Ethics: Read the fine print

A recent High Court ruling suggests solicitors are not obliged to inform clients of advantageous mistakes made by their opponent

In Tamlura v CMS Cameron McKenna, the High Court considered whether a solicitors firm is obligated to tell a client if, during a transaction, the other side makes a mistake which operates to the client’s advantage. In this article, we consider the court’s decision and the practical implications for solicitors.

In 2000, Tamlura instructed Camerons in connection with the sale of its share in Tamlura International Holdings to a company called The Innovation Group (TIG). TIG paid £40m for the shares; £21m of the consideration was to be paid in cash and £19m was to be paid by the allotment of shares in TIG representing that value. On completion, Tamlura received a cash payment of £21m and £15m worth of shares. The agreement made provisions for TIG to retain the remaining £4m, which represented the outstanding share consideration to meet any liabilities, indemnities and warranties for a two-year period following completion. The remaining £4m of shares was to be allotted two years later, when the extent of the liabilities would be known. 

The agreement stated that the number of shares passing to Tamlura would be determined by reference to the market value of the shares when the transaction completed (i.e. 2000), rather than the date on which the shares would be allotted. In the intervening years, TIG’s share price fell substantially. This meant that when the remaining shares were allotted in 2002, the market value of those shares was significantly less than the £4m which had been retained. 

Tamlura brought proceedings against Camerons and claimed over £3.9m in damages, representing the difference between the value of the shares, which Tamlura asserted it should have received, and the value of the shares which were actually allotted.  Tamlura claimed Camerons was negligent by failing to ensure that the agreement made provision for the deferred shares to be valued at the date of allotment instead of the date of completion.  Tamlura also claimed that Camerons had failed to explain the final version of the agreement, having been led to believe that the value of the deferred consideration was guaranteed when in fact the agreement allowed any risk, in an increase or decrease in the value of the shares between completion and allotment, to pass to Tamlura on execution of the agreement.

During the course of the contractual negotiations, Camerons had received a draft agreement from TIG’s solicitors which provided for the valuation of the deferred shares to be determined by reference to the allotment date. That version of the agreement did not accord with Tamlura’s instructions, nor with heads of terms which had been drawn up prior to drafting the agreement, which provided that the value of the shares was to be determined on completion.

Camerons therefore amended the agreement to ensure it accorded with both their instructions d the heads of terms. The key question, then, is was Camerons negligent in failing to inform Tamlura of the mistake which appeared in the draft agreement, in case Tamlura wished to take advantage of it?

The court held that no, Camerons had not been negligent.  The agreement which was ultimately reached had reflected Tamlura’s instructions, which were captured in both the heads of terms and in Camerons’ notes of the meetings with TIG’s solicitors.  Consequently, Camerons did not have a duty to tell Tamlura about the apparent mistake that appeared in the draft agreement, nor did Camerons have a duty to take advantage of that mistake, notwithstanding that the terms that were ultimately agreed later proved to be disadvantageous.  The court pointed out that had Camerons gone along with the mistake, the consequences of doing so could have been severe; it could have imperilled the transaction or resulted in a rectification action based on allegations of sharp practice by Camerons.

The decision suggests that the courts might be reluctant to impose a duty of care to inform a client of an opponent’s mistake that operates to the client’s advantage. This is particularly noteworthy, since rule four of the Solicitor’s Code of Conduct requires a solicitor to disclose to a client all information which is material to the client’s matter.  Although the judgment did not refer to rule four, one can assume that the mistake did not meet the materiality threshold as the parties’ instructions were clear. 

The court did, however, recognise that the position may have been different if there had been any ambiguity as to whether TIG’s solicitors had been proposing a change in the commercial aspect of the agreement. The court determined that this was unlikely since Camerons’ notes from the meetings with TIG’s solicitors before the agreement was finalised did not make reference to a proposed amendment to the mechanism for calculating the value of the deferred shares.

This claim arose from a corporate transaction, but a similar situation is foreseeable in other contexts. For example, where a solicitor amends a settlement agreement to lose an advantage which the client would otherwise have gained due to an opponent’s error. The decision is a victory for those who believe that professional values should be upheld, and at times be put ahead of the duties owed to a client. It is also a timely reminder of the need for solicitors to produce contemporaneous records of instructions, telephone conversations and meetings to ensure that parties’ intentions are properly recorded and solicitor-client disputes are avoided.  

Richard Harrison is a partner and Caroline Shaw an associate at Barlow Lyde & Gilbert.