Should you advise on the commercial aspects of a transaction?

'A solicitor is not a general insurer against his client's legal problems', said Justice Laddie in Credit Lyonnais v Russell Jones & Walker [2002] EWHC 1310. 'His duties are defined by the terms of the agreed retainer'¦ He is under no obligation to expend time and effort on issues outside the retainer.'

Evidence of the late senior judge's view can be found in the Chapter 1 retainer letter, which '“ assuming it has been properly and comprehensively drafted '“ will set out the nature and scope of the work the solicitor has agreed to carry out.

However, it is far from unusual for claimants to ask the court to find that the solicitor should have done, advised on or alerted the claimant to something incidental to the work they were carrying out. But the court has been hesitant to widen the scope of solicitors' duties.

Commercial advice

Whether a solicitor is under a duty to give general commercial advice was considered most recently in the case of Richard Gabriel v Peter Little, BPE Solicitors & Ors [2010] EWHC 1193.

Gabriel, a property developer, instructed the fourth defendant, BPE solicitors, to act for him in the course of a loan transaction, including the preparation of a facility letter. He intended to lend the sum of £200,000 to the borrower, Whiteshore Associates Limited, a company owned by the first defendant, Little, a close friend of Gabriel. It was intended '“ at least by Gabriel '“ that the loan would be used to develop an airfield, which stood as security for the loan, and repaid with interest of £70,000. In fact, as BPE had been told by the solicitors acting for Little, his intention was to use the loan to purchase the property from another of his companies, and thereafter to discharge other lending over the property.

The facility letter drafted by BPE wrongly stated that the purpose of the loan was to develop the property, as opposed to Little's true purpose. At trial, BPE submitted that '“ notwithstanding the terms of the facility letter '“ Gabriel knew the true purpose of the loan. Although the judge found against BPE, this was not because of any failure to advise on the nature of the transaction '“ a significant loan to a shell company whose security was, in the event, worth only a fraction of the loan sum.

The judge concluded that there was no duty owed to Gabriel by BPE to advise on the nature of the transaction. This was because, in part, the judge found Gabriel to be an 'astute businessman' who was 'undoubtedly knowledgeable in the field of property and generally conversant with property dealing'.

Previous advice

In Shepherd Construction Ltd v Pinsent Masons [2012] EWHC 43 the court had to consider the relationship between a firm of solicitors and a long-standing client. The firm had acted for Shepherd Construction since the late 1980s, although it was not until the late 1990s that it was instructed to draft standard form contracts for it to use in its contractual relationships with sub-contractors. After that advice was given, the Insolvency Act 1986 was amended in a manner which undermined the 'pay when paid' clauses in the subcontracts. Thus, when Shepherd Construction's developer client became insolvent, it was still liable to make payment to the subcontractors even though it had not been paid by the developer.

Pinsent Masons' original advice was not negligent, and it had only become wrong in law as a result of subsequent amendments. In order to make out its case, therefore, Shepherd Construction was forced to allege that its solicitors had an ongoing duty to keep previous advice under review and alert it to any changes in statute which affected previous advice. The company alleged that there had been a single retainer with each of the Pinsent Masons entities which had advised it over the years, involving over 70 individual instructions and 13 matters relating to subcontracts.

The judge rejected this view. There was no general requirement on a solicitor that extended their duties to reviewing all previous advice or services provided in such circumstances. The scope of a solicitor's duty should be determined by the nature of the retainer, and there was no evidence that a single retainer had been agreed. Justice Akenhead commented that 'there is something commercially and professionally worrying if professional people are to be held responsible for reviewing all previous advice or indeed services provided'.

The court did, however, identify certain circumstances in which a solicitor might need to revisit and reconsider advice given previously. The judge took the example of standard form documents and indicated that if instructed to review a subcontract, that might be found to require the solicitor to consider the advice previously given when drafting that document; re-drafting one standard form document might alert solicitors to the fact that other similar documents also need revision and would require the solicitor to inform their client of that fact. These considerations however involve the solicitor becoming alerted to problems arising with previous advice during the course of a live instruction.

Duty to warn?

In both Credit Lyonnais and Mortgage Express v Bowerman [1996] 2 All ER 836, the court found a solicitor has a duty to warn his or her client of problems identified or new information learned during the course of a retainer which the client did not or could not reasonably be thought to know about.

Applying the principles in Gabriel, the court found that the information learned by BPE '“ about Little's intended use of the loan monies '“ was in the category of information which BPE should have passed on to its client. The judge held: 'that [BPE] had no duty to advise Mr Gabriel as to the commercial risk inherent in this loan. Nevertheless, from what he learned as Mr Gabriel's solicitor he should in my view have explained to Mr Gabriel that, although he was advancing £200,000, his funds were going to be applied substantially for Mr Little's benefit and in reality Mr Little was not putting anything at all into the project.'

The nature and scope of a solicitor's duty continues to be governed by the extent of the retainer agreed with the client. It remains difficult for a sophisticated client to assert that a solicitor should have given it advice as to the commercial consequences of the transaction it is contemplating. However, the position for less savvy clients will be different. Again, while the court clearly found against the existence of a single, general retainer in the Pinsent Masons case, there are circumstances in which solicitors might need to consider and review previous advice. Lastly, it is well established that a solicitor ought to warn his or her client of information or risks which the client would wish to know about learned during the course of the retainer. A properly drafted, well-ordered retainer letter '“ together with a detailed attendance note of any meetings or conversations where instructions are given by the client '“ are likely to assist firms in complying with their duties to their clients, and avoiding the imposition of extraneous duties later if things go wrong.