John Erridge v Coole & Haddock (2000)
The negligent failure of a solicitor to advise the claimant as to the effect of a change of control article in the articles of association of a joint venture company had not caused the claimant any loss since the court was satisfied that, even given the correct advice, he would have accepted the article.
Action by the claimant ('E') for damages for professional negligence and/or breach of contract against the defendant solicitors ('the firm') arising out of the alleged failure of one of the partners ('N') to give proper advice to E as to the effect of a change of a control article in the articles of association of a joint venture company ('Newco'). At all material times E was the majority shareholder in, and was director and chairman of Erridge Group Holdings Ltd ('EGH'). In 1990 E was negotiating with a third party ('Tarmac') for the formation of Newco, into which EGH would put all of its assets, and Tarmac would put some of its. EGH was to become a member of Newco. Draft articles of association for Newco were submitted to N, whom E had instructed to act on behalf of EGH. Those articles provided, inter alia, that: (i) prior to the preparation of audited accounts showing a profit for Newco, its value was effectively to be treated as being nominal; (ii) Tarmac would have a right of pre-emption over EGH's shares in Newco in the event of EGH wishing to dispose of those shares; and (iii) the obligation to transfer EGH's shares would be triggered by any change in control of EGH. Within a short time of implementation of the joint venture, E and Tarmac fell out. E alleged that, because of the effect of the three articles referred to above, he was forced to retain his shares in EGH when he would otherwise have disposed of them, since any sale by him would have entitled Tarmac to acquire substantial assets of EGH for a nominal price. E further alleged that as a consequence of being "locked in" to EGH, he was obliged to meet certain guarantee obligations in respect of that company when it subsequently went into administrative receivership. He sought to recover the amount paid by him under the guarantee as well as the reduction in value (to nil) of his shares in EGH. The firm admitted that it owed a duty of care in negligence to E, in his capacity as a member of EHG, but denied that it owed E a contractual duty of care. The firm also denied causation and/or loss.
(1) The facts justified the inference that the firm had been retained to act on behalf of E personally as well as on behalf of EHG. The firm was, therefore, under a duty to advise both E and EGH as to the meaning and effect of the joint venture. Johnson v Gore Wood & Co (a firm) (1999) PNLR 426 considered. (2) N had properly advised E in relation to (i) and (ii) above, but not in relation to (iii). That failure was negligent, because it was by no means obvious to a layman such as E that the combined effect of (i), (ii) and (iii) was that a sale by E of his shares in EGH would transfer Tarmac's right of pre-emption just as much as a sale by EGH of its shares in Newco. (3) However, the court was satisfied that, even if correctly advised, E would have accepted the articles as drawn. E had anticipated a long term commitment to the joint venture, and at the relevant time would have had no reason to guard against the exercise of the right of pre-emption in the short term. (4) If it had been necessary to consider issues of causation and loss, the court would have held that: (a) loss sustained by E under the guarantee was not a foreseeable consequence of the firm's negligence; and (b) the claim in respect of the loss in value of E's shares was a claim for the same loss as had been sustained by EHG, so as to be irrecoverable at law. Prudential Assurance Co Ltd v Newman Industries Ltd (1982) 2 Ch 257 considered.
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