The case involved the meaning of a clause in a partnership agreement between two partners, who ran a business farming and selling soft fruit. One of the partners wanted to retire. It was open to the continuing partner under the agreement to opt to purchase the retiring partner's share of the business, rather than allow the partnership to be dissolved. One question that arose was, if the continuing partner did exercise that option, would the goodwill of the business be included in the valuation of the retiring partner's share?
The solicitors acting for the continuing partner advised that a goodwill payment would not be included if he exercised this option, having regard to the timing of the retiring partner's notice that he wished to retire and the wording of the partnership agreement. They also advised that, if a goodwill element were included, only the earlier years of the business would be taken into account, so the goodwill element was likely to be a negative figure. They took counsel's advice on the point, and counsel confirmed their view. The continuing partner then went ahead and exercised the option to purchase the retiring partner's share.
However, the retiring party disputed the continuing partner's view on the goodwill point, and this dispute went to arbitration. The arbitrator decided that goodwill should be included in the valuation of the retiring partner's share and that the most recent financial year should be taken into account. The continuing partner was therefore ordered to pay a much larger sum to the retiring partner than he had expected to.
The continuing partner sued the solicitors and the counsel for giving bad advice. The issue was whether their advice had been such as any reasonably competent solicitor or barrister could have given, not whether it was right or wrong. The judge decided this point in the solicitors' and barrister's favour. In fact, he said that in his view the advice had been correct all along (although there was nothing he could do to change the arbitrator's award).
Consultants should think whether they need to advise a client that the advice that they are giving may be wrong
The matter did not end there, however. The judge went on to say that solicitors and barristers remain under a duty to warn about the risk of their advice not being accepted by an appropriate court or tribunal. This effectively amounts to a duty to advise that, while the advice you have offered has been given with reasonable care, it may be wrong, and even to advise as to the chances of it being wrong! On this point, the judge found that the solicitors had passed on to the continuing partner an assessment given by the counsel that there was a 60-70% chance of success if the matter were referred to an arbitrator, and so they did give a warning of a substantial risk of the advice not being upheld.
This sort of situation may be of particular relevance to solicitors and barristers, whose advice will often be tested by a court or other tribunal.
But consultants in other professions may face a similar situation. For example, architects may advise on whether planning permission based on their designs will be granted and engineers may advise that, in their opinion, their designs comply with Building Regulations. That advice may be given with reasonable care but a court or tribunal may later decide that it was incorrect.
Rachel Barnes is a partner in solicitor Beale & Company, www.beale-law.com.