Commercial update

Shepherd Construction Ltd sued Pinsent Masons LLP (PMLLP), and its predecessor firms, for negligence relating to advice given by Masons in 1998 on a standard form contract. It alleged that Masons and its successors should have updated that advice and that Pinsent Masons and PMLLP were liable under a 'single contract' to Shepherd for Masons' advice.

In 1998, Shepherd instructed Masons to advise on a draft contract that contained a pay-when-paid clause. At the time, the Housing Grants, Construction and Regeneration Act 1996 was coming into force. It outlawed pay-when-paid clauses in construction contracts unless the person whose payment is a condition of payment is insolvent 'on the making of an administration order under part II of the Insolvency Act 1986'. Masons replicated this proviso in the contract.

The Enterprise Act 2002 made some alterations to the Insolvency Act 1986, adding an additional route to administration by the passing of a resolution. Masons had not, of course, in 1998 made the passing of a resolution a reason for Shepherd not to pay.

Masons and Pinsent merged in December 2004 into a new partnership under the name Pinsent Masons which then transferred its business and assets in 2008 to Pinsent Masons LLP.

In 2007, Trinity Walk Wakefield Ltd engaged Shepherd as contractor to carry out a development. Trinity went into administration in 2009 following a resolution passed by the board of directors.

Shepherd defended claims from its creditors that the contract (materially on the terms drafted in 1998 by Masons) permitted it not to pay in circumstances in which Trinity had gone into administration by whichever route. Mr Justice Akenhead disagreed, saying that the contract allowed a 'pay-when-paid' arrangement only where there was an administration order, not where there had been administration by resolution. Shepherd had to pay even though it would not itself be paid by Trinity. The total losses exceeded £10.6m.

Akenhead J rejected the existence of any implied term that there was a duty of care at common law to review advice previously provided. He did conjecture that if a solicitor has advised on standard form X and is asked, for example, three years later to advise on standard form Y and advises that Y needs a specific term and knows that X did not contain such a term, 'it is at least arguable that the duty extends to advising the client that X may be deficient. It may well all be a matter of fact and degree.'

However, he went on to say: 'There is something commercially and professionally worrying if professional people are to be held responsible for reviewing all previous advice'¦ There is a difference to be drawn between a specific retainer or commission which imposes a continuing duty to keep earlier advice or services'¦ under review and some sort of obligation which requires the professional to review and revise previous advice given or services provided on commissions or retainers which are complete.'

Different considerations may apply: 'A solicitor may draft a will for a long-standing private client and later handle his divorce; knowing that an impending re-marriage would invalidate the earlier will, it may be incumbent upon the solicitor at least to advise his client accordingly.'

In rejecting the extension of the duty in this case, he also poured cold water on the notion of the single contract between successor firms: only an express agreement could create a single contract between a client and successive firms.

Key principles

Claire Swain Mason & six Ors v Mills & Reeve (A Firm) [2011] EWHC 410 (Ch) also dealt with the extension of the scope of a solicitor's retainer. It is worth us first restating eight key principles of the settled law:

(i) 'The starting point'¦ must always be the solicitor's retainer [and its] terms, whether express or implied.' (Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44). 'What has he been retained to do?'

(ii) 'The court must beware of imposing upon solicitors'¦ duties beyond the scope of what they are requested and undertake to do.' (Midland Bank Ltd v Hett, Stubbs & Kemp [1979] Ch 384, 403)

(iii) The test is 'what the reasonably competent practitioner would do having regard to the standards normally adopted in his profession'.

(iv) 'The law does not'¦ demand either omniscience or infallibility'¦ reasonable competence means not only that there will be errors which are not compensable but that legal advisers are not expected to divine every claim that a client may theoretically have.' (Pritchard Joyce & Hinds (A Firm) v Batcup [2009] PNLR 28)

(v) 'In this world there are few things that could not have been better done if done with hindsight'¦ But hindsight is no touchstone of negligence. The standard of care'¦ must be based on events as they occur, in prospect and not in retrospect'¦ the duty of care is not a warranty of perfection'¦ a marginal case does not make negligence.' (Megarry J in Duchess of Argyle v Beuselinck [1972] 2 Lloyd's Rep 172, 185)

(vi) The solicitor 'is not bound to say'¦ 'if I were you I would do it'; or 'if I were you I would not do it''¦ [he] should put clearly before the [client] the nature and consequences of the act'¦ [so] that from the clear language of an independent mind they should know what they are doing'. (Fletcher Moulton LJ in Re Coomber [1911] 1 Ch 723, 730)

(vii) In Levicom International Holdings BV v Linklaters (A Firm) [2009] EWHC 812, the duty was shown not just to be a duty to give correct advice, but also to do so clearly. Mr Justice Andrew Smith emphasised that Linklaters was negligent 'not because they failed to exercise proper skill, care or competence'¦ but because [a letter of advice] did not properly convey their advice'.

(viii) The extent of a lawyer's duties changes with the terms of his retainer: '[there is] no such thing as a general retainer'¦ the [solicitor's duty] depends upon the terms and limits of that retainer and any duty of care implied must be related to what he is instructed to do'.

Defining responsibility

This last point was explored in the Mills & Reeve case. Solicitors advising on the tax issues of a management buy-out learnt by copy of an email of their client's impending and routine heart operation. Were they under a duty to provide advice as to the tax consequences if their client died during the operation? Was it reasonable for them to proceed on the understanding that the client looked to the accountants for more general tax advice?

Mr Justice Arnold surveyed the law and considered that the duty depends on the individual client'¦ a younger client with little experience of business or legal services would be likely to require a detailed explanation, which in the case of an experienced businessman would 'be pointless, or even sometimes an impertinence' (Pickersgill v Riley [2004] UKPC 14).

He recalled Gray v Buss Murton [1999] PNLR 882, 'where there is a dispute between solicitor and client as to the terms of any retainer, prima facie it is the client's version which should prevail'¦ it is the solicitor's business to ascertain the client's wishes accurately, bearing in mind the possibility that the client, through ignorance of the correct terminology, may not have correctly expressed it'.

There can be circumstances in which the solicitor's duty extends to advising upon matters that lie beyond the express instructions. As per Laddie J in Credit Lyonnais SA v Russell Jones & Walker [2002] EWHC 1310 (Ch): 'A solicitor is not a general insurer against his client's legal problems'¦ [however] if in the course of doing that for which he is retained, he becomes aware of a risk'¦ to the client, it is his duty to inform the client'¦ If a dentist is asked to treat a patient's tooth and, on looking into the latter's mouth, he notices that an adjacent tooth is in need of treatment, it is his duty to warn the patient accordingly. So too, if in the course of carrying out instructions within his area of competence a lawyer notices or ought to notice a problem or risk for the client of which it is reasonable to assume the client may not be aware, the lawyer must warn him.'

Therefore, Arnold J judged that a solicitor is not under a duty to advise a client on matters in relation to which he reasonably believes the client to be receiving advice from another adviser. It did not follow though that these solicitors were entitled to assume that the accountants were so advising; their duty was to define their own area of responsibility.

In this case, this firm had agreed only to provide 'general tax advice... in relation to the tax liabilities arising in respect of the [MBO]'¦ [and] the specific tax issues which arise in respect of the disposal of your shares'¦ [and] would not be able to advise on how this transaction fits into each of your own financial and tax planning positions'. On that basis Arnold J concluded that there was no reason to interpret the retainer as anything more or less. Mills & Reeve was saved by the careful and express terms of its engagement '“ a lesson to us all '“ especially in the light of Gray.

Of course, the decision is currently under appeal and the judgment will no doubt further clarify the law in this area.