In a High Court decision this week it was held that there is no general duty on a solicitor to check the credit status of the seller in a conveyancing transaction unless expressly instructed.
The judgment also provides a useful analysis of the extent to which a solicitor should advise a client regarding the risks of a particular transaction generally, not just in the context of conveyancing.
In Kandola v Mirza Solicitors LLP  All ER (D) 26 (Mar), the Claimant sought damages against the defendant firm of solicitors which acted for him in the proposed purchase of a property in 2010.
Upon exchange of contracts a deposit of £96,000 was paid on terms, somewhat unusually, that it be held by the seller's solicitors as agents for the seller (rather than the normal position where it is held by the seller's solicitors as stakeholder and cannot pass to the seller without the buyer's consent). The seller did not complete and the deposit was lost.
The seller was subsequently made bankrupt and the solicitors who acted for him disappeared. The Solicitors Regulation Authority intervened and the two principals of the firm were struck off for fraudulent misuse of client money.
As a result the Claimant - a successful businessman who owned a string of care homes and buy-to-let properties - brought a claim against his solicitors for breach of duty.
The Claimant's main complaint was that he should have been better advised about the risks involved and that his solicitor should have made a bankruptcy search or a Land Registry priority search prior to exchange, either of which would have revealed a bankruptcy petition which by that time had been filed against the seller. He submitted that had he known this fact he would not have proceeded with the transaction on the agreed terms. Despite his commercial experience, it was argued that he was not sophisticated with documents.
The Claimant's counsel accepted that it was not normal procedure for either search to be carried out by a buyer's solicitor before exchange, and there was no recommendation to do so in the Law Society's Conveyancing Handbook. However, it was argued that the circumstances of the transaction required the solicitor to go "beyond the Handbook" and take steps to assist in gauging the extent of the credit risk being run. He argued that any reasonable solicitor would have taken such steps.
The Defendant solicitors argued that the Claimant was fully and properly advised throughout the retainer including specific advice in writing not to exchange contracts on the basis agreed but that he elected not to follow that advice. In addition, that the solicitors were not aware of all aspects of the transaction and that much was going on directly between the Claimant and the vendor.
The Court found that the Defendant was not in breach of duty: the Handbook directed that a solicitor should warn his client of the risks associated with paying a deposit on the basis that the seller's solicitors acted as agent for the seller and this was adhered to by the Defendant. In addition it was not ordinary conveyancing practice (nor suggested by the Handbook) for a bankruptcy search to be carried out.
In reaching its decision, careful consideration was given by the Court to the extent to which a solicitor should explain matters such as the risks involved in taking a particular step.
The key issue was the difference between advising an inexperienced client (or one dealing in matters he/she was not familiar with) and an experienced client. When an explanation regarding the risk was given, the solicitor should appropriately tailor it to fit his knowledge of the client's understanding. If the client asked for further explanation or appeared not to understand, the solicitor might have to go into more detail. However the solicitor was not a guarantor of his client's subjective understanding and would have fulfilled his duty if he gave an explanation in terms that the client reasonably appeared to him to be able to understand.
The Court held that there was no general duty on the part of the solicitor to check the credit status of his client's counterparty in a transaction unless instructed to do so. The position would be different if there was an established practice of obtaining particular types of information in the course of a particular type of transaction.
While there might be circumstances in which a solicitor should check specifically for the commencement of bankruptcy proceedings, since that might affect a party's ability to complete a transaction or give good title, this was not the same as a general duty to make checks about risk of future insolvency. Such a duty did not arise merely because the client was incurring a risk of loss if the counterparty became insolvent, for that would be true in most if not all transactions. Nor did such a duty arise because the transaction took an unusual form which involved a solvency risk, for example on release of a deposit, where the more normal form would not. In such cases, the duty of the solicitor was to advise of the unusual risk, but not to seek to evaluate it unless specifically instructed to do so.
In the present case, the risks had been adequately explained to a person of the Claimant's experience. The Court found on the evidence that the Claimant had understood the advice he had been given and the Defendant had not been under any duty to make the suggested searches prior to exchange. If the Claimant had wanted to check the seller's solvency, he could have done so himself.
The Court reinforced the proposition that the solicitor's duty to explain matters to his client takes account of the client's own experience and the solicitor is not required to explain matters that should be obvious to a person with the client's experience or background (as found in Yager v Fishman & Co  1 All ER 552 and Carradine Properties v DJ Freeman & Co  Lloyd's Rep PN 48).
In dismissing the claim, HHR David Cooke concluded:
" …just because a solicitor (or other professional) could take a particular step does not mean that it is his duty to do so. His duty is always defined by his retainer. If he advises his client of a risk, it is a matter for the client to decide whether he wishes to take that risk, or to obtain further information or security before doing so. The solicitor is not, in general, obliged to seek out such further information unless instructed to do so."
While many aspects of this case were fact specific, with the Court finding the Claimant's evidence inconsistent and to be treated with "great caution", the examination of the extent to which a solicitor should advise a client regarding the risks of a particular transaction has wider relevance in the context of professional negligence.
The judgment makes clear that an inexperienced client, or one dealing in matters he is not familiar with, may require more explanation before he can sufficiently understand the risk he is about to take. An experienced client however is likely to need less explanation or even none at all. In part, this is because the decision whom to trust in business is a commercial decision for the client to take and not the solicitor.