Solicitors' PI: recent caselaw and its implications

Ball -v- Druces & Attlee (a firm) [2004] EWHC 1402

Identity of client and scope of retainer; conflict of interest and breach of fiduciary duty; loss of chance.

Background

The Claimant, Mr Ball, and a Mr Smit were co-founders of the Eden Project in Cornwall (the Project). The idea was to create a grand project in Cornwall for the Millennium, aided by funds by the Millennium Commission. Each man depended on the other's skills and contacts in order to drive the Project forward and obtain the necessary funding. They worked very hard to bring the Project to fruition and, with assistance from other sources, they succeeded in providing an internationally known site, which delivered very substantial economic benefits to Cornwall (including some 4 million visitors and £160 million in 2003).

The Defendant solicitors became involved from the early days of the Project, having been jointly instructed by the Claimant and Mr Smit (although there was an issue as to the capacity in which those instructions were given). The Claimant alleged that the Defendants were in breach of duty in failing to take all proper steps to protect the founders' personal interests prior to the creation of a charitable trust in January 1996, in consequence of which, he had lost his existing rights and interests and the ability to obtain any recognition, save for the payment of historic costs and expenses.

There were many contemporaneous documents in the case and the Judge undertook a detailed and exhaustive review of the key documents and events. The most important dates in the chronology are summarised below.

Following initial discussions with the Claimant, Mr Smit contacted the Defendants on 4 October 1994 and informed them of the proposal for the building of a massive dome and the funding of the Project by the Millennium Commission. The Defendants' manuscript notes recorded an indication that Mr Smit might want some financial gain from the Project but might not do so if he was paid for a job. It was evident from the note that Mr Smit was expressing a possible desire for financial gain from the outset.

A subsequent note on 11 October 1994 acknowledged the possibility that Millennium funding might not be available but that the Project would go ahead anyway.

Contact with the Defendants was principally via Mr Smit, who led the negotiations on legal aspects. The Claimant did, however, meet the Defendants in November 1994. At this meeting, there was some discussion as to how the Project should proceed and the Defendants asked the co-founders to prepare an outline project proposal/business plan.

The Claimant contended that he telephoned the Defendants in early March 1995 to enquire specifically whether there was any difficulty in them acting for him, given that the Defendants continued to act for Mr Smit personally. The Claimant maintained that he was categorically reassured that there was no difficulty in the Defendants continuing to act for him and Mr Smit in their personal capacities.

On 30 August 1995, Mr Smit informed the Defendants that Ove Arup was preparing a business plan for presentation to banks and to the European Commission. The draft business plan followed on 11 October 1995, stating that the basic concept for the Project was that it will be a 'not for profit' enterprise and that it would be owned by a Trust and operated through a management company. Shortly thereafter, on 29 October 1985, Mr Smit sent Ove Arup a document entitled 'Management Structure', which contained references to equity holdings and royalties in favour of the co-founders. These concepts were reflected in a revised business case submitted to the Defendants by Ove Arup on 2 November 1995, which envisaged Mr Smit and the Claimant being "properly rewarded for the upfront costs and sweat equity/risk". It included a 32% equity stake for Mr Smit/the Claimant, which stake was quantified in the Ove Arup plan at £9 million. When forwarding the revised business plan to the Defendants, Ove Arup suggested that they talk to Mr Smit and agree an appropriate structure to get the Project off the ground.

On 8 November 1995, the Defendants wrote to Mr Smit advising that there were difficulties in private enterprise obtaining profit from the Millennium Commission directly. This advice was provided against the backcloth of the revised business plan and Mr Smit's intention to seek equity and royalties for himself and the Claimant. When providing this advice, the Defendants therefore knew that Mr Smit and the Claimant had personal financial aspirations.

In a letter to Touche Ross of 23 November 1995, the Defendants stated that Mr Smit and the Claimant were the driving force behind the Project and suggested a meeting to give Touche Ross a chance to meet 'the clients', so that Touche Ross could tell them why they should be involved.

Following the Millennium Commission's acceptance of the eligibility of the initial grant application, Mr Smit spoke to the Defendants on 30 November 1995. The Defendants stated that they had been instructed simply to form a charitable trust and not asked to deal with the structure. Mr Smit said that that he was merely looking for a commercial way in which he could benefit from his intellectual property rights. The Defendants suggested that Mr Smit could either be a paid employee of the Trust or a paid employee of the company but the Defendants did not think that the Charity Commissioners would be particularly happy about the profit sharing arrangements which were being suggested.

On 7 December 1995, Mr Smit had a lengthy conversation with the Defendants. When discussing various possible structures, it was clear that Mr Smit wanted to extract some of the profit from the Project. The Defendants advised that, strictly speaking, the Trust should benefit from the arrangement and that they could not immediately see on what basis Mr Smit could extract such a profit. They suggested that Ernst & Young be instructed or that other advice taken on this aspect from other firms or counsel.

After that discussion, Mr Smit wrote to the Defendants the same day outlining alternative forms of management structure which might suit the needs of those concerned. Under this proposal, the co-founders would obtain salaries within the range of industry norms and also an incentive based turnover royalty agreement for their services. Although the precise details of the structure were not drawn out in the letter, it was clear that the royalty agreement had the potential for a very substantial personal profit for Mr Smit and the Claimant. In response, the Defendants again recommended Ernst & Young to advise on further alternatives which would meet the investment criteria as well as the charitable objective.

On 15 January 1996, the Trust was created (without any legal protection for the co-founders having been put in place). An application to register the Eden Trust as a charity was made on the following day and the press launch of the Project at the end of the month generated a wave of enthusiasm from both the media and the public.

On 17 June 1996, the Claimant telephoned the Defendants and indicated that he and Mr Smit would require assistance in protecting their own positions. The Defendants' attendance note recorded that the Defendants would essentially not be able to advise the Claimant and Mr Smit as individuals and that the whole question of the Defendants' involvement needed to be resolved. The Claimant had no recollection of that conversation or being told that the Defendants could not advise him and Mr Smit individually. The Claimant's subsequent aide-memoire of 25 June 1996 did not equate to that of someone who had been advised that the Defendants could no longer act for him. The Judge determined that the Defendants had not successfully communicated to the Claimant that they could not act for him, even if they thought they had.

The Claimant and Mr Smit continued to have discussions about their financial interests in the Project. In an aide-memoire dated 20 December 1996, the Claimant recorded that a separate company was to be set up to provide a home for the intellectual property rights and that he and Mr Smit would negotiate an appropriate position with the Eden Trust to balance the securing of their birthright with the fulfilment of the charitable intention. Ernst & Young prepared a structure to put this
in place.

On 9 January 1997, the Defendants advised the Trust against adopting Ernst & Young's proposals, on the basis that it appeared that this might lead to a project without a trust. This was counter to the Defendants' understanding that the Commission would only approve a project if a trust was in existence.

The issue of conflict was raised overtly during January/February 1997. An attendance note of 10 February 1997 showed that the Defendants were happy to continue advising the Trustees until a conflict arose although, 'on present thinking', it was not obvious to them how a conflict should arise. It was agreed that the Claimant and Mr Smit should receive financial benefit for the whole exercise on a 50/50 basis and that the Trustees were likely to agree a one off payment for all time/expenses to date. This demonstrated the Trustees' continued willingness to reward Mr Smit and the Claimant for
their birthright.

In May 1997, however, the Defendants advised the Trustees that any intellectual property rights that existed had already passed to the Trust and that all shares in the Project must be owned by the Trust. At that stage, the Trustees' willingness to reward the Claimant and Mr Smit for their birthright diminished.

Negotiations continued through 1998 and 1999, culminating in an agreement which covered past disbursements and time spent, but not birthright or intellectual property rights. In June 2000, the Claimant was removed as a director of the Project.

In October 2000, he commenced proceedings against Eden Project Ltd and the Trust in the Chancery Division. The Defendants accepted instructions to act on behalf of the Project and the Trust until the Claimant obtained an interim injunction to restrain the Defendants from doing so in December 2001. Shortly thereafter, the proceedings were settled.

Allegations

In the present action against the Defendants, the Claimant alleged that:

his failure to profit from the success of the Project was due to the breach of contract and/or negligence of the Defendants when acting on his behalf.

In essence, the Claimant's case was that he and Mr Smit accepted the Defendants' advice that a charitable trust should be formed as the vehicle for taking the Project forward and for applying for funding from the Millennium Commission and other sources. The Claimant contended that it was made clear before the Trust was established (and, indeed, thereafter) that they also expected to share financially in the success of the Project. Notwithstanding this, the Defendants took no steps to advise either the Claimant or Mr Smit that the formation of a charitable trust would or might defeat their expectations for personal benefit. In particular, the Defendants failed to advise him of the need to enter into a bidding agreement with the Trustees, in consequence of which, the Claimant lost his rights and interests, together with any leverage which he might have been able to exert in order to obtain recognition of these, save for the payment of historic costs and expenses the Defendants had continued to act when there was a conflict of interest between the co-founders and the Trust. There had, in addition, been a breach of fiduciary duty by the Defendants, in two respects: first, in giving advice to the Trustees of the Eden Trust and Eden Project Limited in connection with the Claimant's attempts to receive recognition of his asserted rights; and, second, in acting for those parties in litigation, until restrained by an interim injunction from doing so. The Claimant therefore sought an order for an account and an award of damages in respect of his equitable claim.

The Defendants admitted that they were retained by Mr Smit and the Claimant jointly but denied that they were ever retained to advise the Claimant in relation to his personal position. The Defendants contended that they were only instructed on behalf of the Project and for Mr Smit and the Claimant in their capacity as promoters of the Project. That retainer, they maintained, had never been amended or varied.

The Defendants further contended that, even if there had been a breach of duty, the Claimant was unable to establish that this had been causative. In particular, it was alleged that he could not demonstrate that he would have accepted and followed the advice that he should allegedly have been given or, that had he done so, it would have been of any benefit to him, as Mr Smit would not have joined him in seeking such benefits and the Millennium Commission would have refused to make the grant had he insisted upon a personal benefit of the kind sought.

The scope of the retainer

At the heart of the litigation was a substantial issue between the parties as to the content of the retainer and on whose behalf the Defendants were acting. The Defendants conceded that, if the Claimant's version of the retainer was correct, the Defendants would necessarily be in breach of duty because they had taken no steps to protect the Claimant's position.

The Claimant alleged that the Defendants were jointly instructed by him and Mr Smit to advise on the setting up of the Project, taking into account their wishes to share financially in its success. It was contended that the nature and extent of the instructions were given over a period of time and that the retainer continued after January 1996, when the Trust had been established.

The Defendants maintained that there were three specific retainers: first, to form a Trust; second, to obtain an option on the land which was to form the site; and third, to form a company limited by guarantee. The Defendants denied that their retainer extended to advising the co-founders on their personal positions and any desire to secure an entrepreneurial profit.

The Defendants had not written to either Mr Smit or the Claimant defining the scope and limits of their retainer.

The Judge found that the Claimant's evidence demonstrated his desire for financial reward from the Project, and that this was clear and consistent throughout.

Moreover, 'The Project' could not give instructions to anyone until such time as a legal entity was created which would have legal rights and duties and the ability to give instructions. No such entity existed until the Trust came into being on 15 January 1996. Until that point, the Defendants could only receive instructions from Mr Smit or the Claimant, who were seeking to create the Project. The extent to which the Project would succeed, the sources of its funding and whether or not a grant would be obtained from the Millennium Commission were all unknown. In such circumstances, the Defendants' instructions could not be written in stone and it was clear that they would have to be responsive to the changing circumstances and the
co-founders' wishes.

In the circumstances, the Judge was quite satisfied that until, at the earliest, January 1996, the Defendants were instructed by the Claimant and Mr Smit and that those instructions, express or implied, were the instructions which defined the Defendants' retainer and their contractual duties to their clients.

The Judge made the following findings as regards the retainer:

the Defendants were advising on the legal structure necessary to put the Project in place the Defendants' instructions could change in accordance with the progress being made generally and, in particular, in negotiations with the various bodies in connection with funding. This was not a fixed and certain retainer to set up a charitable trust, but a general retainer to assist the co-founders in setting up the Project in accordance with their wishes and instructions. That such instructions were liable to change in accordance with the circumstances or changes of emphasis in the clients' wishes was inherent in a substantial and complicated project of this nature although it was apparent in early 1995 that matters were proceeding as if there was to be a charitable trust with profits covenanted to that trust, the Judge was satisfied that the Claimant had not in any way relinquished his desire for personal gain from the Project when the first application was made to the Millennium Commission, it included a statement that the Management Company will covenant 'the majority of its profits to the Trust'. This was wide enough to accommodate any aspirations the co-founders might have for personal gain as well as for private equity in July 1995, the Claimant and the Defendants had a lengthy discussion in which management structuring and the Claimant's and Mr Smit's respective positions were discussed. The Judge regarded this as an important conversation. It plainly indicated the Claimant's desire for personal gain from the Project. It should have reminded the Defendants of the aspirations of the Claimant and Mr Smit and prompted them to resolve any doubts that existed about the extent to which the co-founders required personal gain from the Project the Judge rejected the Defendants' submission that the co-founders sought advice as to the structure from Ove Arup and not the Defendants. Advice was sought from both. The forwarding of the revised business plan and the seeking of advice became part of the instructions from the co-founders as to how they wished the Project to proceed and it became part of the Defendants' retainer to deal with that instruction.

The Judge concluded that the Defendants were retained by Mr Smit and the Claimant to act on their behalf in setting up the Project and to enable them to obtain personal reward from it. In such circumstances, the Defendants were under a duty to protect the co-founders' personal interests and to warn them of any risks which would or might defeat their expectations for personal benefit.

Although there was no evidence that the co-founders' wishes for personal reward were expressly communicated, this desire was clearly implied from the documents, letters and conversations reviewed by the Judge, and it was clear and consistent throughout. The Defendants' duty to the co-founders continued after January 1996, when the Trust was set up.

Breach of duty

In concluding that the Defendants were in breach of their retainer, the Judge made the following findings:

there was no evidence of any express instruction to the Defendants requesting them in terms to protect the co-founders' personal interests but 'such a retainer arose by the clearest possible implication' from the documents and discussions during the course of 1995 the creation of the Trust on 15 January 1995, without any legal protection for the co-founders, did adversely affect their positions. Once the Trust had acquired the assets of the Project, the co-founders became supplicants of the Trust rather than the possessors of a legal right the failure to warn the co-founders of this potentially adverse effect was negligent, as was the failure to advise them to protect their respective positions by seeking to enter into heads of agreement with the Trustees in order to reserve their position. In the event, the Defendants gave no thought to the drafting of a bidding agreement, under which the Trustees could have acknowledged the co-founders' entitlement to shares in the company, to possible employment by the company or to payment of a royalty at a reasonable rate although the Defendants, on several occasions, advised Mr Smit and the Claimant to go to accountants or counsel, this did not negate the Defendants' continuing duty to provide advice themselves. If the Defendants saw, or ought to have seen, steps being taken to create a structure which might damage their clients' interests, they could not discharge that duty simply by advising that the clients should go to accountants or counsel. It was the Defendants' obligation to advise the co-founders that the setting up of a Trust might adversely affect their expectation of financial reward from the Project the Judge was not satisfied that the advice given in late 1995 by the Defendants was fully or properly considered. The advice and approach of the Defendants should have been that the question of personal gain needed to be explored with the Charity Commissioners and the Millennium Commission and, in the meantime, the co-founders' rights should have been reserved through a bidding agreement with the proposed Trustees. The failure to give such advice so as to enable the client to make any decision with the appropriate matters in mind, and with their rights secured, was negligent. It was clear from the continued attempts to obtain personal gain in 1996 that the co-founders did not appreciate that their rights had been adversely affected. Nor does it appear that the Defendants appreciated the position either. If there was any doubt in the Defendants' minds about the extent of the retainer or the meaning of instructions at any stage, clarification should have been sought before the Trust was formed.

Causation

It was necessary for the Claimant to establish:

that, on a balance of probabilities, had he been given proper advice, he would have taken it that there was a real and substantial chance that Mr Smit would also have agreed to take it that, had the correct advice been given by the Defendants to the Claimant and Mr Smit, there was a real and substantial chance that the Claimant would have achieved the financially better result that he now sought. This, in turn, required the Claimant to demonstrate that there was a real and substantial chance that the Trustees would have agreed to the terms of a bidding agreement of the type referred to above and that the Millennium Commission would have accepted an application with such a bidding agreement in place in January 1996.

The Judge was satisfied that, if proper advice had been given, the Claimant would have accepted it; the suggestion that he would have done otherwise was improbable. The Judge also concluded, on the basis of all the evidence before him, that there was a real and substantial chance that Mr Smit would have entered into negotiations with the Claimant in order to seek a personal benefit from the Project and that an agreement would have been reached between the co-founders.

As to the position of the Trustees, the documents demonstrated that they remained anxious throughout to ensure that Mr Smit and the Claimant were properly rewarded for their creation of the Project. In the face of the advice they were receiving from the Defendants, however, and in the absence of any bidding agreement reserving the co-founders' rights, they were unable to do what they wished to do and were limited to paying the Claimant's historic costs.

There was a substantial dispute between the parties as to whether or not the Millennium Commission would have accepted a bidding agreement which sought equity and intellectual property rights for the Claimant and Mr Smit. The Millennium Commission did not at the material time have a clear and certain policy as to how to deal with rewards for co-founders and there was a tension between the view that a private individual should not receive a return on public money and the need to be commercial where there was private investment funding as well. The Judge concluded that there was a real and substantial chance that an agreement would have been struck in Autumn 1997 between the Trust and the co-founders which the Millennium Commission would have regarded as fair and reasonable on the basis that there was no leakage of public funds beyond a reasonable amount to enable the Project to go forward and succeed.

Quantum

Applying loss of chance principles, the Judge evaluated the prospects of success of each of the possible outcomes, giving a percentage assessment for each category of lost chance. The chances of failure in relation to each of the matters in issue (e.g. the chances of a bidding agreement being concluded with the Trust, agreement being reached with Mr Smit and approval being obtained from the Millennium Commission) were built into the award, so that this properly reflected the true value of the chance which the Claimant had lost as a consequence of the Defendants' negligent omissions.

As part of the overall exercise, the Judge assessed the Claimant's prospects of achieving variable levels of remuneration for employment and a buy out of equity and royalties, based upon the factual and expert evidence before him.

Taking all these matters into account, the Claimant was awarded approximately £1.8 million in damages.

Breach of Fiduciary Duty and Conflict of Interest

The Claimant contended that the Defendants, having acted on behalf of the co-founders and whilst continuing to do so, acted on behalf of the Trust and, in so doing, were in conflict of interest and breach of fiduciary duty. It was alleged that the Defendants had acted against the interests of the co-founders by advising the Trust and representing them in negotiations in respect of the Claimant's claims on the Trustees and also by representing the Trustees and Eden Project Limited in litigation brought by the Claimant.

In relation to the alleged breach of fiduciary duty the Claimant had to demonstrate three things: first, that he retained the Defendants to protect his personal interests; second, that in the course of that retainer, the Defendants had acquired confidential information; and, third, that in the course of acting for the Trust against their former clients, the co-founders, the Defendants had used that confidential information against their clients' or former clients' interests.

The Judge held that the Defendants were retained to advise the Claimant on his personal position prior to creation of the Trust in January 1996 and that they continued to advise him and Mr Smit thereafter. The Claimant was advised on the strength of his negotiating position and at no stage was he advised to obtain independent legal advice.

By October 1997, the Defendants were clearly acting on behalf of the Trust against the Claimant when he submitted his claim. The Defendants drafted the letter which was sent on behalf of the Eden Project making an offer of settlement of his claim for historic costs. They advised the Trustees that they already had the goodwill and brand name, that intellectual property rights did not exist anymore and that any such rights had already passed to the Trust. Such advice was clearly against the interests of their former clients, the co-founders.

The Judge was satisfied on the evidence that there was a clear conflict of interest between Mr Smit and the Claimant, on the one hand, and the Trust on the other.

The Defendants' evidence as to breach of fiduciary duty was based upon the premise that there was no barrier or secrecy between the Claimant and Mr Smit and the Trustees. It was contended that this transparency of information meant that no information was confidential because it was all available to the Trustees as it was to the Defendants. It was also asserted by the Defendants that no relevant confidential information had been acquired from their former clients.

The Judge rejected both submissions. Any information which indicated where the Claimant perceived his weaknesses to be, how that might affect his negotiating stance and what he might be prepared to accept was plainly confidential information. Accordingly, when the Defendants advised the Trust on the Claimant's claim and drafted a response to his letter of claim they were acting against the interests of a former client and doing so whilst possessing confidential information.

By acting on behalf of the Trust and Eden Project Limited in the subsequent proceedings brought against them by the Claimant, the Defendants were also in breach of fiduciary duty. These instructions should have been declined.

Notwithstanding the breach of fiduciary duty in relation to both the negotiations and the proceedings, the Judge did not consider it appropriate to make an award of damages as the Claimant had already been fully compensated for the loss he suffered at the hands of the Defendants. He could not establish any further loss attributable to the Defendants acting for the Trust and Eden Project Ltd and no order was made for an account or damages in the equitable claims.

Commentary

The decision highlights a number of broader issues.

All projects and transactions involve a number of parties with different interests. These may include the founders, shareholders, directors, the company and the financiers. It is, therefore, essential at the outset to identify the client and the capacity in which any individual is giving instructions.

In the early or formative stages of a potential project or transaction, a firm of solicitors may be in a position to act for one of a number of the interested parties but (not unreasonably) wish to keep their options open until the position has crystallised. In those circumstances, it is imperative that the firm does not, during the course of preliminary discussions, acquire any relevant confidential information about party A which could disable it from acting for party B when it is proposed that a solicitor-client relationship be established with the latter. Even in the absence of a contractual relationship with party A, a duty of confidence may have arisen, whilst a Court may also be prepared, in certain circumstances, to accept that an implied retainer arose between it and the solicitor.

The decision emphasises the importance of identifying the potential for conflicts of interest to arise as matters develop. The position needs to be kept under review and where a conflict or potential conflict of interest may arise, any relevant third party should be advised to obtain independent advice.

Whilst it is always important to define the scope and limits of the retainer at the outset, a solicitor's instructions cannot always be written in stone and he must be responsive to changes in circumstances and matters that arise during the course of the assignment.

Where a solicitor is under a duty to provide advice on a particular issue (such advice being within the scope (or apparent scope) of the solicitor's competence), he cannot discharge that duty by advising the client to go to other advisers, such as accountants or counsel.

The Judgment illustrates the Court's approach to loss of chance claims in non-contentious business, where it will speculate as to what would have happened had the solicitor properly discharged his duty.

Whilst the outcome of any case will turn upon the facts, the Courts tend, unsurprisingly, to lean heavily in favour of Claimants in cases where the solicitor was in breach of duty. It may, in particular, be difficult to persuade a Court that a particular step or measure would not have been pursued or proved effective when, in fact, it was never contemplated by the solicitor and no relevant advice was ever provided to the Claimant.

In more general terms, the Judge acknowledged that, where there were many contemporaneous documents in existence, the Court should exercise caution before accepting evidence which purports to be a recollection, but which is not supported by the contemporaneous documentary evidence. In this respect, the absence of any mention of an important matter in the contemporaneous documents may be significant (albeit not conclusive).

Masons (a firm) v WD King Limited & Another [2003] EWHC 3124(TTC)

Identity of the client; duties to third parties; advice and drafting in respect of construction contracts; the duty to warn; causation.

Background

In 1999, Masons was retained to advise upon a project to build new accommodation for university students in Bath. The project was a joint venture in which WD King Limited, the First Defendant ('WD King'), provided the finance. The contractor was Jarvis. Jarvis' contract was with Prospect Gardens Bath Limited, the Second Defendant ('Prospect Gardens'), which was a special purpose vehicle formed by the joint venture. The contract sum was £5.75 million.

WD King was a family company of which Mr Jeffrey Rosenbaum was the sole director. This type of construction project was completely new to Mr Rosenbaum, hence he relied heavily upon the joint venture team and, in particular, Mr Paul Whitley, an architect, who was the Project Manager under the building contract. Masons received virtually all their instructions from Mr Whitley, who was described in the judgment as 'well informed'.

The university wanted to have the accommodation ready for the start of the academic year in 2000. Accordingly it was agreed that, if the accommodation was not ready by then, the university would not be liable to pay rent until the following year. This would lead to a loss to WD King and/or Prospect Gardens of about £680,000. The Defendants therefore sought, as far as possible, to ensure that (a) Jarvis completed on time, and (b) if Jarvis completed late, the Defendants could recover as much as possible from them. The Defendants' philosophy was elimination of risk if possible and minimisation of risk if not.

The negotiation of Prospect Gardens' contract with Jarvis was a lengthy process. The final contract included the following two clauses:

condition 38, which provided the Project Manager, Mr Whitley, with the power to issue an instruction to accelerate the building works (at Jarvis' cost) if delay in completion looked likely; and condition 55, which entitled Prospect Gardens to recover liquidated damages from Jarvis in respect of any delay in the completion of the work. In an ideal world, Prospect Gardens would have wanted these liquidated damages to be £680,000. However, this proved to be impossible to negotiate and the figure inserted in the contract was significantly less.

The work was delayed. In an attempt to ensure that the project completed on time, Mr Whitley issued an acceleration notice pursuant to condition 38. Despite this, the project was not completed on time. It was late. The Defendants therefore did not receive rent of £680,000 from the university. However, they were not able to recover anything like this amount in liquidated damages under condition 55.

Prospect Gardens referred the dispute to adjudication. It argued that Jarvis was in breach of condition 38. Accordingly, in addition to the liquidated damages under condition 55, it claimed unliquidated damages for breach of condition 38. If this argument had been successful, it would have enabled Prospect Gardens to recover up to the full £680,000. The adjudicator agreed that Jarvis had breached condition 38. However, he added that all of Prospect Gardens' losses arose as a result of Jarvis' delay. These losses were exclusively governed by condition 55. Prospect Gardens could not recover more than the liquidated damages.

Allegations

Masons meanwhile had unpaid fees and they therefore commenced proceedings against the Defendants to recover these fees. In return, the Defendants brought Part 20 proceedings, alleging that Masons had failed to draft the building contract in accordance with their instructions. In essence, Prospect Gardens argued that it should have been able to recover its full loss from Jarvis. It is alleged that the fact that it was unable to do so was due to Masons' negligent drafting and advice.

Held

His Honour Judge Humphrey Lloyd QC's findings are set out below.

Did Masons enter into a contract of retainer with Prospect Gardens?

The Judge held that Masons' retainer was with WD King and not with Prospect Gardens. The Judge made express reference to the terms of a letter from Mr Whitley to Masons dated 14 January 1999 which clearly stated that, "the client, to whom Masons shall be contracted is WD King Limited".

The Judge was of the opinion that, as Prospect Gardens was a SPV, a shell, it was unlikely that Masons would have accepted it as the client, any more than Prospect Gardens would have been so designated by the entity which effectively retained Masons, namely WD King, which had the major financial interest in protecting its SPV, Prospect Gardens, from loss. Accordingly, Masons owed no contractual duty of care to Prospect Gardens.

Did Masons owe Prospect Gardens a duty of care in tort?

The Defendants submitted that Masons owed Prospect Gardens a duty of care in tort since Masons knew that Prospect Gardens would be the employer under the building contract. Accordingly, if the contract was negligently drafted, it would be Prospect Gardens' rights and liabilities that would be affected. The Judge accepted that Prospect Gardens was the object of the contract upon which Masons was advising. However, this was not sufficient to create a duty of care. In circumstances where the loss was economic loss there had to be more than foreseeability of loss; there had to be reliance and an assumption of responsibility. Neither existed in this case. Accordingly, in addition to owing no contractual duty of care, Masons owed no duty of care in tort to Prospect Gardens.

Did the building contract permit Prospect Gardens to recover unliquidated damages for delay in the event that Jarvis was in breach of Condition 38?

If the contract did allow the recovery of unliquidated damages under condition 38, then Prospect Gardens should have been entitled to recover all or most of its losses from Jarvis. In other words, the contract would have achieved what Prospect Gardens wanted it to achieve. Accordingly, Masons' drafting could not be criticised. However, the Judge agreed with the adjudicator. If there was delay to the project, Prospect Gardens' only sanction against Jarvis was the imposition of liquidated damages. Condition 38 did not add to this. Prospect Gardens' losses were capped at the level of the liquidated damages.

What was the extent of Masons' duties to the Defendants?

The Defendants alleged that Masons owed them a general duty to provide legal services in connection with all aspects of the development. This was not an express term of the retainer and the Judge was not prepared to imply it. On the contrary, he noted that the retainer expressly required Masons to keep costs to the minimum and, for that purpose, a fixed fee had been agreed. The fact that costs had subsequently increased did not change the terms of the retainer.

However, the Judge did decide that Masons owed WD King a contractual duty to warn of the risks of the contracts that it would be making. The precise ambit of this duty, though, was a matter for evidence. In this case, Mr Whitley had confirmed in correspondence in August 2000 that liquidated damages did not reflect Prospect Gardens' real loss in the event of late completion. Furthermore, during cross-examination, Mr Whitley went further: "I had advised Masons in the first place that there was a shortfall, therefore, it was not something that they needed to advise us about". There was a duty to warn, but only within limits. Because of Mr Whitley's evidence, those limits were quite narrow.

Was Masons in breach of contract and/or breach of their duty of care at common law?

WD King placed great importance on its inexperience in this type of project. The implication was that Masons should have gone to greater lengths to warn it of the risks in the project. The Judge, however, held that this inexperience was that of the sole director, Mr Rosenbaum. All the other members of the team were experienced and able to assess the risks of the project. This particularly included Mr Whitley, with whom Masons almost exclusively dealt. The Judge found that Masons were not in breach of duty: "Masons were put on their mettle by Mr Whitley and in my view rose admirably to the occasion." WD King was already aware of the risk of the shortfall between the maximum liquidated damages recoverable and the potential losses. Accordingly, the Judge decided emphatically in favour
of Masons.

If Masons had been in breach, did such breach cause Prospect Gardens to lose the opportunity to contract with Jarvis on a more favourable basis?

It was submitted on behalf of the Defendants that they had lost various opportunities, including deferring the project; selling the property; negotiating or contracting on different terms with Jarvis or contracting with someone else on other terms.

The Judge regarded these suggestions as unrealistic and "even fanciful". At the first point in time when Masons should allegedly have advised, the decision had already been taken to proceed with the project and to accept the risk of a shortfall. The Judge found that, in such circumstances, the Defendants would not have embarked on any alternative course of action. Secondly, it was not long after that date that WD King committed itself with the issue of a letter of intent at which point "the die was cast". Jarvis would not have accepted materially different and disadvantageous terms. Thirdly, the Judge did not find that WD King could have negotiated any better terms with Jarvis then or at an earlier stage and there was no other contractor in light of the fact that the next lowest tender was £1.3 million above the finance available.

The Judge therefore decided very firmly in Masons' favour. The Defendants lost on virtually every issue.

Commentary

The Judge's findings highlight a number of important issues:

Who is the client? The case highlights the need for the solicitor to know at every stage of a transaction who his client is, particularly in transactions which use special purpose vehicles or in which new companies are set up. Although Masons had written to Mr Whitley on 12 January 1999 enclosing "details of the services that W D King are likely to need from us…", the Judge held that that letter was merely an offer. The key letter, as mentioned above, was Mr Whitley's response of 14 January. This set out the relevant terms that would form the basis of the retainer and confirmed that WD King was the client. If this letter had been drafted more widely it may have included Prospect Gardens. For the benefit of both the solicitor and the client, the agreed retainer needs to be very clear about the identity of the client.

Can a solicitor be liable to a third party? In this case, for the reasons explained above, Masons did not owe a duty of care in tort to Prospect Gardens. The Judge stated that this would have required "special circumstances to take the situation out of the norm". In this case "the situation was essentially commonplace" and no duty arose. The implication is that, in the absence of a contract, the court will not readily find that a solicitor owed a duty of care to a special purpose vehicle. However, this will always be subject to evidence and it is not difficult to foresee situations in which a duty of care could come into existence. In particular, if Masons had somehow assumed a responsibility to Prospect Gardens, a duty may have arisen.

Duty to warn. A solicitor's job is usually to provide a client with advice. This duty to advise will almost always carry with it a duty to warn of the risks associated with that advice. This case is a reminder that the extent of this duty to warn will not be the same with every client. It will depend upon the knowledge and commercial acumen of that client. If the client is naïve and inexperienced, the solicitor may have to explain the risks in great detail. If the client is knowledgeable, the solicitor may not need to refer to some risks at all. Although Mr Rosenbaum of WD King was inexperienced in this type of commercial project, his team of advisers was very experienced. They were well able to assess the risks involved and, in particular, understood that they may not be able to recover all their losses if there was a delay. Whilst there was a duty to warn, therefore, that duty was quite narrow.

It is well established that there is no duty on a solicitor to question the commercial objectives of a sophisticated commercial client or to advise on general commercial issues of a transaction when the client has retained specialist advisers (unless he specifically agrees to do so). A prudent solicitor should always therefore consider the character of the client: Carradine Properties Limited v D J Freeman & Co [1989] 5 Const. L J 267 and Virgin Management Limited v De Morgan Group plc. [1996] EGCS 16.

General Duties. The case is also a reminder that the Courts will not readily imply duties that go beyond the express terms of the retainer. In this case, Mr Whitley (on behalf of WD King) agreed a fairly tight retainer with Masons. In the litigation, however, WD King alleged that Masons had a general duty to provide legal advice and services. The Judge saw these two positions as incompatible. Interestingly, the Judge linked the agreed fee arrangements with the scope of the duty. WD King had asked Masons to keep their costs to a minimum. The implication was that they did not want Masons to stray beyond the strict limits of their retainer. If WD King had wanted Masons to have a general duty to advise, this could have been agreed in the retainer (and WD King would have had to pay for it). However, it was not in the retainer and the Judge was not prepared to imply it.

Pickersgill v Riley [2004] UKPC 14

Extent and scope of duty to advise; distinction between legal and commercial advice

Background

The Claimant, a Mr Riley, instructed the Defendant solicitors in connection with the acquisition of a 28 year lease by his company, Magnet Publications Limited (Magnet). As a term of the lease, the lessor demanded that the Claimant personally guaranteed the rent from Magnet, which he did.

The Claimant subsequently instructed the Defendants to act for him in the sale of his shares in Magnet to West of England Newspapers Ltd (WEN). The lessor refused to accept a substitute guarantor and so was not willing to release the Claimant from his personal guarantee. The Claimant therefore agreed with WEN that, as a term of its purchase of the shares, WEN would indemnify the Claimant against any liability which he might incur under the lease.

The Defendants were instructed to implement and give legal effect to the transaction, the terms of which had been agreed direct between the Claimant and WEN.

It appears that both the Claimant and the Defendants took WEN to be a company of financial substance, although neither of them carried out any investigation into its status. It was, however, common ground that the Defendants had given a clear warning to the Claimant of the potential risks of accepting a contractual undertaking from a limited company.

Several years later, Magnet became insolvent and defaulted on the rent. The Claimant became liable for the arrears under the personal guarantee and attempted to obtain reimbursement from WEN pursuant to the indemnity. It transpired, however, that WEN was, and always had been, a shell company with no assets.

The Claimant therefore had no prospect of making any recovery against WEN and he issued proceedings against his solicitors.

Allegations

In essence, the Claimant alleged that the Defendants negligently failed to advise him:

that an investigation should have been undertaken into the solvency of WEN of the necessity for sufficient due diligence in respect of WEN's
financial substance on the commercial wisdom of accepting an indemnity from WEN.

The Royal Court of Jersey found in favour of the Claimant, holding that " … [the Defendant] had a duty either to investigate West of England Newspapers Ltd or to advise his client of the risk that he was running by not having the financial standing of the company investigated."

This conclusion was upheld and repeated in the Court of Appeal in Jersey.

The Defendants appealed to the Privy Council. The appeal was heard before Lord Nicholls, Lord Hoffman, Lord Hope, Lord Scott and Baroness Hale.

Held

The Defendants' appeal would be allowed.

In reaching that conclusion, the Judicial Committee of the Privy Council relied upon the application of the following principles:

The scope of a solicitor's duty in any given case will depend, first and foremost, upon the contents of the instructions given to him. It will
also depend upon the particular circumstances of the case (including the nature of the assignment), while the standing and experience of the client may also be relevant.

The Privy Council cited with approval paragraph 10-160 in Jackson and Powell on Professional Negligence, fifth ed [2002]. This states that:

"In the ordinary way, a solicitor is not obliged to travel outside his instructions and make investigations which are not expressly or impliedly requested by the client."

That proposition was supported by the Privy Council decision in Clark Boyce v Mouat [1994] 1 AC 428, where Lord Jauncey said:

"When a client in full command of his faculties and apparently aware of what he is doing, seeks the assistance of a solicitor in the carrying out of a particular transaction, that solicitor is under no duty, whether before or after accepting instructions, to go beyond those instructions by proffering unsought advice on the wisdom of the transaction."

The solicitor nevertheless remained under a duty to draw his client's attention to any legal obscurities of which the client might be unaware, particularly where a transaction or matter gave rise to any hidden pitfalls.

Applying these principles to the present case, the Privy Council concluded that:

The Claimant was an experienced businessman who understood the nature of personal guarantees. Although Magnet had potential for profit earning (hence WEN's purchase of the shares) it had not yet, under the Claimant's management, made a profit. In circumstances where the guarantee might remain in force for the full 28 year term of the lease, the Claimant must have known, from his own experience, that Magnet's future profitability was speculative. It followed that the guarantee had no 'hidden pitfalls' for him.

The possibility that WEN might be a company of little or no financial substance was a commercial risk, of which the Claimant, an experienced businessman, could have been expected to be aware. It was not a risk arising out of any legal complexity. It was not a 'hidden pitfall' that the Defendants had a duty to warn the Claimant about.

The first instance Judgment of the Royal Court of Jersey in favour of the Claimant appeared to have been based upon the proposition that, upon accepting instructions, a solicitor in Jersey becomes the client's 'homme d'affaires.'

Their Lordships regarded this 'homme d'affaires' categorisation of the Defendants as a mis-direction. Whilst the scope of a solicitor's duty might, in some cases, justify his description as an 'homme d'affaires', in the present case, it was misleading and apt to suggest a duty to advise on the commercial implications and wisdom of the transaction, a duty that neither the Defendants' instructions nor the circumstances of the case warranted.

In giving clear and correct advice about the risk of taking a contractual indemnity from a limited company, the Defendants discharged any duty they had to warn the Claimant about the risk he was taking in accepting the contractual undertaking from WEN. Their duty did not extend to investigating and advising on the financial substance of WEN, advising the Claimant to investigate the financial substance of WEN or to advising on the commercial wisdom of accepting an undertaking from that company.

In the final analysis, it was a matter of commercial judgment for the Claimant as to whether he was prepared to accept WEN's indemnity as a term of the share sale agreement. In the words of Lord Scott:

"Mr Riley's commercial decision … may, with hindsight, be regarded as imprudent and to have been based on a mistake as to WEN's financial substance at the time of the transaction. Mr Riley cannot, in their Lordships' opinion, extend [the Defendants'] role from that of his solicitor acting on the instructions to that of his commercial adviser, or to that of his insurer against his commercial misjudgment."

Commentary

The Privy Council's Judgment highlights a number of broader issues.

In any case where similar issues arise, it will be important to consider:

• what the solicitor was instructed to do. This will always be the starting point
• the nature of the transaction or assignment in question and how this may have affected the scope of the solicitor's duties
• the experience and standing of the client. Thus, whilst certain matters may be obvious to an experienced businessman, an inexperienced client will be entitled to expect a solicitor to take a broader view as to the scope of his retainer
• whether there was anything to alert the solicitor to the fact that the client had misunderstood or failed to appreciate what was proposed
• whether the allegedly negligent omission related to a legal issue or a 'hidden pitfall' which would not have been apparent to the client.

In the context of his instructions, the solicitor has a duty to protect his client's interests and to consult with him on all questions of doubt. It is the omission to do so which frequently gives rise to problems, although the position remains that a solicitor is not obliged to give advice to a competent client on the commercial wisdom of a transaction unless he specifically agrees to do so. A prudent solicitor will not volunteer commercial advice (especially in the corporate context), the rationale being that, generally speaking, the client operating in the relevant market is in the best position to assess the commercial viability of any transaction.

There are occasions where the demarcation between legal and commercial advice may be unclear (as illustrated by the dissenting Judgment of Sir Thomas Bingham MR in Reeves v Thrings & Long [1996] PNLR 625), but the solicitor's duty remains to provide legal advice in the commercial context. Care does, however, need to be exercised in the preparation of brochures and other promotional material. For example, if a firm goes too far in seeking to impress upon clients and prospective clients its ability as a business adviser, this may lead it into dangerous territory, both in terms of liability and the scope of any recoverable loss.

Whilst it will always be important for a solicitor to seek to define and agree the scope and limits of his retainer with the client, those instructions may change as an assignment progresses and new facts, matters or issues emerge which require fresh advice and input from the solicitor (as to which, see the earlier report on Ball v Druces & Attlee [2004] EWHC 1402). Wherever it is practicable to do so, such variations should be confirmed (or at least evidenced) in writing.

Although the solicitor in Pickersgill v Riley had given a clear warning on the risks of accepting an indemnity from a limited company, it is submitted that, even if such a warning had not been given, the risk in question was a matter which ought reasonably to have been apparent to the Claimant. This is consistent with the principle that, in the commercial context, a solicitor will not be liable for omitting to advise where the matters in question relate to business (rather than legal) considerations and "are well within the client's competence to appreciate and evaluate for himself …" (per Simon L J in Reeves v Thrings & Long).

When difficulties arise following a commercial transaction, it is not uncommon for clients to point the finger of blame at their solicitors or other professional advisers. The Privy Council's decision is, therefore, a welcome one, in emphasising that a solicitor is not to be regarded as an insurer of the commercial risks inherent in any transaction. As such, their Lordships' approach may serve to discourage a number of speculative claims, where commercial entities are seeking a scapegoat and a potential 'deep pocket' when things have gone wrong.

For more information, please contact Peter Maguire at [email protected] or on +44(0)20 7367 2893.

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