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The
Court of Appeal largely upheld and, in part, extended the scope of a
solicitor's duty in respect of negligent advice given to a company;
the solicitor's duty of care may be extended to encompass personal losses
and other losses that are separately recoverable. The judgement contains
a useful analysis of various issues concerning the scope of the solicitor's
duty, applying the legal principles set out in SAAMCO.
Mr Johnson sued solicitors, Gore Wood, for negligent advice given to
a property company, WWH, of which he was the managing director and 99%
shareholder. WWH had been granted an option to acquire a development
site but the grantor of the option, a Mr Moores, subsequently challenged
the enforceability and the dispute ended up in court.
Gore Wood had given advice in relation to this litigation to the effect
that WWH was in a "no-lose" situation because it would make
a full financial recovery whether against Mr Moores or against various
other parties and that the proceedings would take no more than six months.
In the event, WWH succeeded against Mr Moores at trial and on appeal
but the proceedings took three years and the property fell in value
in the interim.
WWH brought proceedings against Gore Wood which were compromised at
trial on payment by Gore Wood of approximately £1.5 million and
costs.
A further action was brought against Gore Wood, this time by Mr Johnson
himself, who contended that in addition to the losses sustained by WWH
he had suffered personal and separately recoverable losses arising out
of Gore Wood's negligent advice. The losses were: his investments in
two video technology ventures ('CPV' and 'Adfocus'); the cost of personal
borrowings; interest on a personal overdraft; the diminution in value
of a personal pension scheme into which WWH would have made contributions,
and certain additional tax liabilities.
Gore Wood admitted negligence in respect of the exercise of the option
and the "six month/no-lose" advice. At first instance, the
judge determined that Mr Johnson did not have a general retainer with
Gore Wood in respect of his business affairs but that Gore Wood did
owe a duty of care in respect of the manner of exercise of the option,
the "six month/no lose" advice and the conduct of the action
against Mr Moores. The judge ordered Gore Wood to pay Mr Johnson damages
in respect of his lost investment in CPV, the cost of personal borrowings,
bank interest and charges on the overdraft and additional tax liabilities.
He also directed an inquiry as to damages in respect of the pension
benefits claim.
Mr Johnson appealed and Gore Wood cross-appealed. The main issue on
appeal was the scope of Gore Wood's duty to Mr Johnson.
The Court
of Appeal focused on the "extraordinary" nature of Gore Wood's
advice. Advice on the prospects of any litigation is normally given
in cautious terms, even where the client is likely to win. Here, all
such caution had been "thrown to the wind". The action therefore
became an asset on which, as Gore Wood knew, Mr Johnson might rely to
raise money for investment or other purposes.
Admittedly, Gore Wood was not formally asked to advise on the wisdom
of further investment beyond CPV during the currency of the litigation.
But Gore Wood did give advice to Johnson on several business matters
in quick succession knowing that he was an entrepreneur who made his
living by making investments. The duty owed to Mr Johnson personally
was in his capacity as a shareholder in WWH and guarantor of its liabilities.
Once it was accepted that the personal retainer extended to Mr Johnson
in his capacity as guarantor and bearing in mind that Mr Johnson was
effectively the sole shareholder of WWH, comparatively little knowledge
was required on the part of Gore Wood of the losses which might accrue
to him from WWH, for Gore Wood to be liable.
The judge had been wrong to hold that Gore Wood was liable for Mr Johnson's
loss in CPV but not in Adfocus, on the basis that Gore Wood knew much
more about CPV. Mr Johnson was also entitled to recover his lost investment
in Adfocus, but only in so far as that investment was made prior to
Gore Wood ceasing to act on 1 December 1989.
Mr Johnson was entitled as part of his damages to recover the costs
of his personal borrowings incurred prior to 1 December 1989. It was
also within the scope of Gore Wood's duty of care to protect him against
loss of pension contributions from WWH and against the additional tax
liabilities, but no recoverable loss was demonstrated on the evidence.
It follows that where advice is given to a company on a certain course
of action, and that advice impacts upon an individual who is not only
the managing director but also the de facto owner, the solicitor's duty
of care, when giving that advice, may extend to the individual.
Note:
The Gore Wood litigation is primarily known for the House of Lords ruling,
on an interim application to strike out, that a shareholder cannot bring
proceedings to recover loss that is merely reflective of loss suffered
by his company.
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