The art of advising clients

A key part of a solicitor’s job is to provide clients with advice about risk. For these purposes, risk can conveniently be defined as the application of uncertainty to a client’s objectives (see, for example, the risk definition used in ISO 31000:2009). The effective provision of risk advice is a skilled and complex task, which deserves greater study by all lawyers.

Risk advice can be likened to painting a portrait. It involves a process of selection and accentuation of some attributes of the subject, and deselection or even blurring of others. Naturally, the client wants bold brush strokes depicting the benefits of the proposed venture. The question for the lawyer is what to do about the shadows and background detail.

This tension is best captured in a well-known quote by the Court of Appeal in Queen Elizabeth’s Grammar School Blackburn Ltd v Banks Wilson (a firm) [2001] EWCA Civ 1360: ‘Clients, I know, want two inconsistent things. They want confident advice on which they can act, and they want cautionary advice about the risks of doing so. It is a solicitor’s unhappy lot to have to try to satisfy both requirements simultaneously.’

Boundaries to advice

The initial boundaries of risk advice are set by the scope of the lawyer’s instructions. These should of course be recorded in the engagement letter. Usually, the lawyer is not required ‘to travel outside his instructions and make investigations which are not expressly or impliedly required by the client’ (see Gabriel v Little [2013] EWCA Civ 1513). A key word there is ‘impliedly’: it provides a foundation for an aggrieved client to argue for a much wider scope of advice.

There may also be sources external to the engagement letter that influence or determine the scope of issues on which risk advice is needed. These include any applicable regulation, codification of instructions such as the Council of Mortgage Lenders’ handbook, and of course the common law.

The scope of instructions does not precisely define the scope of risk advice. A lawyer may need to provide unasked-for advice where a risk is stumbled upon (see Credit Lyonnais v Russell Jones & Walker [2002] PNLR 2).

Materiality of risk

Often a lawyer will be duty-bound to advise a client on the material risks of a course of action. The use of the word ‘material’ implies the adviser must make a choice about the risks that are mentioned. Such a choice must not only reflect issues intrinsic to the risk itself (e.g. its likelihood or the ability to mitigate if it occurs) but also the client’s characteristics and preferences.

The most developed legal rules for risk materiality unsurprisingly derive from medical practice. The November 2016 guidance from the Royal College of Surgeons suggests the test of risk materiality is twofold: ‘whether, in the circumstances of the particular case, a reasonable person in the patient’s position would be likely to attach significance to the risk, or the doctor is or should reasonably be aware that the particular patient would likely attach significance to it’.

This reflects the decision in Montgomery v Lanarkshire Health Board [2015] UKSC 11, and that in turn demonstrates a judicial rejection of the paternalistic model where the adviser is the sole arbiter of what risks are material to the advisee. Recent case law such as Baird v Hastings [2015] NICA 22 (solicitors) and O’Hare v Coutts & Co [2016] EWHC 2224 (financial advisers) suggests an increasing tendency to apply the Montgomery approach to professional advisers. It may require a high degree of vigilance on the part of the lawyer to discharge a Montgomery test, especially in ascertaining the preferences and intentions of an unsophisticated client.

Of course, one shouldn’t take the application of Montgomery too far: clients and patients are not the same. Two particular differences concern sophistication and ability to pay. Unlike most medical patients, some lawyers’ clients may be repeat consumers of particular kinds of legal advice, and a client’s lack of means may delimit the scope of advice (see Minkin v Lesley Landsberg (Practising As Barnet Family Law) [2015] EWCA Civ 1152).

Expression of risk

Lawyers should think carefully about how to express the size of a risk to a client. Words like ‘modest’, ‘reasonable’, and ‘big’ are capable of different subjective interpretations.

If words fail, then what about numbers? Percentages offer the prospect of greater precision and standardisation when describing risk, but perhaps also a greater risk of misuse and misunderstanding.There has been little judicial consideration as to how percentages translate into the expression of likelihood, although in Levicom International Holdings BV & Anor v Linklaters (a firm) [2010] EWCA Civ 494 Lord Justice Stanley Burton appeared to equate a 70 per cent chance of litigation success with the adviser being ‘very confident indeed’.

The case law makes it clear that it can be the duty of a lawyer not only to express their opinion as to the ‘correct’ analysis of a legal issue, but also to point out contrary arguments and explain the consequences if that opinion were not upheld. In the context of interpretation of legal language this is particularly important (see, for example, Queen Elizabeth’s Grammar School and Herrmann & Anor v Withers LLP [2012] EWHC 1492). Likewise, when advising on the risks of litigation a lawyer may be required to provide a ‘balanced view’ comprising both their opinion and the counter-arguments (see Levicom and Thomas & Anor v Albutt [2015] EWHC 2187 (Ch)).

The prominence that a lawyer should give to advice on a particular risk can also be affected by the ability of the client to remedy the risk should it occur (see Levicom).

Risk transfer

A lawyer should be very circumspect when advising a client whether or not to proceed with some course of action. The usual legal rule is that a lawyer may be found responsible only for the consequences of specific information or advice being wrong. But where the lawyer advises the client whether or not to proceed with some course of action, they may be required to consider all the potential risks of that course of action (per Lord Hoffman in South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191).

This key rule is perhaps best understood in terms of risk transfer. A client that asks for advice on certain aspects of a course of action has already made a choice in their selection of those material aspects and is now attempting to transfer their risk to the adviser. If, however, the adviser answers the client’s question ‘What would you do in my shoes?’, they are taking to themselves the task of that selection.

In the first blush of enthusiasm to act for a client on a new matter, lawyers often forget to consider properly the extent to which they can, and should, reallocate onto the client the risks of advising on certain aspects of a matter.

Standard terms and conditions and the engagement letter are the key tools here. It is important that any such reallocation of risk is agreed with the client and recorded in writing (see Hurlingham Estates Limited v Wilde & Partners [1997] 1 Lloyd’s Law Reports 525 and Minkin).

There are host of issues that could be introduced into the process of matter inception so that their risk can be fairly and (above all) prominently passed back to the client. Consider, for example, excluding or delimiting the adviser’s responsibility for: the tax implications of a matter; any foreign law issues; outsourced service provision (but be mindful of chapter 7 of the SRA Code of Conduct 2011); the accuracy of client instructions; the security of a client’s email service; the valuation of any asset; the commercial merits of a business venture; and the impact of advice on non-clients affiliated to the client (e.g. directors, share-holders, family members, etc.).

Risk and Dreamvar

The decision in Dreamvar v Mishcon de Reya and another [2016] EWHC 3316 is an important example of the court dissecting the quality of a solicitor’s risk advice. The facts are simple: Mishcon de Reya (MdR) acted for the buyer of a property where the vendor’s identity had been cunningly impersonated by a fraudster. As a result, the buyer lost around £1m of the purchase price.

The decision considers in detail the risks of identity fraud in such a situation, the indicia of such fraud on this transaction, the extent to which MdR ought to have given certain kinds of risk advice, the client’s appetite for risk generally, and its hypothetical response if more risk advice had been given. MdR emerged unscathed from that aspect of the case, and was found not to have acted negligently in this regard.

Surprisingly, MdR was nonetheless held responsible for breach of trust in releasing the client’s funds, on the basis there was an implied term to the effect that it would not be released save for the purposes of completion with a genuine purchaser. With the benefit of hindsight, perhaps it can be said that the only thing MdR did that was wrong was not to allocate expressly in the engagement letter with the client the risk of undetected identity fraud.

Graham Reid is a legal director at RPC

@RPCLaw www.rpc.co.uk