A recent English Court of Appeal decision reinforces the principle outlined in South Australia Asset Management Corporation v York Montague(“SAAMCo”) that, unless a solicitor’s retainer requires that he advise on the taking of a particular commercial course of action, the solicitor will not be liable for losses which flow from the commercial risk (even if the solicitor was negligent in the transaction).
In Gabriel v Little Mr Gabriel had loaned £200,000 to Whiteshore Limited, a company of his friend Mr Little, to develop a building at an airfield site (the “Site”). The loan was made on the basis of a facility letter dated 13 December 2007 which was drafted by Mr Gabriel’s solicitor. The facility letter provided that the money was ‘a contribution to the costs of development of the property’.
In fact most of the loan was used to purchase the Site from High Tech, Mr Little’s principal company, and the remainder was used to discharge debts of Mr Little. Mr Little did not repay the loan or significant interest accruing thereon and Mr Gabriel recovered only £13,000 on sale of the Site. Mr Gabriel sued Mr Little and his companies. He also sued his solicitors for negligence and breach of duty in transferring the money, most of which was transferred pursuant to the sale of the Site.
The trial judge noted that Mr Gabriel’s solicitor had been informed by High Tech’s solicitor of the intended use of the monies. In this regard, there was no misrepresentation on the part of Mr Little. He also found that the solicitor mistakenly assumed that this accorded with his client’s intentions and failed to clarify the position. He determined that it was the solicitor’s duty to provide this information to his client to enable him to make an informed decision. He found that the solicitor was in breach of duty and that he failed to exercise reasonable care and skill in drawing up the facility letter.
The trial judge acknowledged that, unless specifically instructed, a solicitor does not normally have a duty to advise on the commercial wisdom of a transaction. He noted however that if, in the course of doing that for which he is retained, a solicitor becomes aware of a risk to the client, it is his duty to inform the client. While the solicitor had no duty to advise Mr Gabriel as to the commercial risk inherent in the loan he should have explained the application of the funds to Mr Gabriel. The solicitor was therefore found liable for all losses incurred in Mr Gabriel entering into the transaction.
On appeal, the Court of Appeal agreed that the solicitor had a duty to ensure he understood Mr Gabriel’s instructions. The solicitor failed to appreciate that Mr Gabriel thought his loan was for development purposes and this failure was compounded by him drafting the facility letter so as to refer to development as the purpose of the loan, even though the solicitor knew this was not the case. The Court of Appeal consequently found that the solicitor breached his duty of care.
Applying SAAMCo principles, however, the judge found that the solicitor’s duty was to provide Mr Gabriel with information to enable him to decide on a commercial course of action. His duty was not to advise Mr Gabriel on what commercial course of action to take. There was no evidence that Mr Gabriel had ever informed the solicitor about the commercial basis for the transaction and the court noted Mr Gabriel’s own admission that he never sought his solicitor’s advice as to the commercial wisdom of the transaction.
The court drew a distinction between the consequences of a duty of care being breached and the hypothetical consequences of a duty of care being fulfilled. It found that the reality of the transaction was that recovery of the loan and interest was always highly speculative. A number of commercial risks taken by Mr Gabriel were identified including that his security was always an undeveloped site in poor repair for which he obtained no valuation and that he expressly instructed his solicitor not to conduct searches on the site.
Mr Gabriel knew that the £200,000 was being paid to Whiteshore with the result that, once drawn down, he had no control over how it was spent. In the absence of any deliberate concealment by Whiteshore about the intended application of the monies, the Court could not conclude that the solicitor’s failure to inform Mr Gabriel about the loan monies’ application caused the losses suffered. The Court of Appeal ultimately concluded that Mr Gabriel, who was a sophisticated businessman, took on various commercial risks for which he had to bear responsibility.
This judgment reinforces a recent line of authority on ‘no transaction’ damages cases to the effect that, even if negligent, a solicitor will only be liable for the losses flowing directly from their breach of duty and not all losses arising from their client’s commercial decision to enter into a particular transaction.
In Ireland, the Supreme Court has also recently considered the scope of a solicitor’s retainer in its judgment in Whelan v. AIB. The Supreme Court accepted that there can be “mission creep” and consequently, as a transaction proceeds and develops, a solicitor may incur a duty of care that extends beyond the strict terms of his original retainer, provided there is sufficient proximity.
Where material information affecting the client comes into the hands of the solicitor, the solicitor has a duty to bring this information to the attention of the client, notwithstanding that it is strictly outside the scope of the original retainer. However, in the circumstances of the case there were two firms of solicitors advising the client on different aspects of the transaction and one solicitor passed material information to the other solicitor in respect of aspects that the second solicitor was advising on. The Supreme Court held that the first solicitor had discharged its duty to the client by passing on the information to the second solicitor and it was not necessary for the first solicitor to bring the change in the transaction directly to the attention of the client.