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An expensive reminder: oversights in the legal profession and PD57AC (Trial Witness Statements) in practice

Details

In April this year, the High Court heard a professional negligence claim against Charles Russell Speechlys (which, at the time of the conduct complained of, was known as Speechly Bircham) brought by two of its former clients, Paul Richards and Keith Purves (Claimants). The case was Richards & Anor -v- Speechly Bircham Llp & Anor [2022] EWHC 935 (Comm).

Background

In 2014, the Claimants instructed Speechly Bircham in respect of the sale of their respective equity stakes in IP Solutions (a cloud-based communications technology company) as part of a deal with a private equity house. The Claimants each retained a 30% stake in a newly incorporated company formed for the purpose of the transaction. It was alleged that Speechly Bircham were negligent in failing to advise the Claimants about the impact of a redemption premium provision (RPP) agreed as part of the sale of IPS.

The main element of the claim was an allegation that Speechly Bircham failed to warn the Claimants that, due to the existence of the RPP, even if they were wrongfully dismissed from their employment with the new company (which, in the event, they were) and would therefore be classed as ‘good leavers’, they would receive no (or only nominal) value for their shareholding. 

The reason for this is that, by virtue of the RPP, on a share sale of IPS, the proceeds of sale would be distributed in accordance with the RPP (ie the first £11.5 million belonged to the private equity house behind the transaction). The Claimants’ position was that, had they been advised of this, they would have either attempted to negotiate a deal so that the RPP did not apply to the determination of market value or looked to deal with another investor instead.

Decision

Judge Jonathan Russen QC ultimately held that the RPP was ‘a significant risk [that] went unspotted’ by Speechly Bircham. 

It was decided that Speechly Bircham had fallen short of the standard of care expected of a reasonably competent solicitor practising in the field of private equity transactions. The judge considered that, in all likelihood, had the Claimants been made aware of the potential impact of the RPP, they would have pursued another deal instead. The Claimants were accordingly awarded damages in the sum of £1.404 million. 

A restatement of the impact of PD57AC

At trial, it was also submitted by counsel for Speechly Bircham that the Claimants’ respective witness statements were inadequate because they were prepared from memory, with minimal-to-no reference to contemporaneous documents. 

The judge referred to the case of Gestmin SGPS S.A. -v- Credit Suisse (UK) Limited [2013] EWHC 3560 (Comm) in which Leggatt J noted the ‘considerable interference’ with witness memory which resulted from what was then the procedure of preparing a witness for trial. The judge emphasised that the previous practice of multiple drafts of witness statements, which at times may contain argumentative material, no longer applied by virtue of the introduction of Practice Direction 57AC.

The judge commented that, in his view, the Claimants’ witness statements properly reflected the Statement of Best Practice in the Practice Direction. It was noted that greater reference to contemporaneous documents would have significantly expanded the Claimants’ evidence-in-chief and opened up a greater risk of leading questions. 

Comment

The present case serves as a reminder to both transactional and litigation lawyers that even unlikely outcomes ought to be properly considered and advised upon. The potential consequences of not doing so can be eye-watering. 

Speechly Bircham’s failure here lay not in its failure to predict that the RPP would apply, but in failing to identify the risk that the RPP could significantly impact the market value of the Claimants’ shares: ‘It is one thing to say that [Speechly Bircham] cannot reasonably have been expected to predict a future misalignment of the stars. It would be quite another to conclude that it would be imposing an unduly onerous and unwarranted duty of care upon [Speechly Bircham] to say that it should have undertaken a cross-check upon the meaning and effect of a provision on which it had drafting input.

The judge’s comments regarding the Claimants’ witness statements reiterates the importance of ensuring that witness evidence is no longer document-heavy or over-lawyered; PD57AC is a departure from the old, document-heavy regime and it seeks to avoid circumstances in which a witness’s memory is affected or undermined by information that the witness, at the time, was not aware of.

For further advice or assistance with Professional Negligence claims, please contact Jack Lewis.

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