England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
BIRMINGHAM DISTRICT REGISTRY
HIS HONOUR JUDGE MCKENNA
A90BM181

		Royal Courts of Justice Strand, London, WC2A 2LL
		01/02/2017

Lord Justice Longmore:

Introduction

1. This is an appeal from an order of HHJ McKenna giving summary judgment against the claimants at the instigation of the defendant solicitors' firm in a claim for professional negligence.
2. At all material times the first claimant, Mr Jon Williams, was the sole shareholder in a company called Vital Industries Limited ("Vital"). That company in turn had two subsidiaries called Arc Aluminium Limited ("Arc") and Arc Aluminium Services Limited ("Services").
3. Over the years, Mr Williams had developed a range of window and door products. When he wished to sell Vital he also wanted to extract the intellectual property rights from Vital at the same time. Those rights ("the Rights") were in fact owned by Arc.
4. He therefore incorporated the second claimant Genesis Range Limited ("Genesis") with a view to its being the vehicle into which the Rights were to be transferred.
5. In or about April 2012 Mr Williams agreed to sell his shares in Vital, Arc and Services to Firstmain Investments Limited ("Firstmain") on the following principal terms:-

i) A payment to Mr Williams of £265,000 comprising £170,000 in cash together with deferred consideration of £50,000 to be paid by means of 18 monthly instalments;

ii) A repayment by Mr Williams of his loan account (quantified at £57,623);

iii) Genesis, as Mr Williams' nominee, was to purchase the Rights from Vital for the sum of £45,000 and would then licence their use back to Vital.

6. Mr Williams instructed the defendant firm of solicitors ("HCB") to act on his and Genesis' behalf in the sale of his shares in Vital, Arc and Services to Firstmain, the purchase of the Rights and the granting of the licence from Genesis back to Vital.
7. HCB produced a series of drafts of the documentation designed to put into effect the agreement negotiated between Mr Williams and Firstmain namely (1) a Share Purchase Agreement ("SPA"), by which he sold his shares in Vital to Firstmain, (2) an Assignment by which Vital and Arc assigned the Rights to Genesis ("Assignment") and (3) a Licence ("Licence") by which Genesis was to licence Firstmain/Vital to use the Rights in much the same way as Vital had previously used them, but which nevertheless permitted Genesis to seek to exploit them in new ways.
8. Negotiations on the form of the various agreements were conducted by Mr Adrian Leonard of the Defendant on behalf of Mr Williams and Genesis and by David Goulding on behalf of Firstmain. At a late stage in those negotiations, on or about 3^rd July 2012, Mr Leonard and Mr Goulding agreed, apparently without advising or taking instructions from Mr Williams or Firstmain, that the £45,000 nominally due from Genesis to Vital under the Assignment did not need to be recorded as part of the purchase price because it was too cumbersome to require Genesis to pay £45,000 to Vital only for Firstmain to pay £45,000 immediately to Mr Williams. Instead, they agreed that the purchase consideration ought to be referred to in the SPA as simply the sum of £170,000, plus the value of the first claimant's outstanding director's loan (£57,623) that is to say a total consideration of £227,623. Moreoever, given that the director's loan was being repaid by Mr Williams, the actual cash sum changing hands from Firstmain on completion was agreed to be £170,000. Firstmain however remained under an obligation to pay Mr Williams the deferred consideration of £50,000 over 18 months.
9. The sale of Mr Williams' shares was completed on 5^th July 2012 with the execution of the finalised documents namely the SPA, the Assignment and the Licence.
10. Unfortunately the SPA, at clause 4.2, continued to include the following provision:

"The seller [Mr Williams] shall:-

…

(d) Procure the entry of the Genesis Range Company Limited (Genesis) into the licence and the payment to the Company of the Transferred IP Payment (i.e. the sum of £45,000 payable by Genesis to Firstmain pursuant to the Assignment)."

11. At around the same time Mr Williams and Genesis commenced negotiations to permit Thyssen Krupp Materials (UK) Ltd ("TKM") to develop and market products using the Rights and in early 2013 agreement in principle was reached with TKM for the use by TKM of the Rights and the payment of commission/royalties by TKM to Mr Williams and/or Genesis.
12. Firstmain defaulted on paying the deferred consideration and in early 2013 Mr Williams wrote to Firstmain demanding payment of the deferred consideration and royalties said to be due under the Licence. Firstmain responded alleging that the Assignment had been ineffective to transfer the Rights to Genesis and that they therefore remained vested in Arc as a result of a failure on the part of Mr Williams and/or Genesis to pay the sum of £45,000 in respect of the Rights and that accordingly no further payments were due from Firstmain.
13. It is said by Mr Williams and Genesis that this dispute about the ownership of the Rights caused TKM to withdraw from the agreement in principle with Mr Williams.
14. In this action Mr Williams and Genesis assert that the reason why they were unable to enter into what they say would have been a very lucrative agreement with TKM for the exploitation of the Rights was the defective drafting of the SPA and they claim damages in excess of four million pounds.
15. HCB have applied for summary judgment under CPR 24.2(a)(i) on the basis that the claim has no real prospect of success. The judge gave judgment in their favour on the basis that in law any defective drafting which may have occurred did not cause the loss of the TKM business opportunity.

The dispute with Firstmain

16. Mr Williams' solicitors, Else Solicitors LLP ("Else") wrote to Firstmain on 11 March 2013 complaining of the failure to pay the January, February and March instalments of the deferred consideration, as well as amounts due by way of royalty payments. Firstmain's solicitors (Bermans) responded on 14 March 2013 maintaining that the assignment of the Rights to Genesis was contingent on payment of the £45,000 being actually made by Genesis (or Mr Williams) to Vital and added:-

"Further we place you on notice that our client disputes any liability to yours, whether in relation to royalty payments pursuant to the Licence Agreement or otherwise; it is clear, on any analysis of the facts and circumstances referred to above, that your client has failed to fulfil a fundamental condition precedent to the assignment of IP rights from Vital to your client (in that it has failed to provide the agreed consideration for such assignment). Accordingly, no effective assignment has taken place and the IP rights remain with Vital."

Bermans' contention, if correct, had the convenient result, from Firstmain's point of view, that the Rights were vested in Vital which Firstmain had acquired by virtue of the Share Purchase Agreement.

17. Mr Khangure QC for the claimants submitted to the judge that HCB's negligent drafting of the agreements had resulted in Mr Williams and Genesis becoming embroiled in a legal dispute about ownership of the Rights, which caused TKM to walk away from the negotiations with Mr Williams and thus a loss of a valuable contract with TKM or at least the opportunity of acquiring a valuable contract.

The judgment

18. The judge decided that it was plain that the Rights had been transferred from Vital to Genesis and there was no question of the existence of any condition precedent requiring actual payment by Genesis to Vital of £45,000 before property in the Rights was transferred to Genesis. He said:-

"27. It was submitted on behalf of the Defendant and in my judgment it is plainly right that the scheme of the SPA, the Assignment and the Licence was self evidently to effect the transfer to Firstmain of the shares in Vital, to extract the Rights from Vital/Arc to Genesis; and then for Genesis to grant a licence to Firstmain to make use of products embodying the Rights to continue the business it had previously operated when Vital owned the Rights. Nowhere is there any indication that any obligation on Genesis to pay Vital £45,000 for the Rights is a breach which would entitle Vital not to transfer the Rights to Genesis. On the contrary:

(1) it was a term of the SPA that the First Claimant would upon completion of the sale of his shares in Vital cause Genesis to deliver to Firstmain an executed copy of the Assignment: the executed copy was made at the time when the First Claimant was still owner of Vital.

(2) It was a term of the SPA that the First Claimant would upon completion cause to be delivered to Firstmain an executed copy of the Licence. If the transfer of the Rights under the Assignment had been conditional upon anything, the SPA would have made provision for the contingency that the condition was not fulfilled.

(3) The operative clause of the Assignment provided that the Rights were assigned "absolutely" that is to say not conditionally.

(4) In the licence not only did Firstmain expressly acknowledge Genesis' ownership of the dies and the Rights embodied in them, it also paid for a licence to use the dies without there being any clause making provision for the position should Genesis not pay the £45,000 due under the Assignment.

28. In all the circumstances to my mind, if any obligation to pay £45,000 existed, it merely gave Vital a claim against Genesis for payment of a debt of that amount."

19. In this court Mr Khangure did not dispute that the judge was right about this.
20. The judge then continued:-

"29 It follows that the agreements drafted by the Defendant were, in fact, effective to do what it was required that they should do. In those circumstances, as it seems to me, the loss of the TKM business opportunity cannot, as a matter of law, have been caused by any breach of duty on the part of the Defendant. The losses which are alleged are not losses which can possibly legally have been caused by the breach of the duty alleged. If any loss were caused by the deficiencies in the drafting, such losses could conceivably have been the additional costs of having to argue with Firstmain about the construction of the agreements but no such losses are claimed."

The Submissions

21. Mr Khangure QC submitted that the judge was wrong to say that the claim could not in law succeed because:-

i) the negligent drafting had given rise to the dispute about the Rights;

ii) the dispute about the ownership of those rights was what caused TKM to withdraw;

iii) the loss of the business opportunity was thus in fact caused by HCB's negligence, at any rate in a "but for" sense;

iv) the claim therefore had a real prospect of success within CPR Part 24.2(a).

22. Mr Mitchell QC for HCB accepted that it was arguable that the dispute about the ownership of the Rights was caused by HCB's negligence and that TKM withdrew because of that dispute (in a "but for" sense) but submitted that the judge was correct to say that there was no causation "in law" because solicitors could not be liable for the consequence of the "other party", to a drafted contract taking palpably bad points and, by doing so, causing their client to lose a business opportunity.
23. There was also a second (and very subsidiary) ground of appeal that the judge ought to have held that there was a real prospect of Mr Williams and Genesis establishing that their failure to obtain payments due from Firstmain was caused by HCB's negligence.

Correct to give summary judgment?

24. While HCB undoubtedly have a strong case, I have come to the conclusion that the case is not suitable for summary judgment and therefore the less I say at this stage the better.
25. The difficulty is that the judge has given no reason for saying that the loss of the TKM opportunity "cannot as a matter of law" have been caused by any breach of duty. He could mean, as Mr Mitchell proposed, that it is never within the scope of the duty of a solicitor to protect his client from the other party to the transaction taking a palpably bad point. But how palpable is the bad point in the present case? It is not suggested that it was taken in bad faith by Bermans or by Firstmain. It only becomes demonstrably bad once a judge has decided that it is bad. Dixey v Parsons (1964) 162 EC 197 is authority for the proposition that it is part of a solicitor's duty to protect his client against unnecessary risks of litigation, see Jackson and Powell Professional Liability (7^th ed. 2012) para 21-105. The judge recognised that the cost of arguing with Firstmain (and perhaps the cost of obtaining any judgment against them) might be recoverable; so on any view the scope of a solicitor's duty extends to some damages if a client becomes involved in litigation as a result of the solicitor's negligence.
26. Mr Mitchell relied on Cavell Leitch v Thornton Estates Ltd [2008] N ZLR 627 in which Cavell Leitch had drafted for their client a contract for the acquisition of a marina which was destroyed between contract and completion when property would pass to Thornton as purchaser. There was a debate about whether the vendor could recover the price which was mediated and Thornton made a payment to the vendor, which they sought to recover from their solicitors. It was later held (on appeal after a trial) that the payment had been unnecessary because risk remained with the vendor until completion on the basis of "res perit domino" ("if you own it you lose it"); at paragraph 47 Baragwanath J said:-

"The contract was unambiguous in its legal effect and properly safeguarded Thornton's interests. There was no reason for Cavell Leitch to expect that it would be misinterpreted. The negligence claim fails."

But the reason why the claim failed was that it was held that there had been no initial negligence (it had been suggested it was negligent to fail to include a clause specifically dealing with risk of destruction). Here there was (arguably) initial negligence and I doubt if the New Zealand Court of Appeal was intending to say that a solicitor who is negligent can never be liable for the consequence of misinterpretation arising from his negligence. If the court did so intend, it goes further than any existing English authority.

27. In any event, controversial points about scope of duty should, in principle, be decided at trial once the full facts are known rather than by way of summary judgment.
28. The judge might have meant in paragraph 29 of his judgment that the loss of the business opportunity with TKM was not within the reasonable contemplation of the parties and thus too remote pursuant to the principle of either the first or the second rule in Hadley v Baxendale (1854) 9 Exch 341. He might also have been intending to say that Firstmain's taking of the bad point about the ownership of the rights constituted a novus actus (or new cause) which obliterated the earlier negligence on the principles set out Borealis AB v Geogas Trading SA [2011] 1 Lloyds Rep 482 para 44 per Gross LJ. But the judge did not give either of these possibilities as reasons for his conclusion and it would not be right to uphold a summary judgment for reasons which the judge did not himself give. The court, anyway, would need to know more about the background facts before it could be sure that HCB could obtain judgment on these grounds.

Conclusion

29. For these reasons I would allow this appeal, set aside the judge's order and allow the claim (including the claim in respect of Firstmain's failure to pay) to go to trial.

Lord Justice Kitchin:

30. I agree

Lord Justice Floyd:

31. I also agree