Are lawyers obliged to warn their clients of risks associated with matters not covered by the original scope? This question is raised in many compensation lawsuits against lawyers worldwide for breaches of duty to advise.
Supreme Court jurisdiction in Germany
In Germany there is a well-established supreme court jurisdiction in this respect. The German Federal Court of Justice (Bundesgerichtshof, “BGH”) has ruled several times that the scope and content of a lawyer’s contractual obligations depend on the client-lawyer relationship and circumstances of the individual case.2 Within the scope as defi ned by the client, the lawyer is generally obliged to provide the client with general, comprehensive and as exhaustive information as possible. In case of a limited scope, the lawyer may nevertheless be obliged to provide information and warnings outside the actual subject matter. Such warning and notifi cation obligations are linked to the information and knowledge gap between the lawyer and the client. The prerequisite for such obligations, however, is that the risks threatening the client are obvious to the lawyer, that the lawyer is aware of these risks, or that these risks become obvious to the lawyer during proper handling of the case.3 The risks are obvious if they are closely related to the limited scope and are evident to the average consultant at fi rst glance.4 Furthermore, the lawyer must have reason to believe that his client is not aware of the risks. The requirements for a warning and information obligation going beyond the agreed scope must be presented and proven by the client if he wants to hold the lawyer liable and claim damages for failure to provide warnings and information.
The case law in Great Britain is generally in line with these principles established by the Federal Court of Justice. A decision of the Court of Appeal of 25 October 2018 in the Lyons v. Fox Williams case has attracted much attention.5
Decision of the Court of Appeal in Lyons v. Fox Williams
The plaintiff was CFO and Managing Partner of Operations for Ernst & Young (“EY”) in Moscow. He was seriously injured in a motorcycle accident. As a consequence of the accident, part of his right foot had to be amputated. His right shoulder and right arm were permanently damaged. The plaintiff asserted claims under two insurance contracts - Accidental Death & Dismemberment Insurance and Long Term Disability Insurance.
The plaintiff hired a law fi rm - the defendant - to advise on his claim under the fi rst insurance policy which had been challenged by the insurers. The scope as agreed in the engagement letter did not mention the second insurance contract. After the plaintiff left EY, he instructed the defendant to assist him in an amicable agreement with EY. The settlement reached between the plaintiff and EY also covered any non-existing claims under the fi rst insurance. Possible claims under the second insurance became time-barred later.
The plaintiff was of the opinion that the defendant had warning and information obligations with regard to his claims from the second insurance and had violated these obligations. The court of fi rst instance rejected this view. The plaintiff had not instructed the defendant to advise on the enforcement of claims against the second insurer. The law fi rm had not been obliged to warn the plaintiff of a statute of limitation of any claim against the second insurer.
The Court of Appeal upheld the first instance decision. In its reasoning, the Court referred to two court rulings that also concerned the scope of a lawyer’s contract (Credit Lyonnais SA v. Russell Jones & Walker and Minkin v. Landsberg).6 In the case of Credit Lyonnais SA v. Russell Jones & Walker, the judge stated that the duties of a lawyer arise from the specific retention and that lawyers are not generally obliged to spend time and effort on other matters. However, if a lawyer becomes aware of a risk (or potential risk) to the client while performing his duties, he is also obliged to inform the client. In the case of Minkin v. Landsberg, the Court of Appeal established the following key principles on the duties of lawyers to provide legal advice:
- Lawyers are obliged to perform the tasks which they have agreed upon with the client .
- Lawyers are also obliged to carry out work reasonably related to these tasks
- In determining what reasonably relates to the scope, all circumstances of the case should be taken into account, including the client’s level of experience and the amount of fees the client is prepared to pay for the lawyers’ work
- Lawyers may limit the scope. If possible, such limitation should be agreed with the client in writing
In light of these principles, and having assessed the circumstances of the individual case, the Court of Appeal concluded in Lyons v. Fox Williams that the law firm had no general duty to warn the client in regard to the enforcement of claims under the second insurance contract. The scope was limited from the outset.
Consequences for engagement letters
Lawyers and professional indemnity insurers welcome the clarification in the ruling of the Court of Appeal in Lyons v. Fox Williams, that there is no general warning obligation for a lawyer and that the scope of lawyers’ duties can be limited. In this respect, particular attention must be paid to the drafting of engagement agreements. The content and scope of the agreed services should be recorded in writing and described as precisely as possible. However, during engagement negotiations onemust keep in mind that the lawyer is obligated to clarify facts and to provide information on the agreement itself. Overall, limiting the scope - in addition to limiting liability - is an effective and simple way for law firms to limit risks.