Solicitors' liability: An evolving landscape

Nearly 20 years after the House of Lords' decision in South Australia Asset Management Corporation v York Montague Ltd (SAAMCo) [1996] UKHL 10, the courts continue to approach questions of limiting liability and recoverable losses by applying the SAAMCo test.

SAAMCo drew a distinction between a duty to provide information for the purpose of allowing a client to decide on a course of action (the information duty) and the duty to advise a client as to what course of action to take (the advice duty). The courts have followed this most recently in the Court of Appeal in Gabriel v Little [2013] EWCA Civ 1513 and the High Court in Credit and Mercantile v Nabarro [2014] EWHC 2819 (Ch).

In Gabriel, the claimant provided a property developer with a loan to be secured on a building. The money was intended for building works but was instead used to purchase the property and pay off other loans secured against it. The claimant alleged a breach of trust by the defendant solicitor, claiming that had he known how the money was to be used, he would not have proceeded with the loan.

The Court of Appeal applied SAAMCo and found that the solicitor was in breach of trust for failing to communicate information to the claimant (that is, the true purpose of the loan). However, he was only responsible for the foreseeable consequences of the information being wrong, and not for any other losses that were not attributable to information not being passed on, such as losses resulting from a fall in the property market. The matter is under appeal to the Supreme Court.

Similarly, in Credit and Mercantile, where a solicitor failed to advise a lender that planning permission on a property could not be implemented, the High Court found that, applying SAAMCo, the recoverable loss was limited to the difference between the actual value of the property and the value if the planning permission could have been implemented.

It is positive news for solicitors that the courts have shown willingness to limit recoverable losses in this way.

Breach of trust

In the wave of continuing lender claims against solicitors, we have seen a surge of claimants seeking to maximise their recovery by framing the claim in breach of trust and thereby seeking an equitable remedy. The benefits of such arguments are that lenders can often recover more in equity and avoid, for example, arguments that SAAMCo or contributory negligence should limit their recovery.

The Supreme Court in AIB Group v Mark Redler and Co Solicitors [2014] UKSC 58 made clear that in breach of trust claims principles of causation of loss apply (similar to, although not the same as, those in contract and tort claims) and therefore a lender is only entitled to damages that represent the loss the solicitor has caused. This is a positive development, showing that while breach of trust is a powerful weapon for claimants, they cannot simply rely on it to claim everything, including loss caused, for example, by their own failure to take adequate security.

Legal or commercial advice?

While the courts have long appreciated the distinction between legal and commercial advice, and confirmed that a solicitor’s duty includes the former but does not extend to the latter, solicitors continue to be on the receiving end of claims from clients seeking to pin the failure of a bad commercial deal on their legal advisers. In Pickersgill v Riley [2004] UKPC 14, the Privy Council identified that the scope of a solicitor's duty depended on the terms of the retainer, the instructions given to them, and the characteristics of their client.

In Wellesley v Withers [2014] EWHC 556 (Ch), the court found that the firm did not owe the client a duty to advise that a term in an agreement provided that a repayment to a counterparty must be in dollars, exposing the client to an exchange rate risk. The first issue would have been apparent to an intelligent layman (as the claimant was) and the second was held to be a business, not a legal, issue that the claimant could assess for himself. The case is under appeal.

Another example demonstrating the principle that the scope of the duty will depend on the sophistication of the client is Rentokil v Goodman Derrick [2014] EWHC 2994 (Ch), where the claimant was a highly sophisticated commercial client acting via an in-house solicitor of considerable experience. The High Court found that it was not necessary for the defendant solicitors to provide a line-by-line explanation of a contract for the sale and purchase of a property. As a result, when the claimant alleged that the solicitors had failed to draft adequately and explain the definition of unacceptable conditions, the claim failed.

It is crucial that solicitors assess whether their clients actually understand the advice being given. In Procter v Raleys Solicitors [2015] EWCA Civ 400, the claimant was successful in his claim against the defendant solicitors, who had incorrectly advised him on all the heads of damage to which he was entitled. The Court of Appeal found that the solicitors had acted negligently: they had never met the client in person and took instructions using lengthy and unclear standardised letters. It was held that there had been a failure to ensure that the advice had been correctly understood by the claimant.

Loss of a chance

Wellesley also brought into focus the fact that there appears to be a distinction between circumstances where a claimant has lost the opportunity to obtain business from a particular third party, and where the claimant has lost the chance to trade profitably generally (i.e. with a number of third parties). In the former case, if the claimant shows there was a substantial chance that the third party would have acted so as to confer a benefit on them, damages will be assessed on a loss of a chance basis. In the latter, the claimant must prove on the balance of probabilities that they would have traded profitably.

The most favourable approach for the claimant will vary depending on the circumstances. Loss of a chance may be seen by some claimants as a way to get around the necessity of meeting the burden of proof. In loss of chance cases, in order to make a recovery, the claimant will only have to show there was a real and substantial chance of the desired outcome happening, although a loss of chance discount will then be applied to the damages. In other cases, the claimant will not recover unless they can show on the balance of probabilities that the desired outcome would have happened, although no discount will be applied.

Standard of care

As business becomes increasingly global, many firms are looking to expand their international footprint. The recent decision in Giambrone and Law [2015] EWHC 1946 is a reminder that solicitors who do so must make sure that they apply the requisite standard of care in their dealings with their clients.

In this case, the court held that an Italian lawyer, practising in England and Italy, was to be held to the expectations in English law of an English firm of solicitors, and therefore, when advising in relation to property developments in Calabria, the solicitor should have advised the clients of the risks of the involvement of the construction industry in organised crime, even if Italian lawyers might not have seen the need to do so.

A word on tax

Finally, as there continues to be a highly publicised clampdown on tax avoidance, claims against solicitors arising out of tax issues are unlikely to diminish. The recent decision in Symrise AG v Baker and McKenzie [2015] EWHC 912 (Comm) indicates the courts will look unfavourably upon claimants who do not take reasonable steps to mitigate any tax liability before seeking to recover it from their advisers. Here, the claimant alleged the defendant solicitors had acted negligently in advising on the tax implications of an inter-company loan agreement. Part of the wording had sought to push debt down to the claimant's Mexican subsidiary, an arrangement which was later challenged by the Mexican tax authority. The claimant reached a compromise in proceedings brought against the tax authority in respect of the unpaid tax bill and subsequently brought proceedings against the solicitors to recover the amount of the settlement.

While the solicitors' negligence had been the cause of the tax authority's investigation, the court found the claimant had acted unreasonably in abandoning the proceedings, in which it would have had a good chance of succeeding. The claimant's tax recovery claim against the solicitors failed as a result. SJ

Sarah Clover, pictured, is a partner and Ed Cotton is a senior associate at Clyde & Co. The firm acted for the successful solicitors in Rentokil and Credit and Mercantile @ClydeCoNews