Lost Opportunity In The Downturn

The Court of Appeal in the recently reported judgment in Mallon v Halliwells (in administration) [2012], confirmed the principles to be applied when assessing losses arising from the negligent drafting of a commercial agreement, in particular the date when loss should be assessed and the application of the loss of a chance doctrine. In this case, the Claimant had not sought to rely on the rights he should have had but for the negligence until some time later than the breach of duty, by which time the value of those rights had deteriorated substantially.

Background

Halliwells acted for Aztec Developments (North West) Ltd ("Aztec") in connection with a joint venture agreement with Pierse Contracting Ltd ("Pierse") for the development of an apartment block. The development was to be carried out through a newly formed company, Brickpaper Ltd ("Brickpaper") which was owned jointly by Aztec and Pierse. It was agreed between them that once the joint venture was complete, the freehold to the site was to be sold to a third party and Mr Mallon, who was the majority shareholder in Aztec, was to receive the proceeds. However, Halliwells failed to include that provision in the agreements, which were completed in April 2005.

As at April 2005, the parties to the joint venture reasonably expected that the development would be practically complete in July 2006 and that all the flats and parking spaces would be sold within 6 months of completion. On that basis, the loans secured on the freehold would be repaid in full and the charges over it released. Brickpaper would then be able to sell the unencumbered freehold, then worth around £249,000, and pay over the sale proceeds to Mr Mallon.

However, the project was not a success. The development was not completed until late 2007, far later than had been anticipated. By the autumn of 2008, only around 80% of the apartments and 30% of the parking spaces had been sold and the combined value of the unsold units was significantly below the balance outstanding on the secured loans. Following the collapse of Lehman Brothers in September 2008, the market was significantly restricted and it was not possible to predict when, or indeed if, the remaining properties would be sold for sufficient money to repay the charges on the site and enable the unencumbered freehold, then worth around £226,000, to be sold.

At that time, Mr Mallon was also under financial pressure and was looking to realise his assets, where possible. He entered negotiations...