Solicitors – Is the tide turning?

As a result of a number of cases reported in the last year, the 35 or so Insurers currently writing Solicitors Professional Indemnity Business may be forgiven for thinking that the Court of Appeal is out to get them. The appellate Court has appeared all too willing on the one hand to develop the scope of solicitors' duties, and on the other, to limit defences to E & O claims upon which solicitors have previously relied, and it has been left to the House of Lords to reintroduce commercial realism to the law. The three main areas of concern have been (1) the Court of Appeal decision in RBS – v – Etridge (No.2) (2) duties to non-clients and (3) limitation.

1. By far the most important recent development for the profession and its Insurers (and the first of the three "areas of concern" to make it before their Lordships) is the House of Lords decision in Royal Bank of Scotland – v – Etridge on 11 October 2001, overruling the onerous duties imposed on solicitors by the Court below. Etridge concerned the advice a solicitor should give to someone standing surety for the debts of another, for example a wife granting a charge over the matrimonial home to support borrowing for her husband's business. To avoid being fixed with constructive notice that the wife's consent was secured by undue influence of her husband (which would entitle the wife to set aside the transaction), lenders have sought certification from solicitors that the wife received legal advice as to the nature and effect of the charge or merely relied on the fact that a solicitor was acting for the wife on the relevant transaction. Typically solicitors charged little or nothing for their services, and the advice was often brief and limited. So the profession, and the Solicitors Indemnity Fund ("SIF") were surprised when the Court of Appeal, in the absence of any submissions from solicitors on the issue, enthusiastically extended solicitors' duties to include the obligation to ensure that the wife was free from undue influence and the transaction was one she could sensibly be advised to enter. This appeared to presuppose expertise not only in law, but also in accountancy and marriage guidance. If the solicitor was not entirely satisfied, he was obliged to prevent the transaction from proceeding by sending a coded message to the Bank that, having "rendered certain advice" he was no longer prepared to act for the wife. The decision effectively placed the profession's Insurers in the untenable position of underwriting inherently risky business debts where these transactions did proceed but subsequently the business failed: potentially an enormous drain on Insurers.

The House of Lords has, however, stepped in to inject much needed commercial common sense to this arena. The duty of a solicitor is now clear. As a minimum, the solicitor must meet the wife face to face, in the absence of her husband, and explain to her;

• why he has been asked to provide advice in the first place
• the nature and practical effect of the charge ie that she could lose her home if the business does not prosper.
• the risks in the transaction, so she understands the purpose of the new facility, its amount and terms, and the fact that it may increase without reference to her, emphasising the practical implications of signing the document.
• the amount of any guarantee in the context of a discussion of her financial affairs generally,
• the financial affairs of her husband, (information which will now be made available to the solicitor by the bank) including the level of his existing indebtedness and facility.
• the fact that she has a genuine choice not to enter the transaction, and in any event may wish to re-negotiate the terms offered
• the solicitor must, above all, be clear that the wife wishes to proceed before giving confirmation to the Bank.

The new duty is certainly onerous, but at least it is clear, and within a solicitor's area of expertise. Self evidently, however, a reduction in future claims by wives against solicitors will only occur if solicitors adopt the new guidance, and abandon the old mindset that giving such advice is a formality. Patently it is not. More than ever there is a need for solicitors to provide common sense advice to bring home the practical implications of the steps to be taken by the client, and to keep proper written records of the advice tendered and instructions received.

2. In Dean - v - Allin and Watts, the Court of Appeal extended solicitors' duties to non-clients. The solicitor acted for a borrower. Notwithstanding the fact that the solicitor could not have acted for the lender (because of a conflict of interest), and the lender had chosen not to be represented, the Court controversially held that the solicitor had "assumed" a duty of care to the lender in relation to his security for the loan. The solicitor had negligently failed to realise that the security taken was ineffective. The Court considered it fair to impose a duty because the solicitor knew the borrower intended to confer security on the lender, and knew this was fundamental to the transaction. The solicitor involved would disagree that imposing a duty on them was fair, as would Insurers. A petition for leave to appeal is currently before the House of Lords.

3. The market is familiar with the Court of Appeal decisions on limitation in Brocklesby - v - Armitage and Guest [2001] 1ALL ER172 and Cave - v - Robinson Jarvis and Rolfe [2001] Lloyds Rep PN 290. These cases virtually extinguish the six year limitation rule in many cases, treating any negligent act or omission as having been deliberately concealed if it was intentional, but without any requirement to show knowledge of a breach of duty. Brocklesby has attracted heavy criticism, not least from members of the Court of Appeal in Cave. The House of Lords has given leave to appeal in Cave. Will this herald a regime more favourable to solicitors and their Insurers? The status quo is certainly not ideal.

The true impact of these cases has not yet been felt by the market. The switch from the SIF to the open market took place in September 2000. Firms gave wholesale notification of potential claims prior to that date to SIF, so most claims arising have fallen to be dealt with by SIF which is in run-off. As the open market Insurers build a claims experience, premiums will inevitably rise. Further, claims against solicitors are apparently on the increase, and one would fully expect this trend to continue as the economy noses towards recession.

A more restrictive judicial approach to solicitors' duties will certainly help keep claims and premiums in check. The best check, however, on escalating claims (and premiums) is effective risk management and professional education. Solicitors embrace this concept more readily than has historically been the case, but a continued and concerted Insurer led effort is required.

For further information, please contact Insurance and Reinsurance solicitors David Casement by e-mail at [email protected] or Peter Gregoire at [email protected] or by telephone on +44 (0)20 7367 3000.