Negligence

Negligent advice by solicitor in relation to joint venture - duty of care owed to shareholder controlling company as well as to company - no recovery by shareholder for loss suffered by companyErridge v Coole & Haddock (a firm): ChD (Ferris J):26 June 2000

The claimant was the managing director of, and held a controlling interest in, EGH Ltd, the parent company of P Ltd.

P Ltd and T Ltd agreed to set up a joint venture.The claimant consulted the defendant solicitors as to the implications of T Ltd's heads of terms, which among other things permitted the other shareholders to exercise a right of pre-emption if control of a corporate shareholder in the joint venture company were to change, for which purpose the value of the company was deemed to be equal to four times its pre-tax profits as shown in the most recent audited accounts.

The claimant subsequently fell out with his partners and wanted to extricate EGH Ltd from the joint venture.

The defendants erroneously advised him that he could sell his shares in EGH Ltd without triggering the rights of pre-emption.

Facing profound financial difficulties EGH Ltd sold its shares in the joint venture company to T Ltd for a nominal sum and was placed in administrative receivership.

The claimant brought a claim in negligence against the defendants.Richard Deighton (instructed by Cooper Carter Claremont, Hailsham) for the claimant.

Edwin Johnson (instructed by Thomson Snell & Passmore, Tonbridge) for the defendants.Held, giving judgment for the defendants, that the court could infer that a duty of care was owed to the claimant from both the close relationship between the claimant and his company and the fact that the defendants had witnessed the claimant sign a shareholders' agreement both on behalf of the company and in a personal capacity with full knowledge that the claimant had received no separate legal advice; that the defendants therefore regarded themselves to be the claimant's solicitor in relation to those parts of the joint venture transaction which had an impact upon the claimant personally; that the defendants had negligently failed to advise the claimant as to the effect of the 'change of control' provisions governing the joint venture; but that the claimant would probably have entered into a shareholders' agreement on substantially the same terms even if he had been properly advised; and that in any event the claimant had suffered no recoverable loss because the diminution in the market value of the claimant's shares in the company was a reflection of the loss suffered by the company and was not a loss personal to him.