Firstcity Insurance Group Ltd, and Another v Orchard (Sued as a Firm) and Another

Mr Justice Forbes

: Technically the first-named Claimant is the Holding Company of the second-named Claimant. As a matter of convenience, for the purpose of these proceedings, the two companies can be regarded as a single entity engaged in the business of insurance broking and to whom I shall hereafter refer collectively as "FirstCity". These proceedings are concerned with an allegation of professional negligence made by FirstCity against the Defendants, who were respectively its Solicitors and Leading Counsel who had the conduct of an action in the High Court on its behalf during the period June 1995 to December 1997 (hereafter referred to as "the underlying proceedings").

The central allegation in the present proceedings is that each of the Defendants failed to plead or argue or give appropriate advice with regard to a particular point of construction that, it is said, would have yielded FirstCity a straightforward and inexpensive victory in the underlying proceedings.

The issue in the underlying proceedings was whether FirstCity was bound to take from the Frizzell Group Limited ("Frizzell") an underlease of premises at 14–22 Elder Street, London E.1. ("the Property") pursuant to the terms of an Agreement dated 17 ^th December 1992 ("the Agreement"). The Agreement formed part of a management buy-out of part of an insurance broking business by FirstCity from Frizzell, which was itself in the course of being taken over by Marsh and McLennan Companies Inc. Apparently Marsh and McLennan only wanted to acquire those companies in the Frizzell Group that were engaged in financial services, not those engaged in insurance broking. The insurance broking subsidiaries were therefore demerged so as to form an independent group outside the Frizzell Group. The demerged companies consisted of, or included, the two claimant companies, which then had different names.

At an early stage in the transaction, the terms of the underlease which FirstCity was committed to take under the terms of the Agreement were perceived to be disadvantageous and the Property itself to be unattractive. FirstCity therefore decided to try and escape the strict terms of its contractual obligations—either by negotiation or by litigation or by a combination of the two methods. To that end a critical question was identified, namely whether certain refurbishment works at the Property ("the Works") had been completed (as defined by the terms of the contract) prior to the 24 ^th December 1995 which, under the terms of clause 15 of the Agreement, was the deadline date for completion (often referred to as "the drop dead date").

So it was that, in the underlying proceedings, the Defendants (as FirstCity's lawyers) raised a number of issues known as "the clause 5 issues". Broadly stated, the essential contention was that Frizzell had failed to consult FirstCity with regard to the Works in a number of respects, as required by the terms of the Agreement, with the result that the Works had never been defined and thus, inevitably, could never be and were therefore not completed prior to the deadline date for completion of the Agreement.

The underlying proceedings duly came on for trial before Ferris J in October 1996. In the judgment which he handed down on 26 ^th November 1996, the judge rejected FirstCity's Clause 5 arguments. Thereafter, FirstCity appealed to the Court of Appeal, again on the basis of the Clause 5 arguments.

The hearing in the Court of Appeal commenced on the 11 ^th November 1997 before Butler-Sloss, Morritt and Ward LJJ. However, at a very early stage of the hearing the Court itself raised an entirely new point. It was suggested that, on a proper construction of Clauses 1 and 8 of the Agreement, the determination which had been given by an independent surveyor as to the practical completion of the Works had been too late to permit completion of the Agreement by the deadline date of 24 ^th December 1995. The effect of this particular construction of the material terms of the Agreement was that the written notice dated 15 ^th January 1996, which FirstCity had given pursuant to Clause 15, was effective in determining the Agreement after all.

After this dramatic intervention, the hearing was adjourned to the following morning to allow time for the drafting of the appropriate amendments to the Notice of Appeal and to allow both parties to take stock. At the resumed hearing, Counsel for Frizzell made a number of submissions against the point (including whether the point could be argued at all), all of which were rejected. The appeal was allowed on the basis of the new point alone. The merits of the Clause 5 arguments were therefore not canvassed or considered in the appeal. As will become apparent from my detailed account of the facts, the same construction argument, which proved to be decisive in the Court of Appeal, had actually been suggested by the Chief Executive of FirstCity, Mr Clive Davis (hereafter referred to as "Mr Davis"), in a memorandum that he wrote to his own lawyers on 4th December ("the 4th December memorandum"). However, both Solicitors and Counsel had rejected the argument and it had not formed any part of FirstCity's case in the underlying proceedings. The appeal was allowed on the basis of the new point, the unanimous judgment of the Court of Appeal having been given by Morritt L.J.

Although FirstCity had been successful in the appeal and thus was no longer obliged to take the underlease of the Property, it was penalised in costs, because the decisive point had not been taken before. In the event, the Court of Appeal ordered that FirstCity was to pay 75% of Frizzell's costs of the trial before Ferris J and that Frizzell was to pay only 50% of FirstCity's costs of the appeal. The financial consequences of these adverse orders for costs form the basis of FirstCity's claim for damages for the loss and damage that it is said to have suffered as the result of the Defendants' negligence. For its part, the First Defendant has a counterclaim for outstanding fees in the sum of £174,167.66, plus interest. The amount of the counterclaim is admitted, but is subject to such damages as FirstCity are successful in recovering if its claim against the First Defendant is successful.

To a very large extent, the facts of this matter are not in dispute. However, before giving a detailed account of the relevant facts as I find them to be, I propose to set out the material terms of the Agreement and the main points of the judgment of Morritt L.J.

The Agreement of 17 ^th December 1992. So far as material, the terms of the Agreement were as follows:—

"…..DEFINITIONS AND INTERPRETATION

1. In this Agreement the following expressions shall save where the context otherwise requires have the following meanings:

….

Additional Works means the works (if any) which the Tenant requires the Landlord to carry out in accordance with the provisions of clause 5.4 of this Agreement;

…

the Completion Date means 5 working days after the Works Completion Date;

Compulsory Works means the works of repair refurbishment and alteration of the Property referred to in the Schedule or such of them as shall be set out in the Final Specification;

Compulsory Works Limit means nine hundred and fifty thousand pounds (£950,000);

…

the Works means the compulsory Works and the Additional Works;

Works Completion Date means the day four Working Days after the Landlord has served notice on the Tenant pursuant to clause 8 or if the Tenant serves notice under clause 8 the later of the date on which the Tenant is satisfied that the works specified in its notice have been completed or the expert determines that the Works have been practically completed pursuant to clause 8(N.B. it was common ground in these proceedings and in the Court of Appeal that the word "later" in this definition was an error and that it should have been and should be read as "earlier");

Working Day means any day (not being Saturday) on which the clearing banks in London are open for business;

…

GRANT OF THE UNDERLEASE

3.1 The Landlord shall grant and the Tenant shall accept the Underlease on the Completion Date.

…

SCOPE OF THE WORKS

5.1 The Landlord shall within 6 weeks of the date hereof:

5.1.1 appoint the Consultants on terms to be approved by the Tenant (such approval not to be unreasonably withheld or delayed);

5.1.2 use reasonable endeavours to provide:—

(a) detailed plans and a specification of the Compulsory Works;

(b) the Cost Statement.

5.2 In the event that the Cost Statement shows the estimated Total cost is in excess of the Compulsory Works Limit the Landlord shall make such amendments to the plans and specifications as are necessary to ensure that the Total Cost is not more than the Compulsory Works Limit taking into account any representations made by the Tenant within the Response Period.

5.3. In making the amendments referred to in clause 5.2 the Landlord hereby agrees that it will ensure that (in so far as possible within the Compulsory Works Limit) the amended plans and specifications include sufficient works to comply with its repairing obligations under the Headlease as at the date hereof.

5.4 Subject to the following provisions the Tenant shall be entitled to...