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Professional Negligence: Solicitors duty to warn of obvious risks

In the Solicitors Disciplinary Tribunal case of SRA v David Hayhurst, the issue of whether a solicitor is under an implied duty to carry out work that is reasonably incidental to the retainer was examined.

Although 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.

A recent judgment of the SDT proves the point that in some cases a solicitor is expected to travel outside his instructions to warn inexperienced clients of obvious and significant risks. An experienced solicitor who specialises in residential and commercial property law has been reprimanded by the Solicitors Disciplinary Tribunal (SDT) for failing to advise on the “obvious risks” of four off-plan property development schemes.

What is the Solicitor’s Duty of Care?

A solicitor’s duty of care is generally to act with professional skill and due care; like any other reasonable solicitor. The duty is owed to the solicitor’s client alone. It includes behaving in accordance with the SRA’s professional code of conduct. As an officer of the Court the solicitor also must act within duties owed to the Court. Specific duties may be set out in the contractual solicitor-client retainer letter and terms.

The 3 Key Factors in a Negligence Claim:

If a solicitor does not act with reasonable care in skill in exercising their duty of care then a professional negligence claim is possible dependant on 3 key factors:

  1. The solicitor owed a duty of care
  2. The professional breached that duty of care, and
  3. That you suffered financial loss as a result of the breach.

Have you suffered financial loss at the hands of a professional who has failed to act within professional standards? If you think you have a case, get in touch with our team of professional negligence lawyers. We can assist you to understand the merits of your claim and advise you on the best way to obtain fair compensation.

The Facts

The lawyer was an experienced solicitor who specialised in residential and commercial property law, including property developments. He had generally acted for developer clients, but also for buyers in off-plan schemes. The allegations involved his role when acting for buyers in relation to four “fractional” property development schemes.

The solicitor accepted that he had not provided adequate advice to his clients but the Tribunal noted that at the time he considered he had complied with his obligations. Nevertheless, whilst not intended, the harm was foreseeable given the Respondent’s level of experience.

The SDT Judgment: advice so inadequate “as to be incompetent”

The solicitor failed to adequately advise clients investing in property development schemes about the high risks inherent in the schemes. Although a solicitor is not obliged to travel outside his instructions and make investigations that are not expressly or impliedly requested by the client, the risks of the schemes were precisely the types of risks that the solicitor ought to advised his client.

The SRA regarded the property schemes as inherently risky and even though the client care letter stated that independent advice should be sought on the schemes, an inexperienced client will need and will be entitled to expect that solicitor to take a much broader view of the scope of the retainer and of his duties than will be the case with an experienced client.

Advice as to risks was at the very least capable of having a material bearing upon the decisions that these clients made. In the event, clients did not receive that advice and so were unable to make such informed decisions. Where some clients might have decided that it was not in their best interests to invest, they have been deprived of that opportunity and instead faced the risk of losing the whole of their capital.

The advice provided and representations given were so inadequate as to be incompetent. Moreover, the Respondent wrongly considered that because (in his view) some of his clients were sophisticated, therefore they did not require relevant advice

SRA v David Hayhurst (Case no. 12072-2020)

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]

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

Download the SDT Judgment

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