Accountancy Newsletter February 2015
DAC Beachcroft's Accountancy newsletter features topical news and insights for our clients and contacts.
Published 1 March 2016
Although a claim against a firm of solicitors, the Harding Homes v Bircham Dyson Bell decision is of significance to accountants and financial professionals, because of the rulings made as to the burden of proof and the evaluation of the chance said to have been lost by the professional's negligence.
The defendant solicitors were instructed by Harding Homes to act in respect of a £9.5 million loan obtained from GMAC-RFC Property Finance (GMAC) to finance a residential development in Colchester.
The second to fourth claimants each provided a personal guarantee to GMAC for Harding Homes' liabilities in relation to the development. Although the guarantee was titled "Interest shortfall and cost overrun guarantee", the Defendant failed to notice that the version executed included (in error) a wider clause providing for an all-monies guarantee.
The Claimants failed to comply with the loan agreement and GMAC served a Notice of Default. Negotiations were unsuccessful and GMAC served a demand on the claimants based on the all monies guarantee for the £8.9 million owed by Harding Homes. Further negotiations resulted in the execution of a forbearance agreement and eventually a full and final settlement. Payments of approximately £4.3 million were made to GMAC.
The Claimants claimed that, as a result of the solicitors' negligence, they had lost the opportunity to obtain a more favourable outcome from their negotiations with GMAC, both as to the sum to buy GMAC out and as to profit on the development, and they sought damages. The solicitors admitted they had been negligent, but denied the existence of the all-monies clause in the guarantee had any material effect on the claimants' negotiating position.
To succeed, the Claimants needed to prove that, if there had been no breach of duty by the solicitors, they would have acted differently and negotiated a better settlement at £2–3 million. Further, that there was a real and substantial (not merely speculative) chance that GMAC would have agreed to sell the site for £2 or £3 million, and the claimants would have obtained funding to enable such agreement to take place.
The Judge also held that the evidential burden fell on the solicitors to show there was no causal link between their negligence and the alleged loss.
The Judge decided that although the Claimants would have conducted the negotiations differently had the all-monies guarantee not been mistakenly included, they had not demonstrated they had lost a real and substantial chance to negotiate a different resolution with GMAC, which would have resulted in a better outcome, nor that there was a reasonable and substantial chance of obtaining the necessary funding.
As the prospects of success were negligible, causation had not been made out. Accordingly only nominal damages were awarded on account of the solicitors' breach of duty.
Where the decision is of interest beyond solicitor negligence cases is in the Judge’s application of the principles set out in Mount v Barker Austin (1998) when holding that the evidential burden fell on the professional to prove there was no causal link between its negligence and the loss. He also held that the Claimant should be given the benefit of any doubt when assessing damages. The Mount decision and the cases following it were all cases where the solicitors' negligence had led to the loss of chance to pursue litigation. By acting for the client in the litigation, the solicitor therefore impliedly believed the litigation had value, and that the evidential burden should therefore be on the solicitors to prove that it did not.
The solicitors here argued a loss of chance in litigation was quite different to a loss of chance in commercial negotiations where there is no presumption the client would achieve a better result in negotiation than was in fact achieved. By extending the Mount principles to a loss of chance in commercial negotiation, the Judge appears to have made new law. This could have a significant impact on the outcome of claims against accountants, and other financial professionals where allegations of negligent advice in relation to commercial transactions are made. Many such claims succeed or fail due to the quality of the evidence given at trial and the burden of proof in those cases can be crucial to the result.
The case involved multiple contingencies. The Judge ruled it would be wrong to mechanically discount the value of the lost chance by applying percentage upon percentage when assessing the chance lost, and instead the chances of the various contingencies happening should be looked at in the round. This too is likely to produce a more favourable result for claimants if widely adopted.