Perkin & Anor v Lupton Fawcett (a firm)

The appellants (Mr Perkin and Mr Clarke) sold their shares in a company Indec’or Ltd (Indec’or) to Arrowblade Ltd (Arrowblade). The respondents were the solicitors who acted for them in negotiating the share sale agreement including the warranties to be given by the appellants. The respondents also acted for the appellants at the commencement of litigation in which Arrowblade made a claim for damages for breach of warranty under that agreement. That litigation was ultimately compromised on a basis of a construction of the warranties which the appellants alleged they had to accept but for which they held the respondents responsible. The appellants alleged that the respondents were negligent in failing to have terms drafted that would have allowed them to succeed against Arrowblade in recovering that part of the purchase price retained by Arrowblade against the possibility of a breach of warranty. In fact the outcome of the litigation was that they only recovered half of that sum and only then by incurring legal fees much in excess of that half. The appellants commenced these proceedings claiming damages in that sum which would have put them in the position they say they would have been in but for the respondents’ negligence.

James Allen QC sitting as a deputy High Court Judge dismissed the appellants’ claim by a judgment handed down on 18^th May 2007. He held that although the partner in the respondents responsible for negotiating and drafting the agreement (Mr Emsley) had “erroneously” advised the appellants as to the construction of the warranty prior to finalisation of the contract, since (1) Arrowblade would not have accepted any different terms and the appellants would still have entered into the contract and (2) since before they commenced the litigation the appellants were aware of the “erroneous” construction their claim based on loss of a chance failed. This is an appeal from that judgment.

Much of the value of Indec’or was represented in debts owed to it by customers. That meant that in negotiating the agreement Arrowblade wished some form of warranty or term that protected them against the possibility that the debts would be irrecoverable. The appellants in agreeing such a term wanted to protect themselves as far as possible from a situation in which Arrowblade would not pursue the customers for the debts but simply rely on a warranty given by the appellants.

In the result the agreement contained two terms which dealt with the situation:-

1.

Paragraph 7.1 of the 3^rd Schedule provided that the appellants gave the following warranty:

“. . . all debts owed to the Company which are reflected in the Management Accounts or which have arisen since the Management Accounts Date either have been realised in full or will be realised in full in the normal course of collection not later that 120 days from the date of Completion.”

2.

Clause 5.4.1 of the contract provided that (without prejudice to the purchasers’ rights to claim damages for breach of warranty):

“If there is a breach of paragraph 7.1 of the 4^th Schedule (sic) the Warrantors shall, after the use of reasonable endeavours towards recovery by the Purchaser in the 365 day period stated in that paragraph (including the issue and reasonable prosecution of proceedings for the recovery of such debt within 90 days of the later of when the debt falls due and Completion) pay on demand to the Purchaser in cash an amount equal to the aggregate of the sums (if any) which shall remain outstanding in respect of all debts which are the subject of the Warranty provided that, upon such payment by the Warrantors, the Purchaser shall if requested to do so, procure the assignment of such debts . . . to the Warrantors . . .”

There was a further term, the effect of which was to postpone for twelve months the payment of part of the purchase price. The total postponed was £62,560. But once that sum became due the terms provided for £28,360 being used to pay off the second appellant Mr Clarke’s debt to Indec’or and £34,430 to be paid £31,280 to the first appellant, Mr Perkin, and £3,150 to Mr Clarke. The contract further provided for such sum to be paid into a joint account in the event of a bona fide claim and it seems as if “such sum” simply meant the sum of £34,430 and indeed it was this sum that Arrowblade were ultimately advised to pay into a joint account.

There were two obvious errors in the above drafting neither of which affects the position. First in so far as Clause 5.4.1 referred to the warranty 7.1 being in the 4^th Schedule, that was inaccurate since it was contained in the third schedule. Second it was clearly the intention that the number of days either 120 or 365 were intended to be the same in clause 7.1 as in 5.4.1. At the trial Mr Cummings who was the solicitor for Arrowblade and its funders, Barclays and 3i’s, and Mr Emsley who was acting for the appellants took different views as to which was the correct figure. Nothing however turned on that question because Arrowblade made no move to enforce the warranty in 7.1 until well after 365 days from the date of the agreement.

The critical issue in the case turned on the true construction of the above terms. What the appellants desired was a term which did not allow Arrowblade to make any claim for breach of warranty as to the debts owed to Indec’or unless they had used best endeavours including “the issue and reasonable prosecution of proceedings” i.e. wording such as was contained in 5.4.1. What Arrowblade and the funders desired was a term such as 5.4.1 but in addition a warranty which was not dependant on Indec’or or Arrowblade having taken any proceedings.

There is no question but that Mr Emsley tried to negotiate terms as desired by the appellants, and it is equally clear that Mr Cummings for Arrowblade and the funders were insistent on maintaining their position although (it seems) both were under a misapprehension as to the true construction of 7.1. The following matters cause complications in the case.

First it was the appellants’ case that they were not advised at all about the terms of the agreement but assumed that the terms were as they desired them to be. The judge did not accept that evidence. He found that Mr Perkin was an unsatisfactory witness. He found that “He was advised in detail and extensively as to the meaning of the terms. He fully understood the advice he received and he provided the defendants with informed instructions in relation to the issues which arose in the course of the negotiations.” Furthermore he had earlier found that that Mr Emsley would have explained the effect of clause 5.4.1 and paragraph 7.1 of the third schedule and how 5.4.1 was an indemnity and 7.1 was a warranty giving rise to a claim for damages.

Second - and this is the most complicating factor - the judge found that Mr Emsley had an erroneous view as to the proper construction of 7.1. Mr Emsley’s view (and it was still his view at the trial) was that what constituted “normal course of collection” would vary according to the nature of the debt and the characteristics of the debtor. His view was that in “appropriate cases” legal proceedings would be necessary; but his evidence was that appropriate cases would be confined to debts which were not disputed, but were not being paid due to the debtor simply seeking to delay such payment. The judge was satisfied that the appellants were advised by Mr Emsley that that was the true construction of 7.1. But the judge found (in my view, correctly) that this was erroneous advice in so far as it suggested there was any obligation to commence proceedings in any circumstances. He contrasted the words in 7.1. with those used in 5.4.1 and held correctly that where an obligation to take proceedings was to be imposed clear language was used and that thus 7.1 did not impose an obligation on Arrowblade (as the judge put it) “to go to the lengths and to incur the costs of legal proceedings in an “appropriate” case or in any case.

Third having made the above finding the judge did not however go on to decide at least expressly whether the giving of the above advice was negligent. What he went on to consider was whether it would have made any difference if accurate advice had been given. In examining this question he made no mention of Allied Maples Group Ltd v Simmons and Simmons [1995] 1WLR 1602 and no mention thus of whether he was assessing a lost chance. His conclusion was, it is right to say, in trenchant terms. He considered whether any of three different express terms might have been negotiated into the agreement. (1) A term varying 7.1 by imposing on Arrowblade an obligation to use reasonable endeavours, including the issue and reasonable prosecution of proceedings for recovery of the relevant debts; (2), a term that precluded Arrowblade from recovering any damages for breach thereof unless it was able to establish that it had suffered financial loss resulting from such breach and that it had taken reasonable steps to mitigate the loss suffered; and (3), a term providing the claimants with a contractual right to require an assignment to them of any of the relevant debts in respect of which they paid damages to Arrowblade for breach of the warranty contained in the paragraph.

As to terms (2) and (3) he found that (2) would not have protected the appellants any better than the terms agreed; that (3) would have been a strange term to seek to incorporate. In relation to both (2) and (3) he found that a reasonably competent solicitor would not have sought their inclusion. There is no challenge to that conclusion.

As regards term (1) his finding was based on the evidence of Mr Cummings and was as follows:-

“73.

. . .Throughout the negotiations Mr Cummings was concerned that paragraph 7.1 was not limited by any requirement for proceedings to be issued and/or prosecuted in the case of any one of the relevant debts where the creditors defaulted in payment. He stated that, if Mr Perkin had said that he would not proceed with the contract unless paragraph 7.1 expressly provided that legal proceedings must be commenced for recovery of the relevant debts before there was liability on the part of the Claimants, Mr Jones might have been prepared to accept this, but he was sure 3i’s and Barclays Bank would not have been. The differences between the relevant express terms of clause 5.4.1 and paragraph 7.1 to the 3^rd schedule in this regard were, Mr Cummings told the Court, intentional.

7.2.

Arrowblade (or more accurately 3i’s and Barclays Bank) was concerned about the effect which issuing legal proceedings against debtors would have been on the company’s goodwill and its customers. Arrowblade would have been very concerned to preserve its rights to damages for any breach of paragraph 7.1 even if proceedings had not been issued in respect of the relevant debts.

75.

I am satisfied that Arrowblade would not have acceded to any suggestion for the incorporation into paragraph 7.1 of the express term now contended for by the Claimants. I am equally satisfied that had Mr Perkin been informed of the correct construction of paragraph 7.1 and of Arrowblade’s refusal to the incorporation of any express term imposing an obligation upon it to commence legal proceedings for recovery of any of the relevant debts, he would have accepted that position and agreed to paragraph 7.1 as it now reads. That being so, the Claimants’ claim, relating to the advices and conduct of the Defendants, fails.”

The appellants’ case the deputy judge spells out correctly in paragraph 77 as follows:-

“I now turn to consider the Claimants’ case in relation to the post completion events. It is that, as a consequence of the Defendants’ advices and conduct pre-completion, they reasonably believed that Arrowblade was unable to enforce paragraph 7.1 against them because Arrowblade had not taken legal proceedings against debtors for payment of outstanding relevant debts. Acting in such belief, the Claimants, on the 14^th December 2000, issued proceedings against Arrowblade for payment of the sum of £34,430.00, being the balance of the purchase price of the shares which Arrowblade retained on the ground that the Claimants had acted in breach of the warranty in paragraph 7.1 of the 3^rd schedule to the Share Purchase Agreement. Arrowblade then raised against the Claimants a counterclaim which exceeded the claim for £34,430.00 contending it was not required, by paragraph 7.1, to take such legal proceedings against debtors. The Claimants reached the conclusion that their said belief was not, or might not be, justified and, in order to limit their exposure to additional legal costs, and to protect themselves against additional liability, they compromised the proceedings by accepting £17,215.00 plus interest but with no order as to costs. The loss claimed by the Claimants to result from the Defendants’ negligence and breach of contract, as detailed in the re-amended Particulars of Claim, is put at £51,664.60, being £17,215.00 (plus interest) retained by Arrowblade and legal costs of the action put at £34,449.60.”

In this instance he did say that the claim is one of “loss of a chance” [see paragraph 78]. He dealt with the claim by tracing how the claim came to be made and how it ultimately came to be compromised. First came the advice of Mr Ian Peacock advising Arrowblade as to whether it had a claim dated 24^th November 1998. That Opinion was shown to Mr Perkin in 1998. Mr Perkin in evidence accepted that from that opinion he appreciated that Arrowblade’s answer to any claim the appellants had to the remainder of the purchase price was a claim for breach of warranty 7.1 and not a claim under 5.4.1. The appellants received advice from the respondents (not Mr Emsley) and according to the judge appreciated that a substantial claim put by Arrowblade as at £62,560 would be made in answer to any claim for the balance of the purchase price. The judge stressed that in no documents during this period was it suggested by the respondents that it was an answer to Arrowblade’s claim that Arrowblade should have taken proceedings. Ultimately on 1^st March 2000 a note prepared by Mr Houghton records the advice given to Mr Perkin as follows:-

“Met with Mike Perkin to decide the approach to take on the money and deposit. Went through my last letter.

I explained the problems with the claim at this stage. The odds of the claim succeeding were 50/50. We had to reduce £80,000 worth of debts to below £30,000. Although the argument I had come up with relating to mitigation of loss was something we would run, I thought that a court would probably apply the general test of mitigation, not the contractual one. If we were to threaten proceedings we needed to back that threat with action.

We decided it would be better to seek a meeting to try and resolve the issue.

Noted that the defendant to any proceedings would be Arrowblade Ltd, not Indec’or.

Thought that Arrowblade may be prepared to deal because it would free up some money for them.”

At paragraph 88 the judge found as follows:-

“In my judgment, by the 1^st of March 2000 at the latest, the Claimants were fully aware that:-

1.

The view of Mr Emsley that paragraph 7.1 of schedule 3 to the Share Purchase Agreement imposed a duty upon Arrowblade to commence/pursue proceedings for payment of the relevant debts, was an erroneous one;

2.

They had only a 50/50 chance of succeeding in their claim to the retained purchase monies;

3.

They made a conscious decision not to even threaten proceedings against Arrowblade but to seek a meeting therewith in an attempt to resolve the issue by negotiation.”

What then occurred was that Arrowblade apparently made the first move. It served draft particulars of claim. It was agreed to mediate but no draft defence was served on behalf of the appellants and no proceedings were commenced at this stage and thus no mediation occurred at this stage. The judge found that thereafter the appellants deliberately waited until Arrowblade went into receivership. They then commenced proceedings claiming £34,430 hoping that the receivers would not put up security to be able to fight any counterclaim and that thus the appellants’ claim would succeed without any major expenditure in costs. In fact the receivers did put up security and contested litigation was thus then in prospect.

The judge found at paragragh 97:-

“I am satisfied the Claimants were fully aware at this time:-

1.

That Mr Emsley’s advice as to the contractual obligation of Arrowblade to commence/pursue legal proceedings against relevant debtors was erroneous and that paragraph 7.1 of the 3^rd schedule to the Share Purchase Agreement did not impose such an obligation;

2.

That Arrowblade’s claim to the retained purchase monies or damages was based upon a breach by the Claimant of the warranty contained in paragraph 7.1 and Arrowblade’s contractual right of set off;

3.

The Claimants’ case in response to that of Arrowblade’s claims was based upon the latter’s common law duty to take reasonable steps to mitigate its loss;

4.

The Claimants’ chances of success, in the event of the dispute with Arrowblade being tried by the Court was 50/50.”

The tactics having failed there was, at this stage, mediation. In the result the appellants received back half the sum they were claiming but only did so having incurred serious legal costs. Thus it is that the claim for damages which the appellants made was in the following terms:-

“Particulars of Special Damage

1.

The Claimants have incurred the following liabilities and expenditure in the sum of £51,664.60 as follows:

a.

Payment to Arrowblade in the sum of £17,215 plus accrued interest to 9^th August 2001.

b.

Payment to their solicitors of the costs of the claim against Arrowblade, as specified in paragraph 16.11 above: £34,449.60

2.

If the Defendants had advised the Claimants that they were not protected in the form referred to in paragraph 15B above, and they had negotiated terms with Arrowblade to include such protection, then the Claimants would not have incurred any of the expenditure referred to above;

3.

In the alternative, if the Claimants had been advised by the Defendants at any time before they commenced the claim against Arrowblade that they, the Claimants, were not so protected, then they would have reached the said compromise with Arrowblade, without incurring any of the said costs, thereby saving £34,449.60.

4.

In the further alternative, if the Claimants had been advised by the Defendants that they were not so protected as aforesaid, and they were unable to reach any compromise with Arrowblade, then the Claimants will aver and contend that Arrowblade, who were in administrative receivership, would not have brought any proceedings against them, and in those circumstances the Claimants would not have brought any proceedings against Arrowblade, would have waived their claim to the £17,215 which they received in accordance with the eventual compromise, but would not have incurred the costs of £34,449.60, thus being in credit by £17,234.60”

The judge’s conclusion was in these terms:-

“101.

In conclusion, by the 1^st of March 2000 at the latest, the Claimants did not hold the belief that Arrowblade was unable to enforce against them the warranty in paragraph 7.1 of the 3^rd schedule to the Share Purchase Agreement and when they commenced their action against Arrowblade on the 14^th December 2000 they did not hold such a belief. Quite the contrary, they had been advised, or had concluded from the advice given by the Defendants, that paragraph 7.1 of the third schedule did not impose a contractual duty upon Arrowblade to commence/pursue legal proceedings for recovery of the relevant debts. In addition, they had been fully advised, prior to commencing the action against Arrowblade, that their chances of successfully establishing entitlement of the retained purchase monies, and of defending a counterclaim for damages for breach of the warranty in paragraph 7.1 was only 50/50. The Claimants decided to adopt a particular tactical strategy which failed and were then compelled, by the risk of losing the action and the disproportionate costs that would be incurred, to settle the same.”

Mr Krolick divides the case between the situation before the contract was entered into and the situation post contract once an issue arose as between Arrowblade and the appellants. In relation to pre-contract he submits that the issues the judge should have addressed were the following:-

“1.

Were the Respondents negligent or in breach of their contract of retainer with the Appellants? If so,

2.

What losses could the Appellants have avoided in the event that the Respondents had not been negligent or in breach of obligation? If so,

3.

Was the chance of avoiding such losses real or substantial, as opposed to speculative? If so,

4.

What was the value of the lost chance?”

He submitted that the judge should have found that in advising the appellants erroneously on the construction of 7.1, Mr Emsley was negligent. He submitted that the judge should then have found (1) that if properly advised the appellants would first have instructed Mr Emsley to attempt to negotiate a term which did provide for Arrowblade being unable to make a claim for breach of warranty unless they had used reasonable endeavours including issuing proceedings to recover the debts; and (2) that if such a term could not be obtained they would have refused to sell their shares. He submitted that once the judge accepted that these would have been the appellants’ instructions the judge should not have been deciding whether Mr Emsley would have succeeded; he should have been considering whether there was a chance of the instructions succeeding. Once considering that question there were factors which indicated there was a “substantial chance” that Mr Emsley would have succeeded. As Mr Krolick put it in his skeleton:-

“There were in fact a number of evidential matters which demonstrated that, had the Appellants been properly advised, there was a substantial chance that they would have avoided the losses which were attributed to the fact that the purchasers could sue the Appellants under their warranty in preference to suing the debtors, only some of which were referred to by the judge. The Appellants’ case is that either they would have negotiated more beneficial terms with the purchasers, or would have refused to sell:

1.

The auditor of Indec’or, Mr Nuttall, testified that the company was solvent; the majority of the debts were “blue chip”, and there was no need for the Appellants to sell the Company, immediately or at all (judgment paragraphs 9 and 10);

2.

Mr Perkin stated in evidence that he had had no thought about selling the business until he was first approached by Mr Jones, the leading member of the consortium, who wished to buy the business. Although the Judge was critical of Mr Perkin’s credibility, this evidence was accepted, see paragraph 5 of the judgment p 648).

3.

25^th November 1997 (A/29): Telephone attendance note of Respondents. There is a telephone conversation between the note maker and Mr Perkin in which Mr Perkin makes it clear that if the purchasers do not agree (to what is unspecified) there would be “no deal”. This note is material because it is the Appellants’ case that if they had been advised as to the true effect of their warranties they would not have proceeded with the transaction;

4.

After the contract was signed, on 3^rd December 1997, Mr Cummings wrote to Barclays Bank on behalf of the purchasers (A32). That letter included the following:

a.

In paragraph 1.4: the purchasers had accepted limitations of the Appellants’ liability under their warranties because “It is the view of (the purchasers) that . . . Mr Perkin would have been extremely unlikely to enter into the Agreement without obtaining these limitations.”

b.

In paragraph 1.5: there was a qualification to the usual restrictive covenant, which favoured Mr Perkin;

c.

In paragraph 1.7 that a proposed warranty was “vigorously resisted by the Vendors and, in the light of my comments concerning Mr Perkin above, the position has been conceded by the Company.

5.

Mr Cummings, the purchasers’ solicitor, gave the following material evidence, in addition to his assessment that the financial backers of the purchasers would not have agreed to a variation. Those referred to in the judgment have the indicated paragraph numbers:

a.

Arrowblade was keen to purchase the shares (paragraph 51);

b.

Mr Perkin was driving a hard bargain (paragraph 51) and the purchasers had had to accept significant amendments;

c.

He had written to Barclays Bank on 3^rd December 1997 (paragraph 51) indicating that it had been necessary to make concessions in order to proceed. An additional relevance of the letter is that amendments had been agreed without prior approval by the Bank;

d.

His own understanding of the provisions of paragraph 7.1, in its final form, was that the purchasers may need to issue proceedings against debtors in certain circumstances in order to bring a warranty claim, but unlikely to happen (see his evidence at B/52, p.622 and 6270;

e.

Mr Jones (of Arrowblade) may have agreed to vary paragraph 7.1 to provide for issuing proceedings, but Barclays would not have done so (Evidence B/52 p 628)’

f.

In answer to the judge, who asked him the question: “what would you have done if you had been faced with a clause requiring issue of proceedings in an appropriate case?” Mr Cummings answered that he would have looked at it and considered it and would not have ruled it out. However, he would have resisted including in the clause any provision for debt collection agencies (evidence B/52 0. 630).

6.

The judge’s finding that, if correct advice had been given to the Appellants and attempts to vary the contract had failed, then they would not have withdrawn from the transaction and would have proceeded (knowingly) on the existing terms, was made without reference to any evidential basis. This allegation had not been raised by the Respondents in their pleadings, and was never advanced in cross-examination by them. In paragraph 7 of his supplemental witness statement (A/11 p/095) Mr Perkin referred to the contractual provisions which he required (including a requirement that the purchasers should resort to litigation before claiming under the warranties) and stated:

“At no stage was I advised that the above provisions were not incorporated into the agreement and had I been so advised I would not have sold my shares in Indec’or to Arrowblade. I firmly believe that, if pressed, Arrowblade and David Jones would have consented to the terms I referred to above. If I had been aware that Arrowblade had not agreed to the above I would not have sold my shares to them.”

This passage was not challenged by the Respondents when Mr Perkin gave evidence.”

Mr Krolick emphasised that although the judge found that Mr Cummings refused to include a term in paragraph 7.1 similar to that in 5.4.1 as to the requirement to take proceedings, that finding was an error because no request was made to Mr Cummings to vary 7.1 to that effect possibly because Mr Emsley was under the misapprehension that at least to a limited extent it already contained such a requirement.

As regards the dispute with Arrowblade post completion Mr Krolick attacked the judge’s finding that Mr Perkin was aware of Mr Emsley’s erroneous misconstruction of 7.1. He submitted that the position was that Mr Emsley’s advice was never corrected and thus the appellants went into the litigation in the belief that Arrowblade would not succeed against them for breach of warranty having failed to sue the debtors. This resulted, submitted Mr Krollick, in the appellants becoming embroiled in costly litigation from which they ultimately had to extricate themselves on a basis which left them out of pocket. If they had known the advice previously given was wrong, the appellants would at least have had a chance of seeking a compromise with Arrowblade without incurring any legal costs.

Mr Bacon submitted that the judge should not have found Mr Emsley negligent even though his view of the construction of the clause was erroneous. He pointed out that this was not a pleaded claim and thus there was no reason why the judge should deal with that question. If he had to deal with the question he argued that in any event the construction favoured by Mr Emsley was a permissible construction and thus he was not negligent in taking the view he did.

The main focus of Mr Bacon’s submissions was however on whether the appellants could establish any loss. He submitted that the judge had had cited to him Allied Maples and could have been under no misapprehension that his task was to consider whether Mr Emsley had any chance of persuading Mr Cummings or his clients (who it was stressed were not only Arrowblade but the funders Barclays and 3i’s) to put into 7.1 a provision requiring Arrowblade to pursue proceedings. He submitted that the trenchant findings of the judge were to the effect that he assessed the chance as nil. As regards the appellants’ case that if such a term could not be inserted into the contract they would not have sold their shares, he submitted that such a case was untenable. By the time that the final negotiations were going on, Mr Perkin had taken for himself through another company the £2million contract with one of Indec’or’s clients, Bass Beers Worldwide, (something he had not revealed to Mr Emsley); and the position of Indec’or was that it was solvent but not comfortably so. To obtain at least £250,000 for the shares and be able to continue with the lucrative contract with Bass Beers Worldwide was not something Mr Perkin would have forgone.

As to the litigation with Arrowblade, Mr Bacon pointed out that up until the last moment the allegations on the pleadings were of the most serious kind alleging that Mr Emsley’s firm continued to act, appreciating they had a conflict of interest. Even when re-pleaded, the case was not one of having been advised wrongly it was of having never been advised at all and an entitlement to presume a term similar to 5.4.1 without 7.1 being there at all. Mr Bacon submitted that the court should not interfere with the judge’s finding that by 1^st March 2000 the appellants were aware of Mr Emsley’s advice being erroneous, resting as it did on Mr Perkin’s lack of credibility. Thus submitted Mr Bacon there was no basis for assessing damages for loss of a chance.

I have not found this case easy. The judge has found that advice was given erroneously in a situation in which he has not accepted the appellants’ case that no advice was given at all. He has clearly taken the view that if he had to decide on a balance of probabilities whether on the receipt of correct advice the same contract would have been entered into it would have been. He has then found that, despite Mr Emsley still contending for his erroneous construction at the trial, Mr Perkin in some way appreciated that that construction was erroneous before commencing any litigation with Arrowblade.

I would reach two preliminary conclusions. First it seems to me that Mr Emsley was negligent in taking the view he did as to the construction of 7.1. With clause 5.4.1 imposing expressly an obligation, which included taking proceedings, it was an impossible construction to place on 7.1 that it also included some obligation to take proceedings in “appropriate” cases. Furthermore, although not the real case the appellants were making, it is difficult to say a case of this type of negligence was not covered by the pleading. Second it seems to me that to hold that Mr Perkin knew that Mr Emsley’s construction was erroneous when Mr Emsley was still supporting his view even at the trial was going too far. That Mr Perkin must have known the way Arrowblade were putting their case and that he knew that there was only a 50:50 chance of defending Arrowblade’s claim for damages for breach of warranty seems to me as far as it is possible to go that being the final advice from the respondents in the note dated 1^st March 2000.

It seems to me also right to stress that Mr Krolick expressly disavowed any suggestion that the appellants were arguing for some separate cause of action in relation to the post completion litigation with Arrowblade. In other words he was not arguing that there was a duty to give advice at that stage as to the proper construction of 7.1 and that that failure independently led to the commencement of litigation with the consequences that followed.

It follows as it seems to me that the case which the appellants would seek to make involves (1) negligent advice (2) establishing what the appellants would have done if correct advice had been given (3) if it is established that the appellants would have acted in a certain way but the question whether loss has been suffered depends on how third parties would have acted, the question becomes whether the appellants lost a chance. (See Allied Maples).

It furthermore seems to me that in the way Mr Krolick puts his case although there may be assessments to be made of chances at different stages what has ultimately to be assessed is whether the appellants lost a chance of being better off than they became as a result of selling their shares and litigating with Arrowblade. To say that the appellants lost a chance of having some term inserted into the agreement would not provide itself a claim for damages; it is only if damage flows from there being no such term that a claim to damages can result. The only suggested damage is the loss resulting from involvement in the litigation. There might have been a quite distinct loss of a chance case based on a failure to advise as to the correct interpretation of 7.1 before litigation was commenced, but that is not a case made.

In other words if loss of a chance is the right measure what a court would be assessing is whether the chance was 100% of a term being inserted into the contract and of the appellants thus recovering the full amount of the retention of £34,000 without incurring any costs, as compared with being in deficit to the extent of £51,664.60.

Although the appellants argue that they would not have entered into the agreement at all if they had known there was no term requiring proceedings to be brought, the claim for damages has never been put on any basis other than that if there had been no agreement they would have kept the company worth £250,000, would not have had a claim to any further part of the purchase price but would not have incurred the legal costs of the dispute with Arrowblade. That figure is pleaded as £34,449.60.

Mr Krolick has argued that this court, if it decided that the judge should have taken the view that there was a lost chance, should send the matter back to another judge to assess that chance and then assess the damages. In a case where the sums are not large by modern day standards this court would be doing the parties no favours to set them off on another round of litigation. Furthermore, since it seems to me possible to see what 100% would bring and what a smaller percentage would bring, it would seem to me to be unnecessary to ask some other tribunal to assess damages. We have the material before us, plus the view of the judge, and it would be contrary to the overriding objective for this court not to perform the task.

I have quoted at paragraph 13 above the passage from the judge’s judgment which found in forceful terms that he would have held that Mr Cummings, acting for Arrowblade and the funders, would not have accepted any variation to paragraph 7.1. But it seems to me that Mr Krolick is right when he says that the judge appears to have been deciding that question on the balance of probabilities. Mr Krolick is right in saying that the judge should have directed himself to the question whether there was a real chance of negotiating some variation to 7.1 to accord with the language of clause 5.4.1 or some watered down version of it. I use the words “real chance” because that, as it seems to me, reflects the language used by Stuart Smith LJ in Allied Maples. As the headnote reflects, his language was to the following effect:-

“Where the defendants’ negligence consisted of an omission, causation depended on the answer to the hypothetical question of what the plaintiff would have done if the defendant had not been guilty of the omission, which was a matter of inference to be determined from all the circumstances and that, where the plaintiff’s loss depended on the hypothetical act of a third party, he was entitled to succeed if he could show that there was a real or substantial, rather than a speculative, chance that the third party would have acted so as to confer the benefit or avoid the risk to the plaintiff.”

The points made by Mr Krolick as to why there was a real chance, either of obtaining a variation or of there being no deal if the appellants had been properly advised, are set out in his skeleton and I have already set them out in paragraph 22 above.

Mr Bacon countered these points with the following:-

I can see the force of Mr Bacon’s answers to Mr Krolick’s points but Mr Krolick’s points cannot, in my view, be dismissed completely. What in particular troubles me is that both Mr Emsley and Mr Cummings actually thought that 7.1 did require in “appropriate circumstances” the bringing of proceedings. How, in those circumstances can one say there was no real chance of putting into express words at the very least what both solicitors thought was the result of the language as it was? In my view, there must have been some real chance of achieving at least that result.

But what then was the chance of the appellants being financially better off than they became? In that assessment many questions arise. For example, what was the chance of a more extensive term? Were the debts of the kind where it would have been appropriate to insist on proceedings? What chance would the appellants have had of negotiating with Arrowblade for the return of the monies retained without incurring any legal costs? All these questions need consideration but, in the end, what has to be assessed is the chance of the appellants being better off financially.

In assessing the chances of the appellants being better off financially, it seems to me the following are the key features. First, the chance of any change being negotiated to 7.1 was on Mr Cummings’ evidence low. The chances of such a change going further than making express what Mr Emsley and Mr Cummings thought to be implied, is somewhat lower. The chances, thus, of having a clause which put the appellants into a better bargaining position than they in fact were with Arrowblade was very low. The chances of the appellants not going ahead with the deal if they had been properly advised as to the meaning of 7.1 were also, as it seems to me, low, for all the reasons given by Mr Bacon. The chances that some legal costs would have been incurred in defeating Arrowblade’s claim for damages for breach of warranty were high. The history would seem to indicate a decision to take proceedings to attempt to achieve total recovery as something of a gamble when a direct negotiation, which would have achieved something less, might always have been sensible.

In my view the chances of the appellants being better off than they in fact became cannot be put higher than 20%. I would accordingly reverse the judge’s decision and hold that, as a result of the negligent advice, the appellants did lose a real chance and that the loss should be assessed at 20%. It seems to me that we have the figures to which that 20% must be applied, and I would accordingly give judgment in favour of the appellants in the sum of £10,333.

I agree.

I also agree.