The perils of advising on contracts

perilA recent case in the English High Court illustrates several points: the need for care when advising on contracts; that proving negligence based on oral advice is difficult; that failing to meet the required standard of care doesn’t give the client a blank cheque for all commercial losses, some of which might have been incurred even if perfect advice had been given; and that people can be obstinate and spend far more on bringing a claim than is justified. Oh, and that coy references to a “former CEO” who is referred to repeatedly in the judgment but not named are fairly pointless in an era of online social media.

The case of Commodities Research Unit International (Holdings) Ltd & Or v King & Wood Mallesons LLP [2016] EWHC 727 (QB) (05 April 2016) was reported on BAILII last week. King & Wood Mallesons, formerly known as SJ Berwin LLP, had advised on the termination of the employment contract of an unnamed “former CEO”. (Hint: if you search on LinkedIn for CEO CRU Group, the identity quickly becomes clear: the individual in question has publicly stated his former employment at that company and the dates on which he was employed.)

Various allegations of negligence were made against Berwins, including allegations that advice was given in meetings. All of the allegations were dismissed except for one. CRU Group sent Berwins the employment terms of the CEO and asked for advice.

UK employment lawyers will be aware of the legal implications of including a clause in the employment contract that allows the employer to terminate immediately and make a payment in lieu of notice, sometimes known as a PILON clause. For reasons that need not concern us here, the omission of the clause potentially affects the enforceability of post-termination restrictive covenants as well as the tax treatment of severance payments. In the present case, the presence or absence of a PILON clause affected the date on which termination of the employment occurred, and whether certain rights under a long term incentive plan vested by that date.

no pylonesThe employment terms that were sent to Berwins did not include a PILON clause, and Berwins advised on that basis. However, the terms that they saw included a reference to “the company’s general terms of employment” which they failed to notice. At a later time, after the advice was given and used, the general terms of employment were identified, and they did include a PILON clause.

The court held that Berwins had been negligent in failing to pick up on this reference and ask for a copy of the general terms of employment at the time they advised.

The advice was used by CRU Group when negotiating an exit agreement with the CEO. In light of the commercial pressures of the negotiations, it might not have made any difference if CRU Group had received correct advice on this point. The court held that there was a 35% chance that, if correct advice had been given, the financial terms of settlement would have been more in CRU Group’s favour, to the tune of £337,500. On that basis, the court awarded 35% of £337,500 to CRU Group, or £118,125.

CRU Group had been claiming a much larger sum, well over £2,000,000, including the costs of litigation with the former CEO of nearly £1,000,000. IP Draughts wonders what the costs of the present case were, which involved 5 days of court hearings and the use of leading counsel on both sides, not to mention the professional witnesses who included leading counsel who had advised on the litigation with the CEO. He suspects that an award of £118,125 may be close to a Pyrrhic victory.

IP Draughts is left speculating why Berwins failed to pick up on the reference to general terms of employment. The responsible partner (Nicola Kerr) had, according to the judge, “a very high reputation as a solicitor providing advice on employment matters”. Was the omission caused by the partner relying on an advice memo from a junior associate, less than 2 years qualified (it appears, from another LinkedIn search) at the time? Was it because the client was apparently extremely difficult, and would not have reacted well to being asked to produce further documents? Was it because the employment terms were set out in various crappy documents, for which Berwins were not responsible, and which may not have been consistent with one another, so that a reference to other terms could well have been a drafting mistake?

Whatever the reason, this case shows the importance of “pushing back” to the client and either demanding further documents where they appear to be relevant, or making clear that advice has been given without the benefit of seeing them.

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Filed under Contract drafting, Employment

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