Revealed: Freshfields and Herbert Smith Freehills settle £140m London Underground claim

Freshfields Bruckhaus Deringer and Herbert Smith Freehills (HSF) have avoided a £140m court showdown with London Underground (LUL) after settling a professional negligence case just weeks before it was due to be heard.

The case, thought to be among the largest ever filed against a City firm, was due to be heard over four weeks in October with London Underground bringing in Ince & Co partner Charlotte Davies and Justin Fenwick QC of 4 New Square to lead the battle.

The Lawyer revealed in July 2011 that Freshfields had been hit with the suit, which was originally for £178.5m, but was reduced after LUL managed to recoup £36.54m from other sources (25 July 2011).

Legacy Herbert Smith, which was named as a second defendant in the suit a year later, had vowed to “vigorously defend” the claim, which centred on advice provided by the firms to the company on its 2003 public-private partnership (PPP) deal with collapsed transport company Metronet (28 November 2012 ).

Freshfields had instructed bar heavyweight Tony Grabiner QC of One Essex Court to lead the defence (8 July 2013 ), while Herbert Smith turned to Fountain Court’s Tim Dutton QC.

At issue were claims by LUL that the firms were negligent in their advice relating to its 2003 PPP with collapsed transport company Metronet. In April 2003 LUL entered into a PPP with Metronet for the renovation of seven underground lines. Together they created special purpose companies so ownership of the lines would pass to Metronet when the 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 claimed the sum would have been much lower if it had been allowed to repay the bonds at the market price. It alleged that a drafting error approved by the firms without reference to LUL meant it had to pay out on the put options instead.

The terms of the settlement have been kept confidential. A statement from HSF said: “Transport for London, Freshfields Bruckhaus Deringer and Herbert Smith Freehills have agreed to end the litigation concerning legal advice relating to Metronet’s borrowings under the PPP.

“All parties involved are pleased to have resolved this dispute without the need to go to trial. The terms of settlement are commercially confidential.”