Reducing the blur

Is it reasonable for clients to expect their lawyer to warn them, where appropriate, against entering into a transaction - even where the client hasn't asked for such advice? Most lawyers would instinctively say no. But do clients see it that way? Certainly there has been no shortage of cases where, in effect, clients have argued that their lawyer was under a duty to advise on the commercial wisdom (or otherwise) of a transaction. In this article I will look at:

• The principles the courts use to decide such cases;

• Key decisions; and

• How fee earners can protect themselves from such claims.

The principles

Solicitors' breaches of duty can arise in the following ways:

• Breach of duty arising from an express term of the retainer;

• Breach of an implied duty under the retainer;

• Breach of an implied duty arising other than under the retainer;

• Breach of an implied duty to a third party; or

• Breach of trust or fiduciary duty.

With the exception of the first and last of these, the same standard of care applies to each of the duties that are collectively referred to as 'negligence'.

Breach of these duties can arise either through the giving of incorrect advice, or a failure to give advice. In relation to incorrect advice, this can be advice as to the law (where the court has tended, understandably, to be unsympathetic to the defendant lawyer) or practical advice given in a legal context where liability will depend on the facts.

It is in relation to failure to give advice that most of the key case law arises. Such failure can occur where a solicitor neglects to provide advice that is specifically requested by a client, or (where no such request has been made) fails to advise where they were under an implied duty to do so. Again, it is the latter scenario that has proved most contentious.

On the face of it, lawyers can take encouragement from the case law, notably Midland Bank v Hett, Stubbs Kemp [1979] Ch 384 where the court held that 'the court must beware of imposing upon solicitors...duties which go beyond the scope of what they are requested and undertake to do...the duty is directly related to the confines of the retainer'.

Following on from that decision, in Pickersgill v Riley [2004] PNLR 31 the Court held that 'in the ordinary way a solicitor is not obliged to travel outside his instructions and make investigations which are not expressly or impliedly requested by the client'.

However, it is not quite that straightforward. As Jackson & Powell are at pains to point out in Jackson & Powell on Professional Liability, 7th edition, there is no hard and fast rule, and each case is judged on its own facts. What is, or is not within the scope of the retainer is not limited to the express terms, but will also include matters which fairly and reasonably arise in the context of the work. In determining that question the court will be influenced by the experience (or lack thereof) of the client. There are also specific duties on solicitors to advise of any obvious risks (per Boyce v Rendells [1983] 286 EG) and to advise on the content of legal documents (per Newcastle International Airport v Eversheds [2012] EWHC 2648 (Ch)).

Key decisions

So how have these general principles been applied in the context of claims seeking to make the lawyer responsible for the client's commercial decision-making, including their decision to proceed with the transaction per se? Again, on the face of it, the cases are encouraging for solicitors and their insurers.

In a much-quoted passage in the judgment in Football League v Edge Ellison [2007] P.N.L.R. 2, Mr Justice Rimer said: 'Is the solicitor supposed to review the whole range of commercial considerations that underlie a particular deal, work out which ones he is concerned the client may not have given sufficient thought to and remind him about them? In my judgment the answer is no.'

The allegation in that case was that the lawyer should have advised on the question of the counterparty's solvency and whether guarantees should have been sought. Whilst the claimant was unsuccessful, they did establish a duty to advise on one basis in relation to the guarantees, but the court held that no loss was attributable to that failure.

Other decisions in this area are arguably more straightforward, in each case the claimant failing to establish that the lawyer was under a duty to provide unbidden advice:

• Clarke v Boyce Mouat [1994] 1 AC 428: on whether the transaction was a prudent one;

• Yager v Fishman Co [1944] 1 All ER 552: on whether the client should determine a lease or keep it in existence and seek a new tenant;

• Carradine Properties v DJ Freeman [1999] Lloyds Rep. PN 483: on the question of whether the claimants might be insured in respect of the claim on which the solicitors were instructed;

• Virgin Management v De Morgan [1996] NPC 8 on whether VAT might be payable and the possibility of negotiating a deal whereby the counterparty would pay it; and

• Reeves v Thrings Long (No.1) [1996] PNLR 265, on whether there were adverse commercial implications or risks associated with restrictions on access to the car park of a hotel being acquired by the client (the legal implications having been explained).

Again, however, there is no clear-cut rule, and, for the following reasons, it is likely that we will see further similar cases against lawyers in the future:

• As the decision in Football League shows, each case turns on its own facts.

• Distinguishing legal and business matters is not always easy, as Bingham LJ pointed out in County Personnel v Alan R Pulver Co [1987] 1 WLR 916: 'I cannot accept the distinction drawn between legal consequences and financial implications, because in this case the significance of the legal consequences lay in the financial implications'.

• There is room for argument on the question of what fairly and reasonably falls within the retainer, especially in the absence of a Chapter 1 letter, or where the wording of any letter is ambiguous or has been superseded as a result of scope creep.

• Likewise, there may be argument as to the experience (or lack thereof) of the client, insofar as this has a bearing on the scope of the lawyer's duty of care. In Football League, the client was undoubtedly sophisticated, as was accepted by the court. Had they been inexperienced, the outcome may have been different.

• Claimants are likely to frame their case on an alternative basis, especially in the light of Football League; hence in Luffeform Ltd v Kitsons LLP [2015] EWHC B10 (QB) (see also Credit Lyonnais v Russell Jones & Walker [2002] PNLR at 28) the court accepted that the solicitor had no duty to advise the buyer of a pub business on the commercial risks inherent in the transaction but nonetheless held that they should have spotted and drawn to the seller's attention an obvious risk, namely the absence of a restraint of trade covenant stopping the seller from setting up their own pub business some three miles down the road. Likewise, in Newcastle International Airport v Eversheds the solicitors were held in breach of duty for failing to provide a covering note explaining the contents of draft employment contracts (this in spite of the evident experience of the recipient of the advice). Fortunately for the lawyers in both cases, the claims failed on causation.

• Finally, and rather obviously, Football League was only a 'bad' claim in hindsight. Given the quantum of the claim (some £142m), and the fact that the claimants succeeded on one element of the claim, who is to say what sizeable settlement offer Edge Ellison and their insurers may have made and which would, had it been accepted, have avoided the case coming to trial?

Practice points

Given these uncertainties, how can law firms best protect themselves from such claims? The following suggested practice points should, if applied consistently, mitigate the risks. Whilst the majority of these points fall to be considered at the outset of the matter, all of them should be kept under review throughout the course of the matter, both as part of regular file reviews and on an ad hoc basis as necessary:

• First - and this is something that insurers, and law firm risk managers have been saying for years - agree a detailed and specific scope of work with the client at the outset, saying what you are and what you are not doing (and responsible for). If you think that the client may not have considered some aspect of the commercial deal which they've struck, say expressly that you're not advising them on that. Ensure that you are 'lawyerly' in the wording used, avoiding wording that is ambiguous or open to interpretation. There's often resistance to this approach on the basis that it seems 'a bit negative' (or amounts to 'defensive lawyering') and at odds with the desire to be the client's 'trusted business adviser', but as the recent ruling in Balogun v Boyes Sutton & Berry [2015] EWHC 275 (QB) shows, having clear engagement terms and sticking to scope (see below) can succeed in driving off a claim.

• Diarise to keep the agreed scope under regular review and avoid - or formalise - any scope creep. Lawyers are notoriously poor at this. Beware in particular the enthusiastic junior lawyer keen to impress the client (and the client partner), giving 'off the cuff' advice on the phone or in the course of a client meeting.

• Remember that the wording of client-facing documents (for example, tenders) or on a firm's website might be taken into account by the court in determining the scope of a lawyer's duty. One doesn't need to look too far on law firm websites to find such statements as 'we will provide you with commercially-focused advice' or similar, with the word 'legal' going missing.

• Take into account the experience of the client, and don't make assumptions about their level of experience that may turn out to be wrong. Having a 'sophisticated' client may help, but as the Newcastle Airport case shows, it is not necessarily a 'get out of jail card'.

• Where you are consciously providing practical commercial advice with limited legal elements (where qualified to do so), consider the risk/reward ratio, scope carefully, and apply an appropriate cap on liability. Warning bells should ring where there is no tangible legal element to the advice, although the breadth of the Minimum Terms should ensure that there is professional indemnity cover for such work.

• The same applies where a fee earner is providing advice on how a client might best present their legal case from a PR perspective, both within the client's organisation (for larger corporate clients) and to the external media. Warning bells should ring where the subject matter is potentially newsworthy and the client hasn't engaged specialist PR advisers.

• Recognise any unusual risks entailed in the transaction and warn the client (although be aware that this will give rise to a duty if you choose to warn of some obvious risks but not others; the fact that you have a well-drawn scope of work may not rescue you).

• Consider the need to explain to the client the content and effect of legal documents. The level of detail will depend on the circumstances, including the client's experience. Again, this may meet resistance from fee earners if they perceive that the client won't read, or value this (or pay for it), or might see it as 'defensive lawyering'.

• Make attendance notes. They don't have to be formal - a legible manuscript note, or an e-mail to yourself, dropped onto the hard copy or electronic file, is fine.

• Take care when accepting any external roles, such as non-executive directorships, or attending client board meetings or AGMs where invited to do so. Many clients have an increasing expectation that their law firms will offer this sort of thing as a 'free value-add'. This could serve to increase a firm's exposure, for example where key commercial decisions are taken at meetings at which the fee earner is present. For the same reason, care should also be taken when providing secondees to clients.

Although these steps can mitigate the risk, they will be of little benefit if the firm's culture allows for maverick behaviours, especially among 'big beast' partners and rainmakers. In the recent ruling in Harding Homes v Bircham Dyson Bell [2015] EWHC 3329 (Ch) (which many managing partners will have read thinking 'there but for the grace…') Justice Proudman said of the property partner concerned: 'I suspect, although there was no evidence about this, that he regarded himself as a man of commerce rather than a typical solicitor', going on to criticise his failure to take notes of meetings, explain legal documents, or send out letters of engagement. She described his practice of asking clients to sign documents subject to amendment as '…. an accident waiting to happen and… the accident did in fact happen in this case.' Get the culture right, however, and good risk behaviours should naturally follow.

Peter Rogers is director of risk at Bevan Brittan (www.bevanbrittan.com)