Wellesley Partners LLP v Withers LLP

Factual and Procedural Background

This opinion concerns appeals by both parties from a judgment in a professional negligence action concerning the drafting of a partnership agreement. The Plaintiff, an executive search consultancy specialising in investment banking, engaged the Defendant, a firm of solicitors, to draft amendments to its partnership agreement to facilitate new investors, including a bank investing capital in return for a partnership interest. The Defendant negligently drafted a clause permitting an investor to withdraw capital earlier than instructed, leading to the investor exercising this option prematurely. This caused financial loss to the Plaintiff, who was unable to finance planned business expansion, particularly in the United States. The Plaintiff brought a claim for damages based on this negligence. The trial judge found negligence and awarded damages. Both parties appealed on various grounds including the applicable test for remoteness of damage and the application of the "loss of a chance" principle in assessing damages.

Legal Issues Presented

1. What is the appropriate test for remoteness of damage where a claimant has concurrent causes of action for pecuniary loss in tort and contract?
2. How should the "loss of a chance" principle be applied to the assessment of damages in this context?
3. Whether the Defendant was negligent in their conduct on 3 February 2009 relating to advice about the exercise of the investor's option?
4. What is the proper approach to causation and quantification of losses associated with diversion of the Plaintiff's principal's time?
5. Whether the Plaintiff's claim for lost profits from US expansion was properly assessed and quantified?

Arguments of the Parties

Defendant's Arguments

• The test for remoteness of damage in cases of concurrent liability in tort and contract should be the contractual test, not the broader tortious test, to avoid anomalous results.
• Reliance on authority and academic commentary supports applying the contractual test when the parties are in a contractual relationship.
• The Plaintiff's claim for lost profits arising from the US expansion was too remote under the contractual test because the specific opportunity (Nomura mandates) was not reasonably contemplated at contract formation.
• The "loss of a chance" principle should apply to the assessment of damages, reflecting the uncertain prospects of obtaining the US business.
• The Defendant was not negligent in their conduct on 3 February 2009 because no advice was sought regarding the origin of the drafting error and no duty arose to investigate or disclose it.
• The judge's assessment of the chance of the Plaintiff obtaining the US mandate was a proper evaluative judgment not to be disturbed on appeal.
• The Plaintiff failed to demonstrate that the diversion of the principal's time was caused by the Defendant's negligence to the extent claimed.

Plaintiff's Arguments

• The Plaintiff is entitled to rely on the tortious test for remoteness, which is broader and more favourable, reflecting concurrent causes of action.
• The contractual test does not exclude recovery for the US losses, which were within the reasonable contemplation of the parties as arising from the withdrawal of capital.
• The judge erred in characterising the US loss of profits claim as a "loss of a chance" claim and in discounting the chance of obtaining the US mandate to 60% instead of 100% or a higher figure.
• The Defendant was negligent on 3 February 2009 by failing to correct the erroneous impression that the investor was responsible for the drafting error, which led to a breakdown in trust and further losses.
• The judge erred in limiting damages for diversion of the principal's time to one month; a significantly longer period should be compensated as the losses flowed from the Defendant's negligence.

Table of Precedents Cited

Court's Reasoning and Analysis

The court carefully analysed the distinction between the tests for remoteness of damage in contract and tort, particularly in the context of concurrent liability. It acknowledged the traditional broader scope of tortious liability but concluded that where tortious liability arises from an assumption of responsibility under a contract, the contractual test for remoteness should apply. This is because the parties have the opportunity at contract formation to define risks and liabilities, and it would be inconsistent to allow a broader tortious scope to upset that contractual consensus.

The court reviewed the factual background, noting that the Defendant was instructed to draft a clause preventing early withdrawal of capital by an investor, which was negligently drafted to allow early withdrawal. It was reasonably foreseeable and within the scope of the contractual assumption of responsibility that such a withdrawal would frustrate the Plaintiff's expansion plans, including into the US market.

The court rejected the Defendant's argument that the specific lost opportunity represented by the Nomura mandates was a different kind of loss, analogous to special contracts in Victoria Laundry or the forward charterparty in The Achilleas. Instead, it held that the loss was of the same kind as contemplated by the parties, being lost profits from overseas expansion funded by the investor's capital.

Regarding the "loss of a chance" principle, the court distinguished between causation and quantification, holding that the Plaintiff had to prove on the balance of probabilities that it would have opened a US office (causation), but the chance of obtaining the Nomura mandates was a matter for quantification of damages. The judge had correctly reflected this chance in his award.

The court found that the Defendant was negligent in failing to correct the erroneous impression on 3 February 2009 that the investor had introduced the drafting change, which caused a breakdown in trust and additional losses. This negligence justified increasing the damages awarded for the diversion of the principal's time from one month to four months.

Overall, the court affirmed the trial judge's findings on negligence and damages, except for the additional negligence found on 3 February 2009 and the corresponding increase in damages for diversion of time.

Holding and Implications

The court ALLOWED in part and DISMISSED in part the appeals.

The key holding is that in cases of concurrent liability in contract and tort arising from professional negligence, the test for remoteness of damage should be the contractual test of reasonable contemplation, not the broader tortious test of reasonable foreseeability. The Plaintiff was entitled to damages for losses caused by the Defendant's negligence in drafting the partnership agreement, including the loss of chance to obtain US business, with damages properly reflecting the chance of success.

The court also held that the Defendant was negligent in failing to correct a material misimpression on 3 February 2009, increasing the damages for diversion of the Plaintiff's principal's time.

The decision clarifies the application of remoteness principles in concurrent liability cases and reinforces the distinction between causation and quantification in loss of a chance claims. No new precedent was set beyond applying established principles to the facts.