Scope of a solicitor's duty considered by the High Court

Posted by Carina McFadden on
The High Court has recently dismissed a claim in professional negligence brought against the solicitors acting for the purchaser in a conveyancing transaction.

Kandola v Mirza Solicitors LLP [2015] EWHC 460 (Ch)

Background to Claim

The claimant was a successful businessman who owned a number of care homes through a limited company together with several buy to let residential properties, either in his own name or in the names of various members of his family.  The claimant was introduced to the defendant solicitors in the 1990s and had since then been on friendly terms with them and instructed them in a considerable number (though not all) of his property transactions.  The claimant was therefore described by the Court as both a long established client and one who was commercially sophisticated.

The claimant sought damages against the defendant solicitors, who acted for him in the proposed purchase of a property in 2010. On exchange of contracts a deposit of £96,000 was paid on terms, unusually, that it be held by the vendor's solicitor as agents for the vendor. The vendor did not complete and the deposit was lost. The vendor was subsequently made bankrupt and the solicitors who acted for him disappeared (the Solicitors Regulation Authority subsequently intervening into their practice).   The claimant's central complaint was that he should have received better advice about the risks involved which would have revealed that a bankruptcy petition was outstanding against the vendor, in which case he would not have proceeded with the transaction on those terms. The defendant's case was that the claimant was fully and properly advised throughout, including specific advice (which he acknowledged in writing) not to exchange contracts on that basis, but he elected not to follow that advice.

Judgment

The Court held that, generally speaking, it is not a solicitor's duty to check on the credit status of his client's counterparty in a transaction unless instructed to do so. The Court was of the view that there may be circumstances in which a solicitor should check specifically for the commencement of bankruptcy proceedings, since that may affect a party's ability to complete a transaction or give a good title. However,  that is not the same as a general duty to make checks about risk of future insolvency. Such a duty cannot arise merely because the client is incurring a risk of loss if the counterparty becomes insolvent.  The Court stated that will be true in most if not all transactions. Further, the Court was of the view that such a duty does not arise merely because the transaction takes an unusual form which does involve a solvency risk (eg on release of a deposit) where the more normal form would not (ie. the deposit held as stakeholder – in the vendor's solicitors account). In such cases the duty of the solicitor is to advise of the unusual risk, but not to seek to evaluate it unless specifically instructed to do so.

This case underlines the importance of defining precisely the scope of the work that a solicitor is instructed to undertake at the outset of a matter.  If concerns exist as to the solvency of a party involved in any transaction the client cannot assume that it falls within the solicitor's instructions to undertake credit checks.  Indeed, this case would suggest that conveyancing solicitors have discharged their duty to their client by following the recommendations set out Law Society's Conveyancing Handbook.  The Handbook sets out that a solicitor must explain what the risks are to the client and says that a client should be advised of these risks before he proceeds.  There is no additional requirement levied against the solicitor to undertake credit checks unless instructed by the client to do so.

The case also provides a useful summary of a solicitor's duty in explaining the risks involved in a transaction to his client.  In the circumstances of this case, the Court was satisfied that the solicitor had adequately explained to his client the risks involved in continuing with the transaction.  In coming to this conclusion the Court was mindful of the fact that the claimant was a commercially sophisticated client.

The Court therefore concluded that the claimant had understood the advice he was given. The Court went further to state that even if it had found the claimant did not subjectively understand the advice, it would have been fatal to his claim that the advice was given in terms suitable for a person of his experience and that he gave the defendant the impression at the time that he had understood it.

The claim was therefore dismissed.

The full transcript to the case can be found here

About the Author

Carina is a Senior Solicitor in the Commercial Litigation team specialising in professional negligence disputes.

Carina McFadden
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