Liability for commercial advice
August 1, 2009 Leave a comment
Lawyers are not financial advisers but, when acting for a client in a commercial transaction, lawyers will be liable for the advice that they give, or fail to give, in relation to the commercial consequences of the client’s decisions. Two recent Victorian cases have considered the extent of these duties in the context of two reasonably common scenarios. In both cases the lawyers were assisted in their defence by the LPLC, which presumably therefore assessed the lawyers’ conduct as blameless, however in both cases the lawyers were held liable to the client in contract and tort. Whilst both decisions may appear to be ‘harsh’, the lesson to be learned is that lawyers advising clients in commercial transactions must be alive to possible commercial consequences of those transactions and ensure that the client is adequately advised in respect of those consequences. This may not require the lawyer to give that commercial advice, but it will require the lawyer to ensure that the client is aware that the client must seek that commercial advice from experts, such as accountants.
Spiteri was a claim by a client arising from an ‘investment’ transaction whereby the client proposed to lend money to a company undertaking a residential development in the expectation of receiving a share of the profits arising from that development. The development failed and the client sued the lawyer for his losses. The key issue was the security provided to protect the investment. The lawyer’s initial advice was that the security, being shares in the development company, was inadequate. Additional security by way of shares in an associated company, said to have $4m ‘equity’ in another development was offered and an agreement, referred to as a Joint Venture Agreement, was signed. Ultimately both developments failed and the shares and personal guarantees of the directors were worthless.
Undoubtedly the best security in such situations is a mortgage over the land. That this was not available was a red light. Additionally, the loan proposal had morphed into a Joint Venture Agreement. Finally, the ‘equity’ in the other project was never investigated. In describing the retainer the Judge said ‘the solicitor is not expected, nor required, to advise the client about the financial or commercial viability of, or risks associated with, the transaction’ however ‘that advice was “inextricably intermingled” with the obligation of the defendant to exercise reasonable care to advise the plaintiff as to the adequacy of the security’ and that the client ‘should first seek expert advice’ as to the value of the security. In other words, whilst the lawyer is not obliged to give financial or commercial advice, the lawyer is obliged to warn the client that the client should seek such advice from others expert in that field. In Spiteri the lawyer had made it clear that he was not giving that advice, he simply failed to warn the client that such advice was necessary. The ‘equity’ in the second project should have been investigated to ascertain whether it did in fact provide security for the client’s ‘loan’.
Snopkowski was an even simpler fact scenario. The client instructed the solicitor to transfer a half share in a property owned by the client to the client’s wife. The practitioner, aware that such a transaction was exempt from stamp duty, did so with alacrity and rendered a nominal bill. However, as a result of the transaction, the client was obliged to pay Capital Gains Tax and claimed that ‘loss’ from the lawyer. Whilst accepting that the lawyer was not obliged to give taxation advice, the Tribunal concluded that in such circumstances ‘a legal practitioner would advise the client to seek advice from an accountant’ and that ‘[A]t the very least she should have asked whether he had obtained any advice from the accountant concerning Capital Gains Tax and if receiving a negative response should have advised him to do so’.
It is the nature of our society that the extent of a lawyer’s duty to the client, both contractual and tortious, will expand. One response might be to attempt to limit the contractual duty by entering into ‘limited retainers’ but the likely outcome of any such contractual reduction will be a judicial extension of the tortious duty – a yin & yang relationship. Indeed it may be that the duty even extends to informing the client that the tooth fairy does not exist, as a recent NSW case has concluded that ‘the solicitor nonetheless, as part of its duty of care to the client, was obliged to caution the client against the extraordinarily unrealistic rate of return which they expected on their proposed investment’. The client had been promised a return of $275,000 per annum on a capital investment of $150,000. It is not enough to tell the client that the lawyer is not giving financial or commercial advice; the lawyer must recognise situations that expose the client to loss and warn the client that the client must seek advice from other experts.
Russell Cocks is also the author of 1001 Conveyancing Answers, which is available for purchase through Smokeball. To view this publication, click here.
By Russell Cocks