In an era of consolidations and alternative business structures, solicitors beware!

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Fuller v Guillaumes Gosling and Wilkinson17.06.2011 (Mayors & City of London CC)

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Of Interest to Solicitor Partners and other Partnerships

The case shows the unforeseen risks, to solicitor partners looking at any type of restructuring or consolidation, particularly to those undertaking publicly funded work due to the vagaries of the workings of the LSC).  Restructuring being a hot topic in every legal, and now non-legal, corridor.

Although it was a first instance county court decision (Mayors & City of London), the arguments deployed use precedents binding on the High Court.

The Facts

F was 1 of 2 partners at a local solicitors practice, GW.  GGW is a local solicitors practice, the product of a merger of GW (Gosling and Wilkinson) and G (Guillaumes). F sought to secure continuity for his colleagues and arrange a dignified exit from practice after 33 years in his firm.  His firm had a not insignificant publicly funded practice.  The courtship between GW and G continued for a number of years with a view to a merger, which ultimately crystallised as the defendant, GGW, following:

  1. A signed heads of agreement to merge between GW and G into GGW INCLUDING provision for F to depart as a partner and be paid the balance of his capital account; and
  2.  A consultancy agreement between F and GGW INCLUDING provision for F to be indemnified by GGW against GGW debts/liabilities.

The merged firm, GGW, continued with GW’s legal aid contract, but sought to close it down, which triggered an audit by the LSC.  As a result of that audit, the LSC clawed back overpayments of legal aid that had been paid during the existence of GW through, as became apparent, negligent administration of the legal aid account by an employee of GW.  Although GGW had no option as the successor firm to pay the overpayments in the first instance, there remained the issue of who ought to be ultimately liable for them: the GGW or the GW partnership – no obvious provision had been made for such overpayments in the accounts of GW. Indeed, they did not feature at all in the negotiations or the heads of the agreement because everyone was ignorant of them.  The action came about when F claimed the balance of his capital account.  GGW admitted the substance of the claim but defended on the basis of set-off against damages for misrepresentation of the value of GW.

The Issues in Dispute

  • F had the benefit of an express indemnity per the consultancy agreement.  That argument failed: the indemnity related to his position as a consultant only and therefore related only to new debts/liabilities of GGW.
  • F had the benefit of an implied right to an indemnity per Partnership Act 1980.  That argument failed:  F was vicariously liable for his employee’s negligence and in consequence, in equity, he could not rely on the indemnity.
  • There was no misrepresentation.  That argument failed: accounts were provided per heads of agreement; the capital account effectively represented the net worth of F’s firm.  The price paid was based on those accounts.
  • The misrepresentation was innocent.  That argument failed: the misrepresentation arose from a failure to supervise staff properly, which amounted to negligent misrepresentation.  Whether negligent or innocent, damages were the appropriate remedy.
  • The misrepresentation did not induce the merger.  That argument failed on the facts: G would not have entered into the agreement at the same price, ‘but for…’

Other

  • F is entitled to depart from early admission: that argument failed: albeit the admission did not amount to a Part 14 admission, F should not be allowed to depart from it.  F is a solicitor with a core duty to act with integrity.  His admission was made with full knowledge of the claim.

A Word of Warning for those seeking Mergers, Restructures and ASBs

It is clear that both F (as a partner of GW) and G, entered into the transaction in good faith.  However, their on going relationship effectively fell victim to the vagaries of the public funding system, which practitioners will know can prove notoriously difficult to keep on top of.  However, this type of risk will not sensibly be limited to firms with a legal aid franchise.

In finding for the Defendant, GGW, the Judge White largely adopted Defence Counsel’s skeleton.  It was a clear indication of the court’s disapproval of a solicitor’s attempt to turn away from his liabilities.

The Claimant was represented by Mr Lawrence Jacobson of Counsel.  The Defendant was represented by Mr Timothy Concannon and Taj Uddin of Counsel (both of Guildhall Chambers Portsmouth).  If any reader has any questions on this case, they will be happily received @ taj.uddin@gcp-barristers.com.

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Taj Uddin, Barrister
Guildhall Chambers Portsmouth
Practising in London and the South (Salisbury to Brighton, Oxford to IoW)

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