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Pessimistic Legal Advice May Still Be Right

Although legal advice may sometimes appear overly pessimistic to clients, that does not mean it is wrong or negligent, as the High Court has emphasised in dismissing a company’s £1.45 million professional negligence claim against a law firm.

The company had issued convertible loan notes to two of its shareholders subject to their undertaking that their right to convert the loans made by them to the company into shares would not be exercised. Those undertakings were expressed to be ‘irrevocable’.

The law firm, through one of its partners, subsequently advised that the undertakings had become revocable due to the company’s failure to pay the shareholders £20,000 each within 12 months of the loan notes agreement being made. On the basis of that advice, the company agreed to a compromise with the shareholders whereby it paid them £1.45 million in satisfaction of their loan notes.

In arguing that the law firm’s partner had acted negligently and in breach of retainer, the company submitted that, on a correct interpretation of the agreement, the shareholders’ undertakings had in fact remained irrevocable notwithstanding the non-payment of the £40,000.

Dismissing the company’s claim, however, the High Court found that there was ‘at least a highly tenable argument’ that the undertakings fell to be construed in the manner contended for by the law firm and that, by failing to comply with the terms of the agreement, the company had forfeited the benefit of the irrevocability clause.

Having not received the money due to them, the ‘better view’ was that it had been open to the shareholders to elect to terminate the undertakings on the basis of the company’s repudiatory breach of the agreement. The partner’s advice that the matter should be swiftly settled accorded with sensible corporate governance and avoided what could otherwise have been a major internal dispute.

Although it was possible, with the benefit of hindsight, to say that the partner’s advice to the company ‘may have been over-pessimistic’ in certain respects, the Court found that he had been motivated by the company’s best interests and that he had not fallen below the standards to be expected of a competent lawyer.