On the face of it, the recent Chancery Division ruling that city-based firm Hextall Erskine is liable to pay £3.6 million in respect of negligent advice given to Silverstone Circuits Ltd (SCL) is a cautionary tale. The obvious moral: don't give wrong advice.
But there is another lesson to be learned, according to the litigation partner from Nabarro Nathanson who masterminded the case through to its successful conclusion.
Michael Hales said the case illustrated the danger to clients of winning an award for costs, but ending up out of pocket because the award is then taxed.
The case, in which Mr Justice Carnwath found against Hextall Erskine, involved a deal in which SCL – a subsidiary of the British Racing Drivers Club (BRDCL) – agreed to buy a half interest in a retail car business owned by the TWR Group.
Under section 320 of the Companies Act, approval for the £5.3 million deal was needed from members of BRDCL because Tom Walkinshaw, chair of SCL and a BRDCL director, was also chair and owner of TWR.
The bulk of BRDCL members are leading racing drivers or former racing drivers. But the deal was kept secret from them because many were involved in the car retail trade and it was feared they might have competing commercial interests. Hextall Erskine had advised that this would be legally possible. It took the view that, provided Walkinshaw declared his interest, it was not necessary for the other members to be consulted.
But the deal, aimed at raising cash for a £20 million investment in Silverstone, was firmly rejected by BRDCL members when they were finally consulted. And, as a result of litigation, the shares were sold back to Walkinshaw – for £2.1 million less than he paid for them.
Hextall Erskine admitted that its failure to advise on the need for approval was negligent. But it attempted to ward off the claim on the basis that the loss had been caused, not by its advice, but by the "flawed commercial judgement" of the BRDCL and SCL directors who had agreed to pay far too much for the shares.
But, in a significant ruling, the judge held that Hextall Erskine's failure was the "effective cause of the loss", rendering the firm liable for damages.
An earlier £3.2 million action brought by BRDCL and SCL against Walkinshaw and others had run up significant costs, which BRDCL and SCL had also sought to recover, untaxed, from Hextall Erskine. The judge awarded the costs but ruled they must be taxed, which could effectively leave them out of pocket.
Hales said: "This is a problem that can prove costly for clients. The profession needs to be alert to in order to warn clients of this.
"Fortunately, in this case the effect is minimal but in other cases it could be much more significant.
"In a wider context, the decision creates a tension between the concept of damages fully compensating clients and the special position of solicitors fees being subject to assessment by the courts through taxation. All of the other professional costs, including accountant's fees, were recovered by our clients in full."