A Warning to Lawyers in Professional Negligence Claims: Solicitors owe a duty to warn clients of risks

A solicitor is not under a general duty to warn clients about risks relating to matters which fall outside the scope of the client retainer; a potential professional negligence claim exists where there is a failure to warn as to risks which are material to the retainer.

Recent judicial authority provides guidance on the scope of a solicitors standard of care when giving advice on risks for the client. Although each case with turn on its fact, the judicial advice is clear: although a solicitor is not necessarily under a general duty to warn clients about risks relating to matters which fall outside the scope of the retainer, a that solicitor fails to warn a client on risks which are material to the retainer leaves open a potential professional negligence claim.

The principle in Bolam v Friern Hospital Management Committee [1957] 1 WLR 582 has been accepted as the established test for breach of a duty of care in all professional liability cases: a professional is not necessarily negligent if they conform to a practice accepted as proper by members of that profession, even if other professionals would have taken a different approach.

The courts have regularly divined the parameters of what a reasonably competent professional would do for a variety of different professionals, for example, Asplin LJ in Barker v Baxendale Walker Solicitors and another [2017] EWCA Civ 2056, sets out the principles determining what advice should be provided by a solicitor in particular factual circumstances.

Do solicitors have a duty to warn clients of risks?

This is heavily dependent on the factual matrix of the particular case, but recent judicial authority is clear that solicitors have a duty to warn clients of risks which are material to their retainer.

The leading authority is expounded by the Court of Appeal inBarker v Baxendale Walker Solicitors were asked to consider whether solicitors were under a duty to give specific warning to the client prior to entering into a tax scheme that there was a significant risk that their interpretation of the legislation might be wrong. By way of background, the client wished to mitigate capital gains tax on the sale of his company and was instructed to the solicitors as specialists in employee benefit trusts (EBTs) as a means of tax avoidance.

The solicitors suggested that the client could technically transfer his shares to the trustee of an EBT which was resident in a jurisdiction that did not levy CGT on transfer and then the shares could purportedly be sold tax free. The solicitors told the client that although he had to be an excluded person under the trust, members of his family and descendants could purportedly benefit instead after his death (through a purposive- but incorrect- interpretation of the Inheritance Tax Act 1984). Crucially, the solicitors did not warn the client that there was a risk that the legislation could be construed differently by HMRC and that his family and descendants would have to be excluded persons throughout the trust’s lifetime.

HMRC did indeed later assess the client for tax in respect of the sale of his company and specifically stated that the post-death exclusion construction was the correct one and as such the EBT scheme had failed. As a result of the incorrect interpretation of the legislation, and given that the scheme had failed, the client was advised to settle for a substantial sum.

Although at first instance the client’s negligence claim was dismissed on the basis that the post-death exclusion construction was doubtful and the solicitors were not negligent in their failure to warn of that significant risk.

However, the Court of Appeal construed the relevant legislation and found that given the proper construction of the legislation, the amounts at stake, the legal fees paid to the solicitors and the nature of the transaction (tax avoidance where the other side is HMRC who are well-resourced), then there was a duty to give a specific warning about the significant risk the scheme entailed.

When determining whether a reasonably competent adviser would have advised that there was a significant risk that a contrary view would be taken in relation to section 28(4) and that the post-death exclusion construction might well be correct, the relevant facts included the fact that this was a very aggressive tax avoidance scheme which was marketed to Mr Barker on the very basis that his family would be able to benefit from the property within the EBT at the date of his death free of Capital Gains Tax and Inheritance Tax, an outcome which might appear on the face of it to be too good to be true. It was for that reason that the sub-trust was established at the outset and section 28(4) and paragraph (d) in particular, were the focus of the drafting and ought to have been at the centre of the advice. It is also relevant that the potential charge to tax was very large and the Respondents’ fee was in the region of £2.4m.

Lady Justice Asplin in Barker v Baxendale Walker Solicitors [2017]

What does the duty to warn mean for the Bolam test?

The Bolam test might have previously been used by defendants to attempt to absolve professionals of alleged negligence when they have followed a practice of reasonable body of professional opinion.

Recent judicial authority is clear that a solicitor that has followed the practice of a reasonable body of professional opinion does not have much application when it comes to the duty to give legal advice on a particular piece of legislation.

Further judicial authority: lawyers are under a duty to advise clients on risks

Failure to advise on the acquisition of the lease

In Luffeorm v Kitsons LLP, the client’s solicitors were found negligent by the court in circumstances where their retainer was to advise on the acquisition of the lease of a public house, and the lawyers had failed to notice the absence of any covenant in restraint of competition and failed to draw such absence to the purchasers’ attention.

Failure to advise on the definitions in an underlease

In Balogun v Boyes Sutton, the Appellate court found that solicitors had breached their duty by failing to warn their client that a court may come to a different interpretation than them as to what fell within the definition of ‘service media’ within a draft underlease. The Court of Appeal stated that in determining whether a breach has occurred is “necessarily highly fact-specific” and of course would also depend on the strength of a different interpretation.

Duty to warn of any substantial risks

Credit Lyonnais SA v Russell Jones & Walker [2002] EWHC 1310 (Ch) sets the bar high for solicitors in that it was held that solicitors are under a duty to warn a client of any substantial risks that would be apparent to a competent property lawyer. A firm of solicitors had been negligent in failing to draw a client’s attention to the fact that time was of the essence in the case of a condition precedent concerned with the early termination of a lease.

Although a solicitor was not to be taken as a general insurer against his client’s problems but rather his duties were determined by the scope of his agreed retainer. If, in the course of his work on the matters in respect of which he had been retained, a solicitor became aware of a risk or potential risk to his client, it would be his duty to inform the client of that risk. In so doing the solicitor would not be going beyond the scope of his instructions nor could he be deemed to be doing any extra work for which he was not to be paid. 

Solicitors are under an implied duty to carry out work (including risk warnings) that are reasonably incidental to the retainer

In Minkin v Landsberg [2015] EWCA Civ 1152, the client had settled divorce proceedings with her ex-husband by negotiating a financial settlement. The client was warned by her solicitors that the financial settlement did not seem satisfactory. The solicitors advised of alternatives, including negotiation, mediation and litigation with full disclosure. However, the client decided to adhere to the agreed settlement. She changed solicitors and instructed the new firm to put the agreement into a form that the court could approve. The client subsequently regretted signing the consent order and claimed damages for professional negligence on the basis that the new firm had failed to advise or warn her against entering into the agreement.

However, there was no duty to warn given that the new firm were acting under a very limited retainer and there would be very serious consequences for both the courts and litigants in person generally if solicitors felt unable to accept instructions to act on a limited retainer basis for fear that what they anticipated to be a modest and relatively inexpensive drafting exercise, albeit complex to a lay person, might lead to a far broader duty of care being imposed on them.

Nevertheless, Lord Justice Jackson in Minkin summarises the relevant principles of when a solicitor is under a duty to warn based on the scope of the retainer as follows:

i) A solicitor’s contractual duty is to carry out the tasks which the client has instructed and the solicitor has agreed to undertake.
ii) It is implicit in the solicitor’s retainer that he/she will proffer advice which is reasonably incidental to the work that he/she is carrying out.
iii) In determining what advice is reasonably incidental, it is necessary to have regard to all the circumstances of the case, including the character and experience of the client.
iv) In relation to (iii), it is not possible to give definitive guidance, but one can give fairly bland illustrations. An experienced businessman will not wish to pay for being told that which he/she already knows. An impoverished client will not wish to pay for advice which he/she cannot afford. An inexperienced client will expect to be warned of risks which are (or should be) apparent to the solicitor but not to the client.
v) The solicitor and client may, by agreement, limit the duties which would otherwise form part of the solicitor’s retainer. As a matter of good practice the solicitor should confirm such agreement in writing. If the solicitor does not do so, the court may not accept that any such restriction was agreed.

Lord Justice Jackson, Sharon Minkin v Lesley Landsberg (Practising As Barnet Family Law)[2015] EWCA Civ 1152

A solicitor’s duty to warn is limited to matters pertinent to the retainer

In Lyons v Fox Williams LLP [2018] EWCA Civ 2347, a solicitor instructed to deal with a client’s claim under an accident, death and disablement policy was held to not have been under a duty to warn his client about the rights arising out of the same accident under a long-term disability insurance policy that was not covered by the retainer.

The important take away from the Court of Appeal is that a solicitor’s obligation to bring to a client’s attention risks which became apparent to the solicitor when performing his retainer did not involve the solicitor in doing extra work or in operating outside the scope of his retainer.

41. It is, I think, worth emphasising that although cases like Minkin are often cited as authority in support of a legal duty to warn, they are in fact decisions about the scope of a solicitor’s duty based on a particular retainer. As Laddie J explained in his judgment in Credit Lyonnais which was approved in Minkin , the solicitor’s obligation to bring to the client’s attention risks which become apparent to the solicitor when performing his retainer does not involve the solicitor in doing extra work or in operating outside the scope of his retainer. The risks in question are all matters which come to his attention when performing the tasks the client has instructed him to carry out and which therefore as part of his duty of care he must make the client aware of.

42.  Neither Credit Lyonnais nor Minkin are authority for the proposition that the solicitor is required to carry out investigative tasks in areas he has not been asked to deal with however beneficial to the client that might in fact have turned out to be. 

Lord Justice Patten at paras 41 and 42, Cathal Anthony Lyons v Fox Williams LLP [2018] EWCA Civ 2347

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