Solicitor duties towards the opposing party: do they exist?

The recent decision reached in NDH Properties Ltd v Lupton Fawcett LLP [2020] provides useful insight into whether a solicitor can owe a duty of care to the opposing party.

THE FACTUAL BACKGROUND

In May 2012, My Nayee, the sole director and majority shareholder of NDH Properties Ltd (“NDH”) took out a short-term loan facility, on behalf of NDH, from Amalgamated Finance Ltd (“Amalgamated”). The purpose of the loan was to discharge a pre-existing debt owned by NDH to a bank, and furthermore, the loan was secured against commercial property (the “Property”).

Once the loan had matured 3 months later, NDH owed Amalgamated a total of £390,000 which covered the original loan amount of £350,000 and additional interest and fees. NDH was unable to pay; therefore, Amalgamated enforced their right to appoint receivers over the Property.

By the time the Property was sold for £751,000, the amounts due to Amalgamated were £647,459, in addition to further disbursements and costs.

Mr Nayee had originally been introduced to Amalgamated by Bankruptcy Protection Fund Ltd (“BPFL”). As a result of this introduction, My Nayee signed a letter which appeared to identify BPFL and Lupton Fawcett LLP (“LF”) as being authorised to act for him in relation to an annulment of its bankruptcy. NDH therefore claimed that LF owed NDH a duty of care in tort to give it advice in relation to the loan, particularly with regard to the high levels of interest and fees payable under the loan.

THE COURT DECISION

The judge dismissed the implied retainer argument, as there was no evidence that the parties had agreed to enter into a contractual relationship of solicitor and client as it could not satisfy the test set out in Caliendo v Mischon de Reya [2016], which considers whether there “was a conduct by the parties which was consistent only with [the defendant firm] being retained as solicitors for the claimants”.

Whilst a duty of care in tort can exist without an explicit contract, in order to identify whether such a duty exists, the following needs to be considered:

  • whether the defendant assumed responsibility for what they said and did vis-a-vis the claimant, or is to be treated by the law as having done so;
  • the “threefold test”: whether the loss to the claimant was a reasonably foreseeable consequence of what the defendant did or failed to do; whether the relationship between the parties was one of sufficient proximity; and whether in all the circumstances it is fair, just and reasonable to impose a duty of care on the defendant towards the claimant; and
  • the “incremental” test, set out in Caparo Industries Plc v Dickman [1990], which reiterated that no single test can apply to tortious claims nor can a single test be applied in all cases to determine whether a duty of care exists.

As the judges concluded that none of the above tests had been met, they went on to explain that there was no direct contact between NDH and LF; in turn, this indicated that My Nayee did not rely upon them. Furthermore, it would have been unreasonable for LF to think that NDH was relying upon them to advise NDH on the financial and commercial benefits and risks of the loan.

THE SRA CODE OF CONDUCT

NDH’s solicitors sought to argue that the SRA Code of Conduct 2011 principle according to which a solicitor should not take unfair advantage of a third party in his professional or personal capacity, implicitly meant that a solicitor should not take advantage of a third party’s lack of legal knowledge where they have not instructed a lawyer. The judges rejected this tenuous argument too, stating that there is no free-standing duty in tort owned by a solicitor to tell the opposing party, especially of a commercial transaction, to get independent advice.

NEXT STEPS

The decision in this case reiterates the fact that: (a) clients should ensure they have contractual arrangements in place with those advisors they seek to rely on; and (b) an assumption of responsibility can only arise when it is reasonable for the client to have relied upon the solicitor’s advice; and the solicitor could reasonably have foreseen that the client would do so. In any event, care must be taken by solicitors when communicating with a party on the opposite side of a transaction, especially where that party is unrepresented.

To review the case please click here.

For more information, and any guidance or advice on the duty of care in tort, Cleveland & Co External in-house counsel™, your specialist outsourced legal team, are here to help.

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