Legal ArticlesProfessional NegligenceA solicitor’s duty to give commercial advice

July 18, 20170

It is often stated that a solicitor does not any duty to give advice on commercial matters. In this lecture delivered at 4 New Square’s 2016 professional liability conference, I examine whether that statement accurately describes the law.

 

The problem which I am going to be discussing is one which is easy to describe, but which can be difficult to answer confidently. I suspect that many of us, acting for claimants or defendants, will be familiar with this type of case: a client comes to a solicitor with Heads of Terms or other agreement in principle – such as for the development of property, or the sale and purchase of shares in a business. The solicitors are involved in some way in drafting or finalising the agreement. When it is implemented, something goes wrong, so the client gets a bad deal. He complains that the solicitor failed to advise him of a problem with the transaction. The solicitor denies breach of duty, on the basis that what went wrong was a commercial aspect of the deal, whereas he was only required to give legal advice.

I often find that that defence leaves something of a sour taste when you look at the solicitors’ website which is plastered with comments about their expertise in commercial transactions and awareness of the business needs of their clients.

We have it on the highest authority that the principle is that solicitors are not required to give commercial advice. I refer of course to Jackson and Powell:

A solicitor is not a general adviser on matters of business, unless he specifically agrees to act in that capacity. Thus he is not generally under a duty to advise whether, legal considerations apart, the transaction which he is instructed to carry out is a prudent one.

 Lawyers amongst you will have noticed the word “generally”.

There is also the authority of the Privy Council in Clarke Boyce v Mouat [1994] 1 AC 428. Lord Jauncey said:

“When a client in full command of his faculties and apparently aware of what he is doing seeks the assistance of a solicitor in the carrying out of a particular transaction, that solicitor is under no duty whether before or after accepting instructions to go beyond those instructions  by proffering unsought advice on the wisdom of the transaction.”

Thus in Football League v Edge Ellison [2006] EWHC 1462 (Ch) there was held to be no duty on the solicitors to advise on the solvency of the counter-party or as to whether guarantees should be sought (until a duty arose later, on particular facts). Mr Justice Rimer regarded this as straightforward, posing the question and answering it simply:

Is the solicitor supposed to review the whole range of commercial considerations that underlie a particular deal, work out which ones he is concerned the client may not have given sufficient thought to and remind him about them? In my judgment the answer is no.”

Some aspects of a transaction will be easy to spot as commercial: is a debtor likely to repay, will a property be a good investment? But there are grey areas, because in a business agreement, changes in legal language may have practical and financial consequences. Finding a definition to distinguish between legal and commercial advice has proved difficult.

In County Personnel v Pulvers [1987] 1 All ER 289 the claimants took an under-lease which had an unusual rent review clause whereby the rent in the under-lease was increased at the same percentage as the head-lease. The problem was that the initial rent for the under-lease greatly exceeded the rent for the head-lease, so that although the percentage increase would be the same in both, in terms of pounds and pence the rent for the under-lease would rise by more. There would therefore be no incentive on the intermediate landlord to resist rent increases in the head-lease, quite the opposite: each rent increase would increase the difference between the two rents and so increase his profit. The defendant solicitors were found to be negligent in failing to advise the claimants of the risks they faced: the Court of Appeal held that the solicitors should have appreciated that the rent review clauses could have operated in this way and should have advised that the rent under the head-lease should be ascertained. Lord Justice Bingham held that this was a classic case in which a risk should have been apparent to a solicitor but not to the client as a layman.

Lord Justice Bingham said:

I cannot accept the distinction drawn between legal consequences and financial implications, because in this case the significance of the legal consequences lay in the financial implications.”

So that suggested distinction was rejected in that case. But it is difficult to see how it could be helpful in other cases either: anything which is wrong with the agreement, if it results in claim, will be because the consequences have had financial implications. And when you consider the facts of the case:

(a)  it seems pretty obvious that the fact that, somewhat unusually, the rent review clause in the underlease was linked to rent reviews in the headlease was a legal feature which the solicitor could be expected to draw to the client’s attention;

(b)  it seems less obvious that whether the intermediate landlord would be motivated to try to negotiate against rent increases was legal matter rather than a commercial one, and one which the solicitor should be any more able to appreciate than the client.   

That difficulty is illustrated by our next case: Reeves v Thrings & Long [1996] PNLR 265. The claimant wished to purchase a hotel to improve and develop. At the rear of the hotel was a car park, which could only be accessed across neighbouring land. There was a licence agreement with the neighbouring owner, the council, which provided this access. The claimant went ahead with the transaction but when he later sought to sell the hotel, he discovered that the right of way was precarious because the licence could be withdrawn.

In the Court of Appeal there was consensus as to what advice the solicitor was under a duty to give: he needed to inform the client that vehicular access to the hotel was governed by a licence agreement and that in 3 ¼ years the licence could be terminated on notice without a right of renewal. There was no duty, said Lord Justice Simon Brown, to advise him upon the importance of the access provision or to warn him against the risks that it might pose for the future development, operation or sale of the hotel, as those were business considerations rather than legal ones, which the client could evaluate for himself.

There was said by Lord Justice Simon Brown to be a distinction from the County Personnel and Pulvers case: in that case the legal implications of the rent review clauses were not obvious and needed to be explained, whereas in the present case it was said that the term, once explained, left no room for legal misunderstanding.

I find this difficult to understand and to apply, because it suggests that once the legal meaning of the clauses is understood, in Reeves, everything else was a commercial decision, whereas in County Personnel whether the intermediate tenant was motivated to dispute rent increases was part of the legal advice.

My thesis is that it would be better to drop the search for a rigid distinction between commercial and legal advice for two reasons:

(1)  one cannot reliably separate the meaning or effect of a clause from the implications of the clause; and as I have said legal implications entail financial and commercial consequences if loss has been suffered;

(2)  it is doubtful whether it can really be said that there is a rule that a solicitor cannot be required to give commercial advice, because solicitors can sometimes be expected sometimes to advise on matters which they have not been asked about; in that regard, reference is often made to the comments of Mr Justice Laddie in Credit Lyonnais v Russell Jones & Walker [2002] EWHC 1310:

However if, in the course of doing that for which he is retained, he becomes aware of a risk or a potential risk to the client, it is his duty to inform the client. In doing that he is neither going beyond the scope of his instructions nor is he doing ‘extra’ work for which he is not to be paid. He is simply reporting back to the client on issues of concern which he learns of as a result of, and in the course of, carrying out his express instructions. In relation to this I was struck by the analogy … If a dentist is asked to treat a patient’s tooth and, on looking into the latter’s mouth, he notices that an adjacent tooth is in need of treatment, it is his duty to warn the patient accordingly. So too, if in the course of carrying out instructions within his area of competence a lawyer notices or ought to notice a problem or risk for the client of which it is reasonable to assume the client may not be aware, the lawyer must warn him.”

Notice how in this passage there is a shift between the dentist reporting something he happens to notice and the solicitor having to report something which he notices or ought to notice. As we will see, that has created a problem for solicitors.

One important element introduced by the authorities is the experience and sophistication of the client.

In Yager v Fishman Co [1944] 1 All ER 552 it was alleged that solicitors were negligent in failing to advise the claimant that he ought to determine a lease rather than keep it in existence and try to find a suitable tenant. The Court of Appeal rejected this contention. But notably that was not because this was said to be because that was a commercial rather than legal decision. Lord Justice Goddard commented:

The nature and amount of advice which, in a matter of this sort, a solicitor would be expected to give to a person wholly unacquainted with business may differ very materially from what he would offer to an experienced business man, who would naturally decide for himself the course he thought it in his interest to take.”

In Carradine Properties Ltd v DJ Freeman Co [1999] Lloyd’s Rep PN 48 the Claimant’s contractors damaged an adjoining property. The Claimant was sued by the owner of the adjoining property. The solicitors advised the Claimant on a claim against the contractors, but they were uninsured and worthless. The solicitors did not enquire, until it was too late, whether the Claimant had his own insurance against which he could claim.  The Court of Appeal held that there was no breach of duty by the solicitors. Lord Denning based his decision on the experience of the client:

Was it the solicitors’ place to ask them, “What insurances have you got? In some cases with clients who are ignorant or inexperienced, it may be the duty of the solicitor to enquire of the client whether or not he is insured against the risk. But this is not such a case. [The clients] were skilled in all property matters and insurance matters.”

And Lord Justice Donaldson stated:

“the precise scope of his duty will depend inter alia upon the extent to which the client appears to need advice. An inexperienced client will need and be entitled to expect a solicitor to take a much broader view of the scope of his retainer and his duties than will be the case with an experienced client.”

In Haighv. Wright Hassell [1994] EGCS 54 the Court of Appeal held that solicitors were not negligent in failing to investigate whether his clients in fact had the necessary funds before the solicitors exchanged contracts and provided a solicitor’s undertaking. Hoffmann LJ stated:

The solicitor is not a business advisor. Although most good solicitors offer business advice and will to some extent try to protect clients from themselves, it would be wrong, in my opinion, to hold that there is an invariable legal duty to do so. It must of course depend upon the facts of the case. There will be situations in which it is clear that the client is commercially wholly inexperienced and is deluding himself. In those circumstances there may well be a duty on the part of the solicitor to probe further

So in the right circumstances, there can be a duty on the solicitor to try to protect a client from himself by giving advice on the commercial wisdom of the transaction.

In Richard Gabriel v Peter Little and BPE Solicitors the claimant property developer instructed the solicitors, to act for him on a loan of £200,000. The security for the loan was an airfield and the Claimant intended that the loan would be used to develop the airfield. By contrast the borrower’s intention was to use the loan to purchase the property from another of his companies, and thereafter to discharge other lending over the property. When the loan was called in, the security proved to be virtually worthless because the airfield had not been developed. There are a number of aspects to the claim against the solicitor which we can ignore for present purposes. But relevantly, the trial judge found, and the Court of Appeal agreed that the solicitor was not under a duty to advise the Claimant on the commercial wisdom of the transaction where he was putting in £200,000 of his own money but in reality the borrower was not investing anything in the project. That was because the Claimant had never sought advice on the commercial wisdom of the transaction and because he was an “astute businessman” who was “undoubtedly knowledgeable in the field of property and generally conversant with property dealing”.

The unsatisfactory state of the law that we have reached is illustrated by the recent decision of Luffeorm and Kitsons [2015] PNLR 30. The Claimants bought a pub business but the agreement did not contain any restraint of competition covenants to stop the seller setting up in competition with them. Just thinking about that, you might consider that there could be some doubt as to whether the need to stop the seller competing is a matter for legal advice or for commercial advice.

The recorder first referred to the authorities and to the principle that there was no duty to give commercial advice. However he then noted that this could depend on the experience of the client. Finally he referred to Mr Justice Laddie’s dictum in the Credit Lyonnais case about noticing a problem by analogy with a dentist. His conclusion was that there was no duty to advise of the commercial risks inherent in the transaction, but nevertheless the solicitor should have noticed the absence of a restraint of competition covenant and so was negligent.

I find this deeply unsatisfactory. There is said to be a principle that there is no duty to give commercial advice, but then it seems to depend on the experience of the client, so it is not an absolute rule at all. And then whether or not it is commercial advice – which he does not indicate a view on – it is subject to an obligation to report problems with the deal. But not just problems which the solicitor has spotted, but problems which he should have spotted.

In my view it would be better to abandon an attempt to distinguish between commercial and legal advice: the distinction is difficult, and in any event, we cannot really say that there is a rule that a solicitor is not under a duty to give commercial advice.

In my view it is more meaningful to ask these questions:

-in the circumstances was the issue one the client could be expected to appreciate himself; 

-or, was it an issue which the solicitor would be expected to be in a better position to appreciate

The circumstances obviously include the terms of the retainer and the experience and sophistication of the client; in my view they should also include what the solicitor said about his own expertise.

Matters like whether a property is a good investment or what it is worth, or how a business will perform are matters which a commercial client can be expected to be in a better position that the solicitor to assess. They are matters of commercial judgement.

But matters which may have an impact on the commercial viability of the transaction may be matter which the solicitor would be expected to point out to enable the client properly to assess that commercial risk: is a right of way precarious, how does the rent review mechanism work? The client cannot properly judge whether the hotel will be a good investment unless he knows that it could end up landlocked.

In some cases the naivety of the clients and the potentially disastrous nature of the deal will be such that the solicitor really does have a duty to save the clients from themselves if the deal is a commercially disastrous one.

Near the beginning of this article I noted the rhetorical question posed by Mr Justice Rimer in the Football League case:

Is the solicitor supposed to review the whole range of commercial considerations that underlie a particular deal, work out which ones he is concerned the client may not have given sufficient thought to and remind him about them?

There is a danger that the law is getting close to the position where the answer may in fact be “Yes”. The title we chose for this session is “lawyers under fire” and I think that may be apt here.

But perhaps I have persuaded you that it would be a step in the right direction if we at least acknowledged that it is no longer accurate, even generally, to say that the lawyer is not under a duty to give commercial advice.

Stephen Innes

13.09.16

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