Phillips: Steps were entirely preparatory
The Court of Appeal has refused to overturn a ruling that two former directors of a law firm were not in breach of their duties by taking preparatory steps to set up a competitor.
Lord Justice Phillips said His Honour Judge Bever, sitting as a High Court judge, had been right in his ruling last year to find that the actions “did not cross the line”, or otherwise put the directors in a position of conflict, so as to amount to a breach of their fiduciary duties.
Liverpool firm CEL Solicitors, which specialises in financial mis-selling and fraud claims, sued former finance director Tom Blanchfield and solicitor Mark Montaldo, ex-head of litigation, after they resigned in January 2023 with a view to setting up a new firm, which did not actually happen.
Following their resignations, CEL discovered that, for several months prior, the pair had been taking preparatory steps to set up a new law firm.
These included registering a trading name, ‘Complex Claims’, incorporating a corporate vehicle, seeking professional indemnity insurance, setting up a website, opening a bank account, applying for Solicitors Regulation Authority (SRA) authorisation (it issued a ‘minded to approve’ letter on 6 January 2023), and entering discussions with litigation funders, including Deminor, with which they had previously negotiated on behalf of CEL.
Phillips LJ said the conclusion reached by HHJ Bever “was plainly open to him”.
The steps taken were “entirely preparatory to trading which would not start until six months after the respondents resigned”, he said, noting that the venture might not have proceeded until the SRA’s response of 6 January 2023; they resigned four days later.
“In the meantime,” Phillips LJ added, “the respondents were able to and did serve CEL faithfully. There is no recognised basis on which that conclusion could be overturned.”
HHJ Bever had found the position regarding Deminor “more finely balanced” but decided that a reasonable person would probably not said there was a real possibility of conflict arising out of the pair’s dealings with it.
Phillips LJ found the conflict argument “tenuous at best given that CEL had already entered a contract to deal exclusively with another funder”.
He continued: “Any residual force in the point was ended, in my judgment, by the judge’s finding that there was no evidence that Deminor could not have worked with both CEL and the respondents in the event that CEL’s exclusive contract with its current funder was terminated. CEL did not challenge that finding.”
The appeal was conducted with CEL no longer seeking injunctive relief against the two men due to the passage of time.
Phillips LJ questioned whether the firm could seek damages even if the findings were overturned – “CEL has struggled to advance an arguable case that the preparatory steps taken by the respondents have caused CEL any damage” – and said that, “in the end, it was apparent that CEL’s primary motivation for maintaining its appeal was in an attempt to reverse the judge’s order as to costs”.
But even “merely establishing technical breaches of fiduciary duty or contract, with no arguable case as to loss, would not obviously, in itself, justify interfering with the order that CEL pay the costs of the trial”.
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