Run for cover: undertakings and the benefit of PII
The courts take a serious view of undertakings, so small errors can lead to huge consequences, says John de Waal QC
Claims for compensation by disgruntled clients are an occupational hazard of professional life. Claims arising out of undertakings that have not been performed are less frequent but can
raise difficult issues for private client solicitors and their insurers.
There are two preliminary points
of particular importance. The first is that when giving an undertaking, a solicitor assumes liability to a third party, and sometimes liability for what a third party is or is not going to do. This is a rare exception to the principle that solicitors are not generally liable to third parties.
The second is that liability for breach of undertakings is strict: the ‘fault’ is to be found in failing to comply with the undertaking; doing your best to comply is not a defence.
The SRA handbook glossary 2012 describes an undertaking as “a statement, given orally or in writing, whether or not it includes the words ‘undertake’ or ‘undertaking’, made by or on behalf of you or your firm, in the course of practice, or by you outside the course of practice but as a solicitor or REL, to someone who reasonably places reliance on it, that you or your firm will do something or cause something to be done, or refrain from doing something”.
Thus, the concept of an undertaking is defined very broadly to include promises made by a solicitor whether or not the word is used. Where the existence or interpretation of an undertaking is in doubt, it will generally be construed in favour of its recipient. The critical question is how the promise would reasonably have been understood by the recipient in the circumstances they received it (see box).
Discharging debt from selling shares
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Enforcing undertakings
A claimant who wishes to enforce an undertaking can proceed in three ways:
-
By an action at law if there is
a cause of action. As consideration has usually been given for an undertaking, the claimant may
sue in contract using the CPR
part 7 procedure. -
By an application to the court to exercise its inherent supervisory jurisdiction. This is done under CPR Part 8 and is by far the most common approach.
-
By application to the Law Society, who can take disciplinary action
for professional misconduct.
The starting point for the modern law on the enforcement of undertakings by application to the court is the decision
of the Court of Appeal in Udall v
Capri Lighting [1987] 3 WLR 465. The relevant passage is in the judgment
of Balcombe LJ:
“The underlying principle is that the court has a right and a duty to supervise the conduct of its solicitors, and visit with penalties any conduct of a solicitor which is of such a nature as to tend to defeat justice in the very cause in which he is engaged professionally... The term professional misconduct has often been used to describe the ground on which the court acts.
“It would perhaps be more accurate to describe it as conduct which involves a failure on the part of a solicitor to fulfil his duty to the court and to realise his duty to aid in promoting in his own sphere the cause of justice. This summary procedure may often be invoked to save the expense of an action... The jurisdiction is not merely punitive
but compensatory.”
The following points were emphasised by the Court of Appeal:
-
The jurisdiction is only available where the conduct of the solicitor
is inexcusable and such as to
merit reproof. -
If the misconduct of the solicitor leads to a person suffering loss, the court has power to order the solicitor to make good the loss occasioned by their breach of duty.
-
Failure to implement a solicitor’s undertaking is prima facie to be regarded as misconduct on their
part, and this is so even though they have not been guilty of dishonourable conduct. Neither the fact that the undertaking was that a third party should do an act, nor the fact that the solicitor may have a defence to an action at law precludes the court from exercising its supervisory jurisdiction. -
The summary jurisdiction involves a discretion as to the relief to be granted. In the case of an undertaking, where there is no evidence that it is impossible to perform, the order will usually be
to require the solicitor to do that which they had undertaken to do. -
If it is inappropriate for the court to make an order requiring the solicitor to perform their undertaking, e.g. on the grounds of impossibility, the court will order the solicitor to compensate a person who has suffered loss in consequence of their failure to implement his undertaking.
Other things practitioners should remember are:
-
All partners in a firm are liable for the undertakings of anyone who is held out by the firm as representing it.
-
A solicitor cannot assign the burden of an undertaking without the consent of the recipient nor
will a solicitor who acquires the
practice of another become liable
for its undertakings unless they
are adopted. Neither can it be
assigned by a recipient. -
There is no statute of limitation on the enforcement of an undertaking.
PI cover
The first part of clause 1.1 of the minimum terms and conditions provides as follows: “1.1 Civil liability. The insurance must indemnify each insured against civil liability to the extent that it arises from private legal practice in connection with the insured’s firm practice, provided that a claim is in respect of such liability.” What is sometimes overlooked when undertakings are given or called on is the important question of whether the undertaking has been given in the course of private legal practice; promises which are made outside the course of practice are not covered by PI insurance.
The decision of HHJ McCahill QC in Halliwells LLP v NES Solicitors [2011] PNLR 30 contains a useful review and discussion of what the judge described as ‘solicitorial function’.
On 22 December 2008, a firm of solicitors, NES, gave an undertaking on behalf of their client to Halliwells for the benefit of their client, a finance company, GCF. The undertaking was to pay £1.5m on or before 10 March 2009. In reliance on the undertaking, GCF made an advance to a property company connected with NES’ client as a bridging loan. The loan was due to be repaid on 11 March 2009 but was not.
NES did not have the funds to hand to meet its commitment under the undertaking and played no other part in the transaction other than to give the undertaking. In the claim to enforce the undertaking, NES’ insurer, Quinn, was joined as third party. Quinn defended, successfully, on the basis that it was not liable to indemnify NES in respect of work not normally taken in the course of business as a private solicitor.
In the relevant passages of the judgment (paragraphs 33 to 38), the judge referred to the decision of the Court of Appeal in United Bank of
Kuwait v Hammoud [1988] 1 WLR 1051: “…two requirements must be fulfilled before an undertaking is held to be within a solicitor’s ordinary authority.
“First, in the case of an undertaking to pay money, a fund to draw on must be in the hands of, or under the control of, the firm; or at any rate there must be a reasonable expectation that it will come into the firm’s hands.
“Solicitors are not in the business to pledge their own credit on behalf of clients unless they are fairly confident that money will be available so that they can reimburse themselves.
“Secondly, the actual or expected fund must come into their hands in the course of some ulterior transaction, which is itself the sort of work that solicitors undertake. It is not in the ordinary business of solicitors to receive money or a promise from their client, in order that without more they can give
an undertaking to a third party. Some
other service must be involved.”
Applying this test, the judge
found that NES had not been providing solicitorial services in relation to the underlying transaction: Quinn was
not obliged to cover the claim.
Redeeming charges
Undertakings given by solicitors acting for sellers to redeem charges on completion can cause problems, most commonly when a particular charge is overlooked.
The current attitude of the courts toward enforcement of such undertakings appears to be strict.
In Angel Solicitors v Jenkins O’Dowd & Barth [2009] 1 WLR 1220 the claimants and the defendants were firms of solicitors who had acted for the purchaser and the seller respectively in three residential property transactions. They undertook to redeem or discharge the existing mortgages and charges, and to send the relevant form of discharge as soon as it was received from the mortgagee.
Having failed to secure the performance of the defendants’ undertakings, the claimants sought to enforce summary jurisdiction of the
court to enforce the undertakings.
-
The claimants applied for summary judgment. The defendants submitted that there was evidence that if they had sought to redeem the relevant mortgages at the time the undertakings were given, the mortgagees would have accepted lesser sums than they were now seeking to recover; that the court should conduct an inquiry to examine what would have been required to comply with the undertakings at the time they were given and breached
-
Summary judgment was granted: the undertakings were to secure the discharge of the existing mortgages and should extend to any sums required for that purpose at the time redemption was sought, including the amount of any further advance.
In Clark v Lucas Solicitors LLP [2009] PNLR 2, the claimant purchasers applied for summary judgment in proceedings for specific performance of an undertaking given by the defendant solicitors to redeem or discharge prior to completion the charges held over the property conveyed. The property formed part of a development over the entirety of which both NatWest and a Mr Kenny held all monies charges.
At completion, the defendants remitted the net proceeds from the purchase price to the developer’s account at the bank but failed to redeem Kenny’s charge, which secured about £775,000. As a result the claimants were unable to register their title to the property or to sell or mortgage it.
-
The defendants admitted breach
of the undertaking but argued that the proper remedy was an inquiry
as to loss and compensation rather than specific performance, on the basis that specific performance
was no longer possible. -
Summary judgment was granted. On the facts this was not a case of impossibility. The undertaking given was in standard form and was to pay off charges on completion. The situation could have been avoided if a redemption figure had been obtained and agreement reached before the undertaking was given.
The undertaking could be performed by the payment of a cheque, albeit a larger one than might have been payable had enquiries been made and agreement reached at the appropriate time.
The giving and receiving of undertakings plays a unique role in the English legal system. It reflects the high regard that society still has for solicitors, that their spoken or written word can and will
be relied on by third parties.
However, the corollary is that when the undertaking cannot be honoured, liability will be strict. The decisions in these last two cases are a timely reminder of how seriously courts treat undertakings and how easy it is for a small error in a routine conveyancing transaction to
create a huge problem.
John de Waal QC is a barrister practising from Hardwicke chambers