You may hope that a long relationship with a law firm will ensure continuity of service. But if the firm merges or becomes a new legal entity, then watch out for what changes

A major reason clients invest so heavily in solicitors is to provide a safety net or insurance policy in case matters go wrong. The difficult step is deciding which of the myriad solicitors out there to use and why. For those in construction, that will probably involve deciding between, on the one hand, the small specialist firms, which claim to be cheaper, more friendly and more committed to the needs of those in the industry, and the bigger more broadly-based law firm that will no doubt promise strength in depth and that magic ingredient, continuity.

The spat going on between Shepherd Construction and Pinsent Masons LLP (“PM LLP”) in the High Court at the moment suggests that continuity was indeed high on Shepherd’s agenda when it made the decision in the late nineties to engage Masons, one of PM LLP’s predecessor firms, as its construction lawyer.

Over the first 10 years of the relationship Masons’ workload for Shepherd steadily grew. Over the same period Masons went through a merger and subsequently became a limited liability partnership. At each stage it seems that clients were assured of maximum continuity in terms of ongoing business and relationships.

The law clearly provided that new separate legal entities did not simply inherit responsibility for what their predecessors had done

One of the first tasks Masons undertook for Shepherd was to overhaul its subcontracts and get it in line with the recently implemented Construction Act. Clearly, this was a matter of updating its standard form subcontracts for future use. One of the matters Masons addressed was ensuring that Shepherd’s form reflected the provision in the legislation that banned pay when paid clauses save in the case of insolvency. The legislation provided a definition of insolvency for these purposes which included the making of an administration order.

In 2007 Shepherd was engaged by a developer on a shopping centre development and duly entered into a number of subcontracts using its standard form. When the developer went into administration Shepherd resisted payment demands from its subcontractors relying upon the pay when paid provision. William Hare applied to the court to have the provision declared unlawful using a “wrong kind of administration” argument. It transpired that the Enterprise Act 2002 had changed the law by introducing a new route to administration by resolution of the board of directors that was precisely the route that Shepherd’s client had adopted. The problem with Shepherd’s subcontract was that it had not been amended to reflect that change and this was sufficient to invalidate the provision.

Shepherd estimated its total losses resulting from losing its pay when paid shield on that development and one other for the same company as in excess of £10.6m. In the ensuing proceedings against PM LLP, it accused the firm of negligence through its failure to ensure that its standard form of subcontract was updated to take account of the change in the law.

Shepherd argued that the merger and the conversion into a limited liability partnership were irrelevant to what it was entitled to expect from a firm such as PM LLP. It argued that the reality was that there had been a single continuing contract between it and the firm from the outset which, among other things, placed a duty upon the firm to keep the advice it had given in the past under review. After all, Shepherd argued, the same senior individuals had been involved throughout the relationship and the firm had given earnest assurances that the changes in structure would not affect the continuity of the relationship.

PM LLP applied to the court to have the single contract aspect of the claim struck out as doomed to failure. First, it relied upon the fact that the law clearly provided that the changes had resulted in new separate legal entities which did not simply inherit responsibility for what their predecessors had done. Those changes did indeed break the continuity of the relationship in terms of liability for the shortcomings of the preceding entities.

Second, PM LLP argued that each brief carried out for a client is a separate one and there is no continuing duty to keep advice given in the past under review.
In finding for PM LLP, and striking out the relevant parts of Shepherd’s claim, Mr Justice Akenhead commented that the concept of professional people being under a duty to keep advice given or services provided under continuing review was “commercially and professionally worrying”.

This litigation, which continues in the Technology and Construction Court, will no doubt cast further useful light on the nature of that complex and important relationship between solicitor and client and perhaps more attention will be given to articulating the parties’ expectations at the outset. That would be a welcome development indeed.

Dominic Helps is a partner in solicitor Corbett & Co