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Do you have to waive privilege to prove mitigation?

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18/12/2014

In Rentokil Initial 1927 PLC v Goodman Derrick LLP [1], the claimant’s refusal to waive privilege was criticised by the court as it meant that there was no evidence to support its claim that it had acted reasonably in the steps it took to mitigate its loss.

Goodman Derrick was instructed by Rentokil to draft a contract for the sale of a property known as Rentokil House to Taylor Wimpey. Completion of the contract was conditional upon the grant of planning consent with acceptable conditions. Planning consent was eventually granted, subject to certain conditions which Taylor Wimpey claimed fell within the contract’s definition of unacceptable; Taylor Wimpey then refused to complete.

The parties started arbitration proceedings which were settled a few days before the arbitration hearing for a figure some £1.8 million lower than the purchase price in the contract. Rentokil then brought proceedings against Goodman Derrick claiming that the firm had acted negligently as it had failed properly to (i) draft the contract, allowing Taylor Wimpey to avoid completing the contract and (ii) advise Rentokil on the proper meaning and effect of the terms of the contract.

The court held that Goodman Derrick had not been negligent. The drafting had not exposed Rentokil to any unnecessary risks, Taylor Wimpey would not have agreed to purchase the property on different terms and Rentokil had been fully aware of the risks involved in entering into a conditional contract.

The court went on to consider the issue of mitigation and whether Rentokil had acted reasonably in settling the arbitration.

Rentokil had received legal advice that it had a better than 50% chance of winning the arbitration, and although throughout the proceedings, it believed that it would win the arbitration, it settled with Taylor Wimpey for a sum significantly less than the contract price. The burden of proof was on Rentokil to show that on the balance of probabilities, this was a reasonable course of action.

Rentokil refused to waive privilege in relation to the advice which it was given in respect of the arbitration and during the course of the settlement negotiations. There was therefore no evidence before the court to explain why Rentokil had decided to settle the arbitration at a considerable discount, when it appeared likely that it would win. The court reached the conclusion that Rentokil’s main concern in settling the arbitration was Taylor Wimpey’s financial situation rather than the drafting of the contract, and that it had acted unreasonably in settling the arbitration when it need not have done so.

It may be appropriate to waive privilege in certain circumstances. However, as a general rule, parties should not be in a rush to waive privilege. Once privilege has been waived and the documents put before the court, they are in the public domain. Parties therefore need to consider carefully all available options before waiving privilege.

[1] [2014] EWHC 2994 (Ch)

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