Judgment Against Named Borrowers SetAside in Light of Commercial Rationale ofthe Transaction
The most surprising feature of this decision is the direction to set aside the judgment against Mr Lynch’s wife, Eileen Lynch, and his children, Judith, Therese, Philipa and Paul. The entire Lynch family had argued that they had understood the loan was limited in recourse only to the land which had secured the loan and not to them personally. However, the clear terms of the facility letter demonstrated that the loan was full recourse against all the family.
The Court ruled that the terms of the facility letter bound Mr Lynch and that, on the face of it, it recorded joint and several obligations against all the Lynch family as co-borrowers. However, the Court observed that whilst they were indeed expressed as parties to the facility letter, their names were only added to the last draft of the letter on the day before financial close as they were co-purchasers of the relevant land. The Bank had been advised by its lawyers that to name them as borrowers would simplify enforcement of the security.
The Court found that “the bank had no interest in those parties [Mrs Lynch and the Lynch children] and their addition to the transaction neither created any additional risk for the bank, nor provided any additional security in terms of payment”. And the Court found that the correspondence from the time “establishes from a commercial point of view [that] the bank was focussed only on the possibility of recovery from [Mr Lynch and his original co-purchaser, Mr Conlon.]”
Therefore the Court concluded that “in all the very particular circumstances of this case” it was questionable as to whether it would be equitable to permit the bank to enforce its legal claim against the wider members of the Lynch family, or at least to do so without having first pursued execution against the "principal borrowers", being Mr Lynch and his original co-purchaser Mr Conlan. Accordingly the Court set aside the judgment and the issues between the Bank and the other members of the Lynch family may be re- litigated, although this is not yet clear.
The startling proposition in this judgment for lenders is the suggestion that notwithstanding the plain terms of the facility letter, regard was had to the commercial focus of the Bank at the time and the Bank’s own legal advice. These of course were all matters private to the Bank at the time. The judgment will likely encourage other co-borrowers, particularly family members of a dominant individual, to challenge claims on the grounds of lack of commercial intent by the Bank.
Such defences, if permitted, would undermine the clarity of the common law where the terms of the written documents signed by the parties have primacy. It would enable such defendants to seek to trawl through a lender’s internal records to establish the commercial rationale for a transaction, which would be a process fraught with uncertainty and would cause considerable delay and expense in litigation. However, as the Court did restrict the decision to “all the very particular circumstances of this case” the decision may not become a precedent in this regard.
Extent Of Duties Owed By Professional Advisors
In dismissing claims against two solicitors' firms, LK Shields and MOP, the Court commented on the extent of the duty of care owed by solicitors, and other professional advisors, and how and, in particular, such duty can extend beyond the express terms of their retainer or engagement letter.
LK Shields had been instructed by Mr Lynch to advise on a limited basis in respect of the co-ownership agreement being negotiated between the Lynchs and Mr Conlan. MOP was acting for the Lynchs and Mr Conlon in respect of the purchase and the borrowing. However, over time, the role of LK Shields expanded. In this context, an LK Shields solicitor interpreted the facility letter and surrounding communications and wrongly advised the Lynchs that the facility letter was limited in recourse to the secured lands only. The Lynchs claimed that they relied on this advice and would not have entered the transaction were the loan full recourse to them personally.
The High Court had previously ruled that, whilst LK Shields’ involvement had moved beyond advising on a co-ownership agreement such that a relationship of proximity existed between the parties, no duty of care arose in relation to the loss suffered. This was because it was not reasonable to expect the LK Shields solicitor to have known that the advice was critical to the Lynchs proceeding with the transaction.
The Supreme Court disagreed with this finding, and held that a duty of care did exist. On an in-depth analysis of the authorities, Judge O’Donnell concluded 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 owes a duty of care independent of contract, and indeed, owes a duty of care in respect of areas outside the original retainer.… [A]n advisor such as a solicitor will owe a duty of care when giving advice to a client on a matter within his or her expertise and where the request for the advice, and provision for it, is neither in casual circumstances nor entirely separate from the business then being transacted. It is not necessary that a client make very clear that the advice is critical to any decision which he or she might make”.
However, while the Court found that LK Shields owed a duty and that it had given the wrong advice to the Lynchs, it did not impose liability on LK Shields. The reason being that the Court also found, as a matter of fact, that the Lynchs had not relied on this advice in deciding whether or not to enter into the transaction. The Court concluded that
“notwithstanding the conclusion that [LK Shields solicitors] owed a duty of care to the Lynch family in relation to the facility letter, and were negligent, the claim based as it was squarely on the decision to enter the loan must fail since there was no reliance on the advice, and therefore any damage was not caused by the error of the solicitors”.
The claim against MOP was dismissed because MOP was found to have properly passed on the relevant information regarding the terms of the facility letter to LK Shields, which had taken on an enlarged role in relation to advising the Lynchs. Therefore the MOP solicitor was entitled to consider his duty fulfilled once he had accurately imparted the information on recourse to LK Shields.
This case is a welcome exposition of the law of the obligations of professional advisors. It is clear that professional advisors will not be able to hide behind the four corners of their retainer if the facts of the case involve a mission-creep in the form of expansion of roles undertaken, and therefore duties owed. Once the professional advisor assumes a role within his expertise, even if that role is not provided for in the black-and-white of the retainer document, the advisor has a duty of care in relation to that role, which duty can found liability for negligence where a client relies on such advice to their detriment.
Reversal By The Supreme Court Of A Finding Of Fact
The exculpation of LK Shields turned on the Supreme Court’s use of a rarely employed and limited jurisdiction to analyse and overturn a finding of fact made by the High Court. The Court ruled as incorrect the finding of the High Court that Mr Lynch had made a last-minute decision not to proceed with the transaction unless the loan was non- recourse to him and his family. Therefore, the Lynchs did not rely on the flawed advice from LK Shields and so that advice was not the cause of their loss.
The Court reached this holding on the narrow basis that “the court of appeal will only set aside a finding of fact based on one version of the evidence when, on taking a conspectus of the evidence as a whole, oral and otherwise, it appears to the court,notwithstanding the advantages which the tribunal of fact in seeing and hearing the witnesses [had], the version of the evidence which was acted on could not reasonably be correct.”
Here the Supreme Court held that this high threshold was surpassed. The Court concluded that “by every known standard for the testing of oral evidence, the assertion that Philip Lynch made this last minute decision must rank as highly implausible and therefore one which would require careful analysis and justification before it should be accepted”.