Withers LLP Meets its Waterloo
Wellesley Partners LLP was incorporated in May 2004 as an executive search consultancy, with a particular specialism in investment banking. The driving force behind the business was Mr Rupert Channing.
In 2008 Withers acted for Wellesley Partners in connection with the entry of new partners into the LLP, including a Bahreini bank, Addax Bank BSC. Addax was to make a significant capital contribution of some £2.5 million and thereby acquire a 25% interest.
A new LLP agreement was duly required and this was drawn up by Withers in May 2008. A critical clause allowed Addax to withdraw 50% of its capital contribution. It was the evidence of Mr Channing that this facility was to be available only after 42 months. This was indeed consistent with the initial drafting.
However the agreement ricocheted between the two firms of solicitors as the negotiations were conducted. This clause mutated in the fog of battle; the final terms were that the withdrawal could take place only within the first 41 months.
The Fates Conspire
The consequences of this error may have been relatively modest, but for two cruel twists of fortune:
- Addax had lost significant sums in a Florida venture and were under-capitalised. They were anxiously casting around for much needed liquidity;
- Lehman Brothers filed for Chapter 11 protection in later 2008. The financial crisis then led to a virtual total halt in hirings by investment banks.
In February 2009 Mr Channing was informed by Addax that they would be exercising the put option with immediate effect. Wholly unaware of this possibility, Mr Channing sought some funds and also some explanation as to the source of this sudden shock.
The combined effect was therefore that Wellesley Partners found itself severely constrained in its expansion plans. Mr Channing was not a happy man. The troubles which beset him were blamed upon Withers.
The Cannons have their Bowels full of Wrath and Ready Mounted are they to Spit Forth their Iron Indignation
It was for the Court to determine how the fatal clause came to be so drafted, and who was to pay for the financial consequences which flowed remorselessly from it. The Court was asked to determine if Wellesley Partners would, but for the drain in its cash flow, have opened an office in New York, and then won a contract with Nomura for hiring an investment banking team. In addition to this would Wellesley Partners have hired more consultants for its London operations? Finally, should a claim be admitted for the time spent by Mr Channing in dealing with the repercussions of the Addax decision and related matters?
The Long and Winding Road
The trail from the LLP agreement to the alleged losses was a lengthy one: the Decision described the forks along the path in respect of the London losses:
“(i) would WP have sought to recruit more consultants? (ii) if so, would it have succeeded in doing so? (iii) if so, would they have succeeded in earning revenue for WP ? (iv) if so, how much revenue would they have earned? and (v) when would they have earned it?”
With such a long chain of potential causation, with imponderables along the way, we might have expected losses to have been sheared back to allow for uncertainty. It is therefore some surprise that the losses were computed as:
| Planned New York Office | £1,057,000 |
| Expansion of London Office | £430,000 |
| Time of Mr Channing | £125,000 |
| Total losses | £1,612,000 |
Wellesley Partners did not have to pay profit shares to Addax in respect of the funds withdrawn. However, perhaps surprisingly, these sums were not deducted from the above losses.
Both parties took the case to appeal: the Appeal Court upheld the above decisions, apart from increasing the claim in respect of the time of Mr Channing.
Andrew Strickland
