Tube hits Freshfields with £140m-plus negligence claim
London Underground sues magic circle firm over Metronet advice
Freshfields Bruckhaus Deringer is set for a High Court showdown with London Underground Ltd (LUL) after the company launched a £141.96m claim against the firm.
The claim was originally for £178.5m, but LUL managed to recoup £36.54m from other sources. It is, however, aiming to recoup from Freshfields the costs it incurred while negotiating that repayment. It is also claiming interest.
The claim, launched by Ince & Co partner Andrew Ottley, relates to advice the firm gave on LUL’s PPP with the now defunct Metronet.
Mayer Brown London senior partner Sean Conn-olly has been instructed for Freshfields, with One Essex Court’s Laurence Rabinowitz QC retained.
He will go head-to-head with Brick Court Chambers’ George Leggatt QC, who is advising LUL on the claim.
LUL claims that Freshfields was negligent in the drafting of contracts relating to the PPP deal, costing it £178.5m.
Freshfields won the mandate to advise LUL in 1998, with corporate finance partner Richard Philips and project finance partner Jeffrey Rubinoff leading.
In April 2003 LUL entered into a PPP with Metronet for the renovation of seven underground lines. Together they created special purpose companies so that ownership of the lines would pass to Metronet when the renovation work was complete.
When financing was agreed with the special purpose companies’ banks, LUL entered into put option agreements on the bonds issued as part of the fundraising. These agreements stipulated that if any of the special purpose companies were to become insolvent, LUL would purchase their debt. When the companies went into administration in July 2007, LUL had to pay £1.74bn in respect of that debt.
LUL claims that the sum would have been much lower if it had been allowed to simply repay the bonds at their market price. It claims that a drafting error approved by Freshfields without reference to LUL meant it had to pay out on the put options instead.
The put option price was significantly higher than the actual value of the bonds at that time.
A Freshfields spokesperson said: “We totally reject the claim and we’ll be defending it vigorously.”
An LUL spokeswoman confirmed the action, but declined to comment further.
Freshfields earned £30m from LUL over a five-year period. The relationship came to an end in 2003, when LUL switched to Herbert Smith.
Readers' comments (9)
Alan Shore | 25-Jul-2011 9:55 am
Can anyone tell me whether there is a set date for the hearing?
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Anonymous | 25-Jul-2011 12:14 pm
Another example of how crucial infrastructure projects in the UK are over-lawyered and over-complicated. The transaction documents are horribly complex, in part due to an absurd number of defined terms.
How many different sets of lawyers will feast on this project from start to finish? Dozens. It's good for lawyers, but another poor deal for the taxpayer.
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Anonymous | 25-Jul-2011 12:24 pm
Seems like a can't miss case to watch. Is there any chance someone knows the dates of the hearing ? Or is it too early to ask.
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Anonymous | 25-Jul-2011 1:20 pm
Calm down, everyone! I understand Freshfields have not even served a defence yet, so we are looking at mid to late 2013 for any trial - if there ever is one. Which (notwithstanding the formulaic vigorous denial of liability) must be regarded as unlikely if Freshfields did cock up the documentation (as the above appears to suggest). Far more likely is a confidential, eight-figure carve-up at a mediation at some point during 2012.
Another thing: I wonder why Herbies relinquished a case as big as this to Inces...
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Client error | 25-Jul-2011 3:35 pm
We don't have the full details, but this seems like a client error, not a lawyers error. A put option could be at (i) par value, (ii) par + interest, (iii) outstanding debt, or (iv) market value. No sane minded investor would agree to (iv), as the market value degrades rapidly as the credit deteriorates, making the put option worthless. Even if LUL can show there was no express instruction on the point, I doubt they can show that they would have negotiated better.
Now if the put option requires LUL to pay par when the debt has already been paid down (i.e. over 100 cents in the dollar), that might be a grounds for negligence.
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Kim Philby | 25-Jul-2011 4:58 pm
Mind the gap!
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AnotherLawyerWhoKnowsTheBackground | 25-Jul-2011 10:54 pm
The problem was that the put option required LUL to purchase for par plus breakage when the bonds were repayable only at par. Does seem like a mistake, but could have been LUL's, Freshfield's or someone else's...
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Anonymous | 27-Jul-2011 10:28 am
I guess the moral of this story is - whatch out when drafting contracts !!
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Anonymous | 1-Aug-2011 10:53 pm
....and also watch your spelling too! (Whatch?)
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