In this article we analyse some of the key themes and issues that have emerged from judgments in relation to claims against lawyers over the past year.
Scope of duty and standard of care
We have seen some positive decisions for solicitors recently that have kept liabilities restricted based on the scope of the duty that the firm owes to the client, including a highly significant decision by the Supreme Court.
Advice v Information
In BPE Solicitors v Hughes Holland, handed down in March, the Supreme Court considered and clarified the wellknown distinction between advice and information cases, known as the SAAMCo principle. The Supreme Court held that:
- Advice cases are those where a solicitor provides advice as to whether to enter into a transaction, and is under a duty to consider all relevant matters and protect against the full range of risks associated with the transaction. In these cases the solicitor will be liable in principle, if negligent, for all the losses flowing from the transaction.
- Information cases are those where the solicitor provides a limited part of the range of information taken into account by the client in forming their decision whether to enter into the transaction. (Information of this sort would include what is commonly understood as advice). In this case, the professional, if negligent, will only be liable for the losses flowing from the specific information being wrong. Further, that will be the case even if the material provided by the professional was known to be critical to the client's decision to enter into the transaction.
- The "no transaction" cases of Steggles Palmer (1997) and Portman Building Society (2000) were therefore wrongly decided. In those cases it was held that if lenders had been told about certain features they would have concluded that the borrowers were dishonest and would not have lent, and therefore, on that basis, the solicitors were liable for all the losses flowing from the transaction.
- It was also confirmed that the burden of proving that losses fell within the scope of the professional defendant's duty is on the claimant.
There are a number of implications arising from the case. It is likely to be fairly rare that a lawyer (or other professional) would assume overall responsibility for a transaction and hence be liable for all the losses flowing from it. It is also common for claimants, particularly but not solely in lender claims, to try to get around SAAMCo by arguing that they would not have entered into the transaction at all were it not for the failure to provide certain information, and so the defendant should be liable for all losses on the transaction. This door has now been firmly closed. The decision marks a welcome development and it is likely that claimants will already have had to rethink whether claims remain viable in light of the judgment. Where a Part 36 offer has been made by a professional defending a "no transaction" claim, it is likely to be worth considering whether the offer should be varied or withdrawn.
The courts have continued to show willingness to take into account the fact that a client is sophisticated when determining the standard of care owed by a solicitor. In Lyons v Fox Williams (2016) one of the issues was whether a solicitor who was retained to advise the client on his claim under an accidental death and disbursement (AD&D) insurance policy, was also required under the retainer to advise on a long term disability (LTD) policy. The High Court found that the retainer letter did not set out that the solicitor would advise on the LTD policy, and that the claimant was an astute businessman, who would have expressed immediate concern if he had been expecting to be advised on the LTD issues. Accordingly no duty to advise arose.
The Court also considered whether, following Credit Lyonnais v Russell Jones & Walker (2002) there was a duty to warn of the LTD risks. The judge found that it had not been objectively unreasonable not to flag any risk arising from the LTD policies. Relevant to this finding was the fact that the claimant was an astute, focussed and commercially minded businessman, who was using the solicitor as a targeted resource not a general legal adviser. This case also flags up the key risk management point of issuing clear retainer letters, which set out what the firm is (and sometimes crucially is not) agreeing to advise on. An appeal of the judgment is pending.
Another area of interest in relation to scope of duty was considered in Barker v Baxendale Walker (2016) (which is under appeal). The case concerned advice given to the claimant to enter into a tax avoidance scheme involving an employee benefit trust. The issue here was the extent to which solicitors are required to give a warning, when advising on the interpretation of legislation, that their opinion may in fact turn out to be wrong if the issue were to come before a court for consideration.
Mr Justice Roth was clear that if the construction turns out to be wrong, it does not necessarily follow that it was negligent, unless the advice was glaringly wrong. The correct question is whether a reasonably competent practitioner at the time (on the facts of this case, one with specialist tax experience) applying proper skill and care, could have advised as the defendant did. Whether it is reasonably necessary to give any warning that the courts may reach a different conclusion on the interpretation of legislation or a document depends entirely on the circumstances. Of particular significance is whether the solicitor could be reasonably confident that the interpretation was correct. In Balogun v Boyes Sutton and Perry (2017) the Court of Appeal referred to the Barker case and confirmed that the question of whether there is a duty to warn in these circumstances will clearly be highly fact sensitive.
The well-known Bolam test is whether the defendant, acting in the way he or she did, was acting in accordance with a practice of competent respected professional opinion. We have seen a move away from the Bolam test, in certain circumstances, when determining the standard of care owed in the field of professional negligence.
In 2015, the Supreme Court held in Montgomery v Lanarkshire Health Board, that a doctor's duty in advising a patient on the risk of treatment was to take reasonable care to ensure that the patient was aware of any material risks involved in the treatment and of any reasonable alternative or variant treatments. The test of materiality is whether, in the circumstances of the particular case, a reasonable person in the patient's position would be likely to attach significance to the risk, or the doctor is, or should reasonably be aware, that the particular patient would be likely to attach significance to it.
In O'Hare v Coutts (2016) (under appeal) this decision was applied by the High Court in the case of a financial adviser. The Court found that in determining the question of the overall suitability of the investments, the Bolam test applied, but that it was inappropriate to determine the required level of communication about the risks of investments by reference to industry standards, and instead the approach in Montgomery applied. This is an interesting development and it seems likely that we may see arguments in this area in relation to solicitors, who also advise clients on the risks of various courses of action.
In the 2015 Court of Appeal of Northern Ireland decision of Baird v Hastings, the court did not specifically address the Bolam test but did refer to Montgomery and draw analogies between the solicitor client relationship and that of a doctor and patient, noting that "as in the medical context, the advisory role of the solicitor must involve proper communication and dialogue with the client".
Free advice counts
Finally, we had a reminder in the case of Lejonvarn v Burgess (2017), which concerned the duty of care of an architect carrying out unpaid services for a friend, that the fact that the work may be undertaken for free outside of a formal retainer, does not mean that the same standard of care will not be owed by the professional to the recipient of the advice or services.
A key battleground in professional liability claims is often causation. Claimants sometimes fail to take into account that, even if there has been some negligence on the part of the solicitor, the claim will still fail if no loss has been caused. We have seen several cases in the past year in which causation has not been established. For example, in Lyons v Fox Williams (2016) it was held that the solicitor in question should have advised that there was no English law and jurisdiction clause in a 2009 settlement agreement, meaning that it would be governed by Russian law and jurisdiction. However, it was found that the claimant was well aware there was no such clause in the agreement and of the risks attendant on this, and he was prepared to run them. Hence, the breach of duty did not cause any loss. In Barker v Baxendale Walker (2016), the judge found the solicitors should have given the claimant, who was entering into a tax avoidance scheme, a general health warning about HMRC's attitude to such schemes and the fact that, if challenged, there was a possibility that the arrangements would not be upheld. However, it was found that such a warning would not have deterred the claimant from entering into the particular scheme, as he understood that it was an aggressive scheme which would be subject to different opinions, so again there was no causation.
These cases demonstrate successes for defendants on the causation front but, of course, whether a causation defence is successful depends on the evidence in the particular matter.
Future developments in relation to causation issues are awaited from the Supreme Court in the case of Tiuta v de Villiers (2016), a surveyor's case but one equally relevant to solicitors' liability. In the case, a lender made a substantial loan secured by legal charge in reliance upon a valuation prepared by the defendant valuer. Sometime later the lender, in reliance on a second valuation from the defendant, then advanced a further sum, and instead of extending the first loan it redeemed the first loan and entered into a second loan secured by a new charge. The borrower defaulted. The lender claimed in negligence in respect of the second valuation only, and the issue for the purposes of summary judgment was whether it could recover the entirety of its loss (full lending on the second loan less money recovered from the sale) or simply the additional sum lent in reliance on the second valuation. The Court of Appeal held by a majority (with a substantial dissenting view) that the effect of the second loan had been to discharge the first loan, releasing the defendant from any potential liability in respect of the first valuation. Applying the "but for" test of causation, the loss was the difference between the value of the second loan and the security, and was not limited to the amount of the additional lending. The judgment turns on its specific facts, but could be applicable where solicitors are advising on a second loan. The key issue in such a case, and as the law stands, will be to consider how the professional has defined the scope of their duty in relation to the second loan, and whether it is to protect the lender against further losses or to take a view on the security for present lending.
The lender argued that applying Preferred Mortgages v Bradford & Bingley (2002) the valuer's liability had been wiped out in respect of the first loan, and if a full recovery could not be made in respect of the second loan then the lender's loss would be sent down a black hole. The Court of Appeal held that it did it not need to consider this as the full loss on the second loan was recoverable under the "but for" test. It will be interesting to see the Supreme Court's view on the black hole issue, and whether it takes the position that the entirety of the lender/borrower relationship should be taken into account, even if it leads to the lender being able to recover less than its full loss.
2015 saw an important development in the case of Wellesley v Withers. The Court of Appeal found in that case that where there is a concurrent liability on the part of the professional in contract and in tort, the narrower principle of remoteness of damage in contract applies. Professionals will almost always have concurrent duties to their client, and this means that a more restrictive test applies to determining whether damages are recoverable. In contract, damages are recoverable if at the time of making the contract a reasonable person would have had damage of that kind in mind as not unlikely to result from a breach. In tort damages are recoverable if reasonably foreseeable even if highly unusual or unlikely. There were two constasting illustrations of this in 2016.
On the one hand we saw a harsh decision from the High Court in the Agouman case, where a solicitors firm was liable for a failure to protect sums it received in settlement of a claim which were paid into an account on the Ivory Coast. A substantial proportion of the money found its way into the hands of fraudulent third parties, facilitated by a corrupt order of the Ivorian coast. The High Court, applying the contractual test, held that the money was recoverable, as the type of loss that was suffered (monies being acquired by dishonest third parties if not protected) would have been contemplated as a result of the breach. The decision is under appeal.
In Wright v Lewis Silkin (2016) the claim was that the firm had failed to include an exclusive English jurisdiction clause in a contract. The result of this was that the claimant had been forced to engage in court proceedings to establish English jurisdiction, obtained a judgment in his claim later than he otherwise would have done, and so lost the chance to enforce it before his opponent became insolvent. Applying the contractual test, the Court of Appeal found that this damage was too remote to be recoverable. The defendant party was a substantial business and its demise could not reasonably have been contemplated.
The Supreme Court has recently given its ruling in Swynson v Lowick Rose (2017), on issues relevant to whether a claimant has mitigated its loss. The difficulty with the Court of Appeal decision was that it had the effect of essentially lifting the corporate veil, in a case comprised of fairly unusual facts.
Swynson, a company owned by Mr Hunt, made a GBP 15 million loan to EMSL, in reliance on negligent advice given by an accountancy firm. Subsequently, Mr Hunt loaned the amounts due to Swynson to EMSL on the proviso that EMSL used the money to repay the loans. The purpose was to clear up Swynson's balance sheet and reduce its tax liability. The issue was whether the accountancy firm was still liable in damages where the loan had been repaid. The case turned on the issue of collateral payments. The general rule is that loss is not recoverable as damages where it has been mitigated. However, there is an exception for collateral payments: where loss has been avoided by a payment that has arisen independently of the breach, the law does not consider the loss to have been made good (for example if the claimant wins the lottery this would not satisfy a claim). Overruling the Court of Appeal judgment, the Supreme Court held that the payments from Mr Hunt to EMSL and EMSL to Swynson were not collateral for reasons including: that the transaction discharged the liability that represented Swynson's loss, and the money that Mr Hunt lent EMSL was not an indirect payment to Swynson but a distinct transaction. The Supreme Court's finding was that the form of the transaction should not be disregarded, and it avoided the confusing precedent that the Court of Appeal judgment set for collateral payments, which might otherwise have been applied in future professional negligence cases.
We have also seen issues of mitigation considered in the past year in the context of solicitor's negligence cases at Court of Appeal level: LSREF III Wight v Gateley LLP (2016) and Bacciottini v Gotelee v Goldsmith (2016). In LSREF, the defendant solicitors failed to draw a bank's attention to a forfeiture clause in a lease over which first legal charge was to be granted to the bank. The issue came to light when the security was enforced. The freeholder indicated his willingness to remove the clause on payment of GBP 150,000 but the claimant (the bank's assignee) declined the offer. At first instance the judge awarded the claimant GBP 240,000 representing diminution in value of the lease as security and found that there had been no failure to mitigate. The claimant then used GBP 150,000 of the damages to enter into a variation with the freeholder. The Court of Appeal overturned this decision, awarding damages of GBP 157,100 (comprising the cost of varying the lease and associated legal costs) and finding that there had been a failure to mitigate.
The case demonstrates that in a capital loss case the courts will not simply mechanistically assess loss as at the date of the transaction without consideration of subsequent events, and as a matter of common sense will not blind itself to relevant facts that demonstrate the loss thereafter.
Date of knowledge is a common issue that arises in professional negligence claims. There is an additional limitation period for a claim in tort of 3 years from the date that the claimant had the knowledge required for bringing a claim. There was an interesting, obiter, finding, in Barker v Baxendale Walker (2016) (facts above) that there was no knowledge at a time that the claimant was questioning the defendant solicitor's advice, and obtained opinions from other legal advisers that there may be issues with the tax avoidance scheme, as this had not been in relation to issues that were relevant to the reason for which the scheme ultimately failed.
We have continued to see cases arising from property fraud. This is against the backdrop of continued warnings from the regulator about fraud risks. Property frauds take many forms: so-called Friday afternoon frauds, ever-increasingly sophisticated cyber breaches, as well as the more old-fashioned imposter frauds. Solicitors are perceived as good targets for claims due to the strict liability basis of breach of warranty or breach of trust claims. A number of recent cases have examined the liabilities of the solicitors where the seller has turned out to be an imposter.
One of the most recent cases is Dreamvar v Mishcon de Reya and Mary Monson Solicitors Ltd (2016). Mishcon de Reya (MDR) acted for the purchaser of a property and Mary Monson Solicitors (Mary Monson) acted for the purported seller who turned out to be an imposter. The 2011 Law Society Code for Completion applied. The judge found that Mary Monson were not liable to the purchasers in relation to any of the matters alleged. Mary Monson were not liable for breach of trust in relation to the purchase monies, as no trust relationship arose with the purchase under the terms of the 2011 Code. Mary Monson were also not in breach of the undertaking contained in para 7(i) of the Code that states that the seller's solicitor "undertakes (i) to have the seller's authority to receive the purchase money on completion." as this was not an undertaking that the client was the registered owner of the property, nor had the firm warranted that it acted for the registered owner.
In relation to MDR the court found that they had held the purchase monies on trust and had acted in breach of trust when the monies had been released to Mary Monson, as there was an implied term that they would only be released on a genuine completion. Although the court found that MDR was not in breach of duty to the purchaser and acted with reasonable skill and care, nonetheless the judge refused to grant relief under s61 Trustee Act 1925. This was on the basis of an assessment of fairness that MDR was insured for events like this, whereas the purchaser was not, and the effect of the fraud on him had been disastrous. The purchaser had no recourse against Mary Monson (notwithstanding that they had been responsible for checking the seller's ID) or any practical likelihood of recovery against the fraudster, and whilst MDR had not done anything unreasonable, they were better placed than the purchaser to consider and achieve greater protection from the fraud. Therefore MDR were required to reconstitute the trust fund, comprising the purchase monies.
The analysis of the court, and in particular the denial of relief on the basis that MDR was insured will no doubt ring alarm bells. An appeal is underway (in this and in an earlier matter arising from similar facts: P&P Property v Owen White & Catlin (2016)) and it is rumoured that the Law Society may intervene.
Legal professional privilege is well-established as a fundamental right. However, where a client commences proceedings against a solicitor who formerly acted for him, the client impliedly waives the right to claim privilege in respect of documents that are necessary for the solicitor to defend himself. Following Eurasian Natural Resources Corp Ltd v Dechert LLP (2016), the Court of Appeal's judgment makes clear that this is a limited waiver. As a result, privilege will not have been waived for all purposes and this may have practical implications for a firm. For example, if the SRA were to investigate the same matter that is the subject of the claim, it will not necessarily be the case that the firm can provide the client's legally privileged material to the regulator on the basis that there has been a claim.
Judgments over the past year have been a mixed bag for solicitors and their insurers. We have seen some positive news with the Supreme Court decision in BPE representing the most significant of the cases. The courts have generally been prepared to take a restrictive view of the scope of retainers, and have declined to push them out at the edges as suggested by claimants. The clarification of the foreseeability test has also been helpful in restricting damages recoverable by claimants, as have the findings in the mitigation-related cases.
On the other hand we have seen comments on limitation which have the ability to push back the time bar that claimants face when bringing claims, and a decision on liability in fraud cases with potentially wide-ranging adverse ramifications.
As mentioned above, a number of these decisions are being appealed. There may therefore be further developments in those areas in 2017/18. We await the outcomes with interest.