Solicitor not negligent in failing to seek warranty from the seller of a petrol station

Lord Doherty
Lord Doherty

A couple who claimed their company’s solicitor had been negligent in his conduct during a purchase transaction have failed to establish negligence.

Sajjad and Rumella Soofi brought an action against Jeffrey Martin Dykes for professional negligence in respect of their purchase of retail subjects in 2008.

The case was heard in the Outer House of the Court of Session by Lord Doherty.

‘Informal agreement’

The case arose out of the purchase of a petrol station and accompanying shop by Bonafied Enterprises International Ltd (BEI). The first pursuer was a director of BEI and its principal shareholder. Prior to the action being raised, he received BEI’s rights, title, and interest to pursue any claims against third parties arising out of or relating to the purchase. He assigned these rights to the second pursuer, his wife, in January 2019.

BEI hired the defender, then a practising solicitor, to act on its behalf in the purchase of the subjects. Prior to instructing the defender, BEI already had an informal agreement with the seller to purchase the subjects for £850,000, which became the basis of the offers submitted by the defender. In March 2007, after BEI had instructed the defender, it obtained a valuation survey of the subjects, including financial reports from the seller, which valued them at £900,000. This report was not seen by the defender.

The bargain was eventually concluded in August 2008, with a date of entry of 1 September 2008. The missives provided that the purchase price was exclusive of VAT and reasonable efforts were to be made by the buyer to notify the VAT authority that the business was to be treated as a going concern before and after the completion date. They also provided that in the event that VAT was made chargeable, the buyer would make payment of said VAT within 10 business days of the seller being notified that VAT was payable. Another clause stating that the seller would make available all business records as reasonably necessary to determine the goodwill of the business was removed from the agreement at this time. This version of the agreement was accepted by both parties.

BEI purchased the subjects using two loans from Alliance & Leicester Bank. The subjects were not profitable during the time BEI operated the business. Furthermore, it failed to comply with its obligations in respect of providing information to the VAT authority. As a result, the seller was assessed for VAT, and therefore raised proceedings to recover the payable VAT of £126,595 plus £1,298.79 of interest. BEI did not make any VAT returns during its time operating the business, which the first pursuer claimed was because the VAT money was needed to provide cashflow for the business. The company defaulted on its loan repayments to the bank, and administrators were appointed in 2010.

The pursuers believed that the financial information supplied to them by the defender was inaccurate and overstated the profitability of the business, with the true value of the subjects being around £465,000. They argued that the defender ought to have advised them to obtain a warranty from the seller that the information she provided was accurate, and that in failing to do so he was in breach of his contractual and delictual duties to exercise the care of an ordinarily competent solicitor. They averred that had the defender given them that advice, they would have acted on it, and thus either have an action against the seller for providing inaccurate information or possibly avoided the loss of £385,000 in the event that a warranty was not given. Furthermore, the first pursuer could recall his August 2008 meeting with the defender prior to concluding the missives being very long, maybe about twenty minutes, and could not remember the VAT clause being mentioned to him, stating that he would not have accepted it if it was brought to his attention.

The defender argued that it was never suggested to him by the pursuers that such a warranty would be needed, and the circumstances did not indicate that one was necessary. Furthermore, the purchase price had been agreed before the defender was instructed, it had not been intimated to him that BEI were relying upon the accuracy of any information provided by the seller, and the pursuers had been happy at the time to proceed with the VAT clause intact and the clause regarding the seller making business records available removed. His evidence was the August 2008 meeting was an hour and forty minutes, and that he explained the agreement to the pursuer in some detail.

‘Unable to accept critical parts’

In his judgment, Lord Doherty stated that he found the defender to be “a credible and reliable witness who was able to draw considerable support for his account from the contemporaneous documentation”. However, he had doubts regarding the evidence of the first pursuer, saying: “He had a tendency to understate the extent of the advice he was given and the time involved in meetings with the defender. The first pursuer‘s suggestion that no meetings with the defender were ever lengthy is plainly wrong. It is clear from the defender’s file that there were a number of lengthy meetings.”

He believed that, with the passage of time, the first pursuer “ha[d] genuinely convinced himself that his account of events is what actually occurred”. Turning to expert evidence given by a qualified solicitor regarding competence, accepting the defender’s version of events as correct, he said “a body of solicitors of ordinary competence exercising ordinary care would have done what the defender did”.

Regarding the financial reports, Lord Doherty was “not convinced that the court ought to infer from BEI’s lack of success that the seller’s accounts were inaccurate. Nor am I satisfied on the evidence before me that I ought to exclude other possible explanations for the differing success achieved by the seller and by BEI”. He cited the 2008-9 recession, BEI’s likely larger overheads, the fact it closed the business for a time after acquiring it and the company’s large loan payments as contributing factors. Furthermore, BEI’s failing ”to use all reasonable endeavours to procure that the transaction was treated by HMRC as a TOGC for VAT purposes was a serious failing”.

Regarding the pursuers’ contention that a warranty clause would have changed the course of events, Lord Doherty was not convinced that they would have pulled out of the transaction. Furthermore, their submissions regarding an included warranty were “premised upon the pursuers establishing that the financial information the seller provided to BEI was inaccurate”, which he did not believe was the case. As such, decree of absolvitor was pronounced for the defender in respect of all pleas.

© Scottish Legal News Ltd 2020

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