Burness Paull sued for $210m by former client over ‘breach of fiduciary duty’

A judge in the Court of Session held that the claim by Robert Kidd that he sustained loss as a consequence of Burness Paull’s alleged “breach of fiduciary duty” should be determined after proof.

Lord Tyre heard that the pursuer was until September 2009 the owner of the whole share capital of a company incorporated in Scotland called ITS Tubular Services (Holdings) Limited (ITS), which provided downhole tools and drilling equipment to the oil industry, together with ancillary services.

Paull & Williamsons (P&W) were instructed in 2008 to act as solicitors in connection with the proposed sale of some of the pursuer’s shares in ITS to an American private equity firm called Lime Rock Partners.

However, it later emerged that while one Paull & Williamson partner Scott Allan was advising him on the deal, another partner Ken Gordon was “covertly” advising Lime Rock.

ITS subsequently went in to administration in 2013 following “gross mismanagement” of its affairs by its executive directors and was eventually sold to a competitor and Mr Kidd lost his entire shareholding but received nothing from the sale proceeds.

The pursuer, who was a client of the P&W which merged with Burness LLP in December 2012 to become the larger firm of Burness Paull, sued the defenders jointly and severally in respect of loss and damage said to have been caused by the first defender’s “breach of contract, fault and negligence, breach of fiduciary duty and fraudulent misrepresentation”.

The pursuer’s case, in so far as founded upon breach of contract and fault and negligence, was that the first defender failed to provide advice to and take instructions from the pursuer directly, but instead relied upon communication through persons whose interests conflicted with those of his own.

It was averred that it was the firm’s duty to inform the pursuer directly not only of the material terms of the transaction but also of their practical effect; to ensure that he understood the transaction he was proposing to enter into and its foreseeable risks; to recognise that the persons purporting to issue instructions on behalf of the pursuer, had conflicting personal interests; and to report that to the pursuer.

By failing to avoid acting in conflict of interest, the firm was in breach of contract and “negligent”, and thereby caused the loss sustained by the pursuer, as if he had been given the advice to which he was entitled he would not have proceeded with the transaction with Lime Rock and would not have sustained the loss claimed.

The pursuer’s case, in so far as founded upon breach of fiduciary duty and fraudulent misrepresentation, was that at all material times from commencement of Lime Rock’s interest, Mr Gordon was “actively assisting and advising Lime Rock”, including giving commercial advice on negotiation strategy and revising documentation for Lime Rock’s interest.

But he did so “covertly” and arranged for another firm to be presented as Lime Rock’s advisers in order to convey the impression that Lime Rock were being appropriately and independently advised.

In response, the defenders admitted that Mr Gordon considered himself to be the “unofficial counsel” for Lime Rock in the due diligence exercise conducted by it, but it was claimed that Mr Allan was “unaware” of Mr Gordon’s role or that he was communicating directly with Lime Rock during the transaction.

The defenders accepted that Mr Gordon’s actions caused a conflict of interest and admitted that the first defender was in breach of its fiduciary duty not to act in a position of conflict, but they did not accept that the first defender was guilty of dishonesty or that it is liable for intentional injury.

Lord Tyre dismissed that case against the defenders based on fraudulent misrepresentation as “irrelevant”, but granted summary decree that the first defender was in breach of its fiduciary duty to the pursuer.

The judge also refused the defenders’ motion to dismiss the action based upon breach of contract and negligence as irrelevant, held that the relevancy of the pursuer’s claim to have sustained loss as a consequence of the firm’s breach of fiduciary duty should be determined after proof.

In his written opinion, Lord Tyre said: “With some hesitation, I have concluded that the pursuer’s causation case is sufficient for proof before answer.

“It is not clear to me that the pursuer in the present case was “locked into” the fortunes of ITS share…However, I consider that that is a matter better determined after inquiry into the facts.

“The pursuer founds upon the terms of his agreement with Lime Rock and not simply upon the mismanagement (which is not laid at Lime Rock’s door) that is said to have occurred after the sale of part of the pursuer’s shareholding in 2009.

“I am not prepared to go so far as to hold at this stage that the pursuer’s case is certain to fail even if all of his averments are proved. I shall therefore allow a proof before answer with regard to the pursuer’s case based on breach of fiduciary duty.”