In the recent case of Cutlers Holdings Limited v Shepherd & Wedderburn LLP the former owners of Sheffield United Football Club ("SUFC") took action against the lawyers who advised on an agreement to sell the club and its assets. While the court found that the lawyers had provided negligent advice, it did not accept that the negligent advice had caused any loss to the former owners.

Background

Shepherd and Wedderburn LLP ("S&W") were instructed by the owners of Sheffield United Football Club (Cutlers Holdings Limited - formerly Sheffield United Limited ("SUL")) to draft an investment and shareholders' agreement relating to the purchase of shares in the club by a new investor. As part of the process of seeking investment, the ownership of the club was divided and new subsidiary, Blades, was created to which SUL's shares in Sheffield United Football Club ("the Club") were transferred. The club properties, including the football stadium (the Stadium) and training ground, (together "the Properties") were retained by SUL. The intention was that the Properties would be resold to the club once investment had been made.

SUL and an investor, UTB, subsequently entered into an Investment and Shareholders' Agreement (ISA), which provided for UTB to invest £10 million over a period of two years in return for 50% of the shares in Blades.

Clause 9.1.12 of the ISA detailed that, if any shareholder acquired 75% of Blades, Blades would then be required to exercise call options it had on the Properties of SUL ("the Property Options").  A mechanism for valuing the Stadium – following exercise of the Stadium Option – had been negotiated between SUL and UTB. However, shortly before the ISA was finalised S&W agreed an amendment to the valuation assumption to be used in the Stadium Option. The amendment was requested by UTB and S&W did not seek SUL's approval before agreeing to it.

Clause 11 of the ISA provided that either shareholder could exercise a 'Call Option' to purchase the shares of the other, by serving a notice which stated the option price. The other shareholder could then either accept that offer, or choose to buy out the offeror's shares at the option price instead. Clause 11.9 allowed the purchasing shareholder to instruct those shares to be transferred to a third party rather than to the purchasing shareholder on completion.

The relationship between SUL and UTB subsequently soured. SUL took steps to end the joint ownership of SUFC and offered to buy UTB's shares for £5 million by serving a Call Option Notice under the ISA. SUL anticipated that UTB would not be in a position to purchase the Properties at that time and that UTB would not be able to issue a counter-notice to purchase the shares as a result. Unfortunately this did not prove to be the case. 

UTB went on to serve a counter notice, offering to purchase SUL's shares for the same price. To avoid having to exercise the property call options, UTB transferred 80% of its shares in Blades to a new group company and directed the same to happen to 80% of the shares being purchased from SUL.

UTB issued proceedings seeking to enforce the purchase of SUL's shares. In response, SUL asked the Court to declare that the contract was void or to set it aside and require UTB to sell its shares to SUL instead.

The court held that UTB was entitled to enforce the purchase contract in accordance with the ISA, SUL was required to sell its shares to UTB at the price offered. However, the court did not accept that UTB's transfer of shares in Blades to a new company worked so as to allow UTB to avoid having to purchase the Properties under the Property Options. There was an implied term in the ISA that a shareholder would not wilfully obstruct the reunification of the club with the Properties pursuant to clause 9.1.12 - where that would otherwise take effect under the ISA.

At an arbitration to determine the purchase price, the arbitrator used the Stadium valuation assumption included in the ISA. This meant that the amount awarded to SUL for the Stadium was £600,000 less than it would have been.

SUL brought a claim in negligence against S&W as a result. SUL argued, among other things, that S&W had been negligent;

  • in the drafting of the ISA. The wording of clause 9.1.12 allowed UTB to gain control over the shareholding without exercising the Property Options – which had not been the intention;
  • in the drafting of the Stadium Option, they should not have agreed to the amended valuation assumption without discussing and agreeing it with SUL; and
  • in failing to identify the issue with the wording of clause 9.1.12 and advising SUL that there was a risk the shares could be purchased by UTB without the Property Options being exercised. As S&W drafted the documents in question, they were in a position of conflict and should have instructed SUL to secure independent advice.

Chancery Court decision

Mrs Justice Bacon held that S&W had breached its duty to SUL and had been negligent.

Drafting the ISA

A 'reasonably competent' solicitor should have identified that the drafting allowed UTB to gain control of the shareholding but avoid exercising the property option. S&W should have realised the error and suggested amendments that would have avoided the situation. However, the court also found that the express wording of clause 9.1.12 did not frustrate the intention of the clause; it was open for the court to imply a term requiring the property option to be exercised – to ensure the reunification of the club with the Properties as intended by the agreement. Therefore, S&W's negligent drafting of the ISA had not caused any loss.

Even if UTB had agreed to a re-draft the evidence indicated that UTB would have still served a counter-notice to SUL's call option and there would have still been litigation, and if UTB would have objected to the re-draft, it is likely SUL would have accepted the position to ensure the deal could be completed. The position would have been no different.

Drafting of the stadium option

S&W had been negligent in agreeing to the amendment to the valuation assumption without discussing it with SUL. The lawyer dealing with it had not been a property valuation expert and S&W should have sought further instructions from SUL.

S&W's negligence had not, however, caused any loss.  Mrs Justice Bacon accepted the evidence before the court that had S&W raised the amendment with SUL, SUL would have conceded the point to ensure the deal with UTB completed. SUL had done this with almost all of UTB's previous demands.

2017 advice

S&W were negligent in failing to advise SUL that UTB was in a position to use permitted transfers under the ISA to avoid exercising the Property Options. Mrs Justice Bacon did not accept that had they received such advice, SUL would have increased the offer price for UTB's shares when issuing the Call Option Notice as SUL alleged. The court accepted that the same offer would have been made by SUL even if advice on the share transfer options had been given. Again, S&W had not caused SUL to suffer any loss.

Conflict of interest

Once it became clear in January 2018 that UTB were intending to serve a counter-notice and avoid exercising the property call options by transferring shares, S&W had known that was likely to be a problem with the clause it had drafted and the advice it had given. The firm had not advised SUL of this conflict of interest or that SUL should seek independent advice. S&W had been negligent.

Mrs Justice Bacon held that SUL had failed to establish that the outcome of the litigation would have been any different had SUL been advised by different solicitors. As a result S&W's negligence had not caused SUL any loss.

Comment

While S&W may not have been liable to pay damages to SUL in this case, the situation could easily have been very different. The case illustrates a need to ensure careful drafting – to make sure that a contract works to meet the intentions of all parties and that there is no scope for ambiguity.

The case also provides a helpful reminder that even if a party has been negligent, any claim made in respect of that negligence will fail unless the 'wronged' party has suffered damage. Evidence will be required to illustrate what a party would have done if the negligence had not happened. If clear evidence is not given that the wronged party would have acted differently, claiming damages will be very difficult.

Clearly the best solution is to ensure the contract is right at the outset!

For any questions regarding this article, or for more information regarding negligence or dispute resolution, please contact Emma Carr, Sarah Gray or Teresa Edwards or visit the Dispute Resolution page.