS WERE NEGLIGENT BUT THERE WAS NO LOSS: CLAIM DISMISSED

Many a salutary lesson can be learnt from the judgment of Mrs Justice Bacon in Cutlers Holdings Ltd & Anor v Shepherd And Wedderburn LLP [2023] EWHC 720 (Ch). It was a case about negligence in the conduct of litigation. The judge found that the defendant solicitors had been negligent, however the claimants had not established that the result would have been any different. There was a four week trial.  This must have been an expensive exercise.

“I have concluded that S+W were negligent in failing to advise SUL that there was an own interest conflict, and in failing to advise SUL to seek independent legal advice on the point. I have not, however, found them to be in breach of fiduciary duty in that regard. I have also concluded that the claimants have not established that the outcome of the litigation would have been any different if SUL had been advised by different solicitors. S+W’s negligence therefore did not cause SUL any loss.”

THE CASE

The claimants had been involved in the management of Sheffield United Football Club.  The club had been sold to a third party.  There were issues about the terms of the sale and shareholders agreements.  The matter went to trial and, at the claimants case failed to a large extent.

THE CLAIMANTS’ ACTION AGAINST THEIR FORMER SOLICITORS

The claimants then brought an action against the solicitors who had represented them at the trial. The same solicitors had also drafted the documentation which was the subject matter of the action.  It was alleged that the solicitors had been negligent in failing to identify a conflift of interest in that the action centred around the documents they had drafted.

THE JUDGE’S FINDINGS: THE DEFENDANT SOLICITORS SHOULD HAVE ADVISED THE CLAIMANTS OF THE CONFLICT OF INTEREST

The judge found that there had been negligence in failing to inform the claimants of the potential conflict of interest.

THE CLAIMANT’S FAILURE TO ESTABLISH CAUSATION

The action failed, however, because the claimants failed to establish that they would have acted any differently, or the outcome been any different, if the defendants had advised appropriately.

THE JUDGMENT ON CAUSATION

  1. The remaining question is whether, if S+W had properly advised SUL that there was an own interest conflict, and that SUL should take independent advice, the subsequent litigation would have turned out any differently.
  2. The claimants’ case is that if SUL had been advised of the possibility of a conflict of interest and that it should seek independent legal advice, it would have done so. That advice would then have been that SUL’s best course of action would be to have a narrow dispute with UTB over the meaning and effect of the ISA and (if SUL lost that dispute) to seek compensation from S+W. SUL would have followed that advice and would have thereby avoided the huge costs of the litigation with UTB.
  3. In their written closing submissions, the defendants’ case on causation was put at a high level of abstraction, without condescending to any discussion of the principles of causation, or any of the authorities on the point. It was, in short, that since the claimants do not criticise any other aspect of S+W’s handling of the litigation, no loss or damage can be said to have been caused by the failure to advise SUL of a conflict of interest. Moreover, when SUL did seek independent advice, it continued to instruct S+W and did not bring a negligence action until after the arbitration had been concluded, having not paid for S+W’s services in the meantime.
  4. In Mr Hollander’s oral closing submissions, his position came down to the contention that even if independent advice had been obtained, the litigation strategy would have been the same, because it was not devised because of or affected by the conflict of interest (and the contrary was not pleaded by the claimants).
  5. In light of those submissions, it is convenient to consider the various stages of the litigation.
The outset of the litigation
  1. I accept that SUL would probably have sought independent legal advice at the outset of the litigation, if they had been advised to do so. Indeed, it was not put to their witnesses that they would not have done so; nor is there any other evidence indicating the contrary. I am not, however, persuaded that SUL would have sought to replace S+W in their conduct of the UTB litigation. It seems far more likely that SUL would have obtained advice as to whether, if the UTB litigation went badly, they might ultimately be able to sue S+W, but that they would have retained S+W in the meantime.
  2. That is because that is precisely what SUL did do after Fancourt J’s judgment was handed down. At that point, S+W were told that another firm of solicitors had been instructed to provide a second opinion on the litigation, but S+W were nevertheless instructed to continue to act for SUL in the meantime (which they duly did). If that was the way that SUL behaved after a judgment which it considered a complete disaster, I think it very improbable that it would have sacked S+W and replaced them with other solicitors at a much earlier stage in the litigation, when the advice SUL was getting from counsel was that it was likely to succeed on the question of the construction of clause 9.1.12.
  3. Furthermore, even if SUL had replaced S+W completely in the litigation, I am unconvinced that SUL’s instructions and decision-making as to the strategy at the outset of the litigation would have been different; and that applies a fortiori if SUL had simply obtained independent advice as to the strategy in parallel with S+W’s conduct of the litigation.
  4. The contemporaneous email discussions show that even before the call option notice was served by SUL, Kevin McCabe was starting to think about bringing proceedings against Prince Abdullah in relation to his conduct in the management of the Club. That made it no surprise that his instructions were to “attack” the Prince with “Offensive actions” once UTB’s counternotice was received (see §§94–99 above).
  5. While S+W’s advice was to go “nuclear” in the dispute (§102 above), that was no doubt a response to the belligerent tone of Kevin McCabe’s instructions up to that point. S+W did, moreover, explicitly ask Mr McCabe what his priorities were in the litigation at the outset. His response was that his preference was to buy out SUL, which was confirmed in his 11 February 2018 email (§§103 and 109 above). That required the pursuit of arguments beyond a simple question of the construction of clause 9.1.12. Mr Downes had also advised that it would be tactically preferable to combine the argument as to the construction of clause 9.1.12 with the s. 994 and conspiracy arguments, to strengthen SUL’s position (§§104 and 265.i) above).
  6. Although Kevin McCabe sought to deny any responsibility for the litigation strategy which was adopted, it is apparent that the initial strategy was formulated on the basis of a combination of the instructions given by Mr McCabe and the advice given by counsel. That litigation strategy led to the defences pleaded by the defendants, the additional claim, and the s. 994 petition. I do not consider that there is any evidence to suggest that this strategy was influenced by S+W’s conflict of interest, such that SUL’s decision-making would have been different if independent advice had been given. Nor, as Mr Hollander said, have the claimants pleaded such a point.
The course of the litigation during 2018 and early 2019
  1. As to the development of the litigation strategy during the course of 2018 and leading up to the trial in 2019, the claimants say that this was the result of the advice given (or not given) to SUL, which Kevin McCabe always followed. In particular, Mr Elkington said that SUL was not determined to litigate at all costs but hoped for settlement for much of the litigation.
  2. I agree that notwithstanding the aggressive response to UTB’s proceedings, at least part of SUL’s strategy during 2018 appears to have been to achieve a settlement with UTB. In an email on 29 April 2018 to Mr Blain, Kevin McCabe suggested a tactic of backing down and accepting the “cheating route” that UTB chose while retaining the Properties and the rights to continue litigation for compensatory damages. Some initial settlement discussions then took place, as I have recorded at §113 above.
  3. While those discussions ultimately proved fruitless (as did a subsequent mediation in September 2018), the claimants have not put forward any explanation of how that outcome would or might have been different if SUL had been advised by different solicitors, in circumstances where it is not suggested that (apart from the conflict of interest) any part of S+W’s conduct of the litigation was negligent.
  4. Following the failed settlement discussions and mediation, discussions with Alan Pace/ALK progressed to the point of agreeing heads of terms premised on the reacquisition by SUL of UTB’s shares. As I have already found, that is no doubt why SUL decided to proceed with the litigation despite UTB’s consent to the exercise of the property options, at the end of April 2019. Although it is not clear whether S+W or counsel ever discussed with SUL the possibility of settlement at that point, it would have been obvious to everyone that if SUL was content to receive what it originally bargained for when it served the call option notice, the trial did not need to go ahead. The reason it did so was that, as Fancourt J recorded, SUL’s position was that it no longer wanted to sell its shares in Blades.
  5. That was a commercial decision taken by SUL, and the claimants have not suggested that this was influenced by S+W, or that things would have been different if SUL had been independently advised.
The 8 May 2019 conference
  1. As I have already noted, there was a conference with Mr Downes on 8 May 2019 at which detailed advice was given on the prospects of success and possible outcomes, following the exchange of skeleton arguments for the trial. There was also some discussion of the trial strategy. Mr Elkington contended that SUL was not advised at that conference to settle the litigation and/or of any risks of continuing to fight on, and that (quite the contrary) SUL thought that it was going to win at trial.
  2. Mr Sewell contended that SUL was in fact advised at the conference that it could settle having achieved what they originally set out to do; but that Kevin McCabe was adamant that he did not want to settle, since he wished to gain full control of Blades. By contrast, Mr McCabe and Mr Tutton both denied any recollection of advice being given about settlement. Given my comments above regarding the reliability of all three of these witnesses, and the fact that I do not have any evidence from Mr Downes as to what he said at the conference, it is necessary to consider whether either of the opposing accounts is corroborated by the contemporaneous evidence.
  3. As to that, I note that an email sent by Mr Sewell to Mr Downes ahead of the conference with a list of issues to be covered at the conference did not refer to settlement. Mr Sewell’s (extensive) notes taken during the conference and the photographs of the flipchart used by Mr Downes at the conference likewise made no mention of settlement. The contemporaneous evidence does, therefore, tend to corroborate SUL’s account. But the claimants’ case is not that S+W were negligent in failing to advise on settlement at that point; nor did the claimants explain how S+W’s advice at the time could have been caused by S+W’s conflict of interest.
  4. It is also notable that Mr Sewell’s notes of the 8 May 2019 conference include the following comments:
All McCabes
V imp to get HRH shares
Want to humiliate him”
  1. Those comments reinforce my conclusion that Kevin McCabe’s decisive position by this point was that he wished to buy back UTB’s shares. That being the position, even if SUL had been advised that it should settle at that point, I consider it improbable that it would have decided to do so.
  2. As regards the advice on prospects of success, Kevin McCabe and Mr Tutton’s evidence was that they left the conference somewhat confused as to the advice that they were being given, save that they thought that they would win. Having seen Mr Sewell’s notes of the conference, the photographs of the flipchart, and the emails exchanged between Mr Sewell and Mr Downes prior to the conference, I can readily accept that Mr McCabe and Mr Tutton did not have a clear understanding of the advice that was given to them. It is apparent that Mr Downes presented a rather complex series of interconnected outcomes, by reference to arguments raised in the UTB claim, SUL’s additional claim, and the s. 994 unfair prejudice petition. While Mr Downes had emailed Mr Sewell two days before the conference to explain his thoughts on the “matrix of outcomes” with percentage prospects of success, that email had not been copied to SUL.
  3. Mr Sewell’s email to Mr Downes on the morning of the conference showed, moreover, that Mr Sewell did not entirely understand Mr Downes’ position on the various outcomes. Indeed, despite Mr Sewell’s reliance in his witness statement on the “clear advice” given at the conference as to the most likely outcomes at trial, in his oral evidence he was unable to explain his understanding of that advice. If Mr Sewell, the S+W litigation partner responsible for the conduct of the trial, was unable to explain what advice had been given to the client at a key conference shortly before the trial to discuss the prospects of success, I am not surprised that Mr McCabe and Mr Tutton claim not to have understood that advice.
  4. I also think it likely that Kevin McCabe and Mr Tutton thought from the advice that they were being given that they were going to “win”. The problem was that their understanding of what a “win” meant appears to have differed from that of Mr Downes. Mr Downes was advising that they had a 70% chance of winning on the construction of clause 9.1.12. But that in itself didn’t give SUL more than it had already, given UTB’s agreement to exercise the property options. What it needed if it was to proceed with the sale to ALK was to win on the arguments which sought to set aside the ISA and contract of sale for SUL’s shares, and the arguments in the s. 994 petition which led to a claim to buy UTB’s shares. Mr McCabe’s evidence at trial suggested that this is what he, at least, thought of as “winning”. Mr Downes’ advice appears to have been that the prospects of success on those arguments were not as high as on the construction point. Mr Tutton recognised this in a note circulated after Fancourt J’s judgment was received, in which he commented that “our own legal advice was that our unfair prejudice/conspiracy claim was not at all strong.” But the permutations of possible outcomes were complex, and it seems entirely plausible that these were not fully understood by Mr McCabe and Mr Tutton before the trial.
  5. Nevertheless, the point remains (yet again) that the claimants have not explained how any of that was caused by S+W’s conflict of interest. The advice at the conference was given primarily by Mr Downes, and there is no allegation of negligence by S+W in relation to any of the advice given around that time. There is therefore nothing to suggest that SUL’s decisions would have been any different had they been advised by different solicitors.
Conclusion on the conflict claim
  1. I have concluded that S+W were negligent in failing to advise SUL that there was an own interest conflict, and in failing to advise SUL to seek independent legal advice on the point. I have not, however, found them to be in breach of fiduciary duty in that regard. I have also concluded that the claimants have not established that the outcome of the litigation would have been any different if SUL had been advised by different solicitors. S+W’s negligence therefore did not cause SUL any loss.
ISSUES (5) (6) (7): REMAINING ISSUES IN THE LLP CLAIM
Quantum
  1. In light of my findings above, it is not necessary to address the parties’ further arguments on the quantum of any loss suffered by the claimants. It was agreed at the hearing that it would be inappropriate for me to attempt to address the quantum arguments on the basis of hypothetical alternative findings on breach and causation.
SGIL’s claimed losses
  1. The claim by SGIL is brought in the alternative to SUL’s claim for interest on its losses. The basis of the claim is a contention that SGIL, as the parent company of the Scarborough group, suffered loss due to the funds that it did not receive from SUL as a result of the breaches of duty by S+W. As a result of not having access to those funds, SGIL says that it was not able to invest in financially profitable property developments, and claims damages at a rate of 15% per annum on the sums from the dates on which it would have had use of them.
  2. In light of my findings above, this aspect of the claim does not arise. Had it done so, however, I would have rejected it. The evidence before me does not support the existence of any duty of care owed to SGIL, as opposed to SUL, in relation to the issues which are the subject of the LLP claim. SGIL was a guarantor under the ISA, but nothing turns on that for the purposes of these proceedings.
  3. Furthermore, the claim by SGIL is advanced on the basis that SGIL was required financially to support SUL and was unable to use those funds to invest elsewhere. That contention was supported by the evidence of Mr Tutton in his witness statement that there was a net increase in the debt owed by SUL to SGIL between 2017 and 2020. During Mr Tutton’s cross-examination, however, he agreed that there were no loans from SGIL to SUL; rather, the loans to SUL came from other Scarborough companies, namely SUGL (which is a subsidiary of SGIL) and Scarborough Luxembourg Sarl (which is owned by the McCabe family but is not within the UK group). That is also consistent with SUL’s accounts for the years ending 2017 to 2020. The premise of SGIL’s claim therefore fails.
  4. Insofar as SGIL’s claim is in fact based on an (unpleaded) contention that, but for SUL’s losses, dividends would have been paid up the group structure to SGIL, that would in any event be barred on the basis of the “reflective loss” principle considered in Marex Financial v Sevilleja [2020] UKSC 31[2021] AC 39.
Limitation of liability in the letters of engagement
  1. At the outset of the trial, S+W relied on the terms of business attached to letters of engagement sent to SUL in 2012 and on 24 January 2018. On the basis of those terms, S+W’s pleaded case was that it was not liable for any of the losses claimed, since they were “indirect or consequential losses” in respect of which S+W terms excluded all liability. In the alternative S+W relied on terms limiting its liability to the minimum amount of professional negligence insurance required at the time, which was £3m.
  2. By the end of the trial, however, S+W’s submission on the letters of engagement was only pursued in relation to the period from January 2018 onwards, on the basis that Mr Hollander accepted that there was no evidence that SUL had received the 2012 letter of engagement.
  3. Given my findings above, the issue of limitation of liability by S+W does not arise, and I do not think it appropriate to express a view on the point on the basis of hypothetical alternative findings.
ISSUE (8): THE PARTNER CLAIM
  1. As I have already indicated, the Partner claim was only pursued in relation to the claim against Mr Blain for negligence in relation to the December 2017 advice, and the claims against both Mr Blain and Mr Sewell for breaches of fiduciary duty in relation to the conflict issue.
  2. The claims fail from the outset for the simple reason that there is no evidence before me showing that either Mr Blain or Mr Sewell assumed personal responsibility to SUL for either the December 2017 advice (Mr Blain) or the conduct of the litigation thereafter (Mr Blain and Mr Sewell):
  3. i)There is no dispute that the Scarborough group was a longstanding client of both Mr Blain and S+W. Mr Blain was the relationship partner for SUL, and was asked to advise in December 2017 no doubt because of the client relationship and his previous involvement in the 2013 transaction – or at least the start of the negotiations for that transaction, There is not, however, anything to suggest that when advising on the exercise of the call options in December 2017 Mr Blain conveyed, directly or indirectly, any assumption of personal responsibility.
  4. ii)Mr Blain was not a litigation partner and therefore did not run the litigation from 2018 onwards (or purport to do so). He was involved in some of the meetings in the initial stages in January and February 2018, but after that left matters to Mr Sewell who was the litigation partner. The claimants say that SUL trusted that Mr Blain was keeping an eye on the proceedings to protect its interests. That does not come close to showing that he was assuming personal responsibility to the client for the conduct of the litigation.
iii)          Mr Sewell was the litigation partner who had overall responsibility for the UTB litigation. He did not have a longstanding client relationship with Scarborough, and had only joined S+W in November 2017, very shortly before the UTB litigation commenced. While the claimants are correct to say that Mr Sewell did most of the work in the UTB litigation himself, it does not follow that Mr Sewell assumed personal responsibility to SUL, over and above the responsibilities owed by S+W as an LLP.
  1. Even if there had, however, been assumptions of personal responsibility by Mr Blain and/or Mr Sewell, the claims would have failed for the reasons set out above in relation the LLP claim. As with the LLP claim, therefore, I do not need to consider any further defence arising from the terms of the relevant letters of engagement.
CONCLUSIONS
  1. For the reasons set out above, my conclusions are as follows:
  2. i)In relation to the drafting of the ISA in 2013, S+W were negligent in failing to identify the possibility of Device 1, and in failing thereafter to advise on and suggest drafting in the ISA which would have sought to preclude UTB’s use of Device 1. I reject the claims of negligence by S+W in relation to Device 2 and the obligation on SUFC (rather than Prince Abdullah/UTB) to exercise the property options and pay for the purchase of the Properties.
  3. ii)In relation to the drafting of the Stadium Option in 2013, S+W were negligent in failing to seek SUL’s instructions on the permitted use assumption, and in informing SUL that the amendment was immaterial.
iii)          S+W were negligent in the advice given in December 2017, by failing to advise SUL as to the risk that UTB might seek to use Device 1 to avoid exercising the property options.
  1. iv)S+W were negligent in failing to advise SUL that there was an own interest conflict, and in failing to advise SUL to seek independent legal advice on the point. S+W were not, however, in breach of their fiduciary duty in that regard.
  2. v)The claimants have not established that any loss was caused by the negligence of S+W in relation to the drafting of the ISA and Stadium Option, the December 2017 advice, or the conflict of interest issue.
  3. vi)It is therefore not necessary for me to make any findings about the quantum of loss.
vii)        The claim by SGIL therefore does not arise, but I would have rejected it in any event.
viii)      The question of limitation of liability by the LLP in its letters of engagement also therefore does not arise.
  1. ix)I reject the Partner claims against Mr Blain and Mr Sewell for the same and additional reasons.
  2. The claims therefore fail.