Both insurers and policyholders of professional-indemnity policies should pay heed to recent a Supreme Court decision that looked at advisors’ duty of care.
The case involved a property developer, who approached an investor to purchase 86 acres of development land. A loan was obtained from a major bank. The investor instructed a law firm to draft a co-ownership agreement to delineate the division of the lands between himself, his wider family and the property developer. A second law-firm was appointed to act on the joint venture’s behalf in relation to the purchase of the land. The sale closed in 2007 and, shortly thereafter, the value of the land dramatically declined.
The bank initiated proceedings against the investor and his family for summary judgment for the full amount of the loan. The main defence was that the loan was issued by the bank on a non-recourse basis (i.e. the bank had no recourse once it had sold the land). Against this background, the investor and his family issued proceedings against both of the law firms on the basis that they had received poor advice regarding whether the loan was non-recourse in nature.
The High Court dismissed the action against the solicitors. The judge commented on the first law-firm’s duty of care by virtue of its retainer. The judge observed that the advice provided by the first law-firm had moved beyond merely advising on the co-ownership agreement and that “a relationship of proximity undoubtedly existed between the parties”. The judge decided, however, that it “was not just and reasonable to impose a duty” on the firm in the circumstances, as the solicitors could not have been expected to have been aware that advice given regarding the recourse aspect of the bank’s facility letter would have determined their clients’ participation in the transaction.
The judgment was appealed to the Supreme Court. While the appeal was denied, the Supreme Court disagreed with the High Court on the extent of the solicitors’ duty of care.
The Supreme Court said, “It has been beyond controversy for more than half a century that an advisor may owe a duty of care when making statements which may be relied upon even if there is no contract or retainer covering the advice. It is also well established that a solicitor may owe a duty of care independent of contract, and indeed, owe a duty of care in respect of areas outside the original retainer”.
The Supreme Court’s judgment demonstrates that a professional advisor will not be able to use the specific limits of their retainer as a shield if the facts demonstrate that the advisor willingly expanded their role in a transaction. The Supreme Court’s view in this case was that, once the professional advisor engages in such an expansion, that advisor has a duty of care that flows from this decision.