Solicitors can owe a limited duty of care to third parties

In Caliendo v Mischon de Reya, the Court found that a firm of solicitors had not been retained, either expressly or impliedly, to represent the majority shareholders in respect of the sale of their shareholding in a football club.

Summary

However, whilst the Court found that it had not been breached, it was nevertheless held that the solicitors owed a limited duty arising from an assumption of responsibility towards the shareholders, which is noteworthy in terms of the ongoing debate on duties owed by solicitors to non-clients.

Background

The first Claimant ("Mr C") was an Italian businessman who was a director and held shares in a well known football club's holding company ("Q"), via a second claimant company. Mr C's associates also held shares and, together, they had the majority shareholding in Q.

Q had major financial problems and Mr C and his associates lent it substantial sums in order to keep it going. When Q was faced with a significant bill from HMRC (which resulted in a winding up petition being made against it in 2007), Mr C and his associates decided they did not want to invest any further funds and so wanted to sell their shares.

A firm of solicitors ("M") acted on behalf of Q in the sale, which included an acknowledgment from Mr C that the club owed him £6.5 million in interest free loans and a waiver of £4.5 million of that debt. Mr C also warranted that no loans were outstanding to his associates. One of the partners of M, Mr S, was heavily involved in the transaction, had been treated as a non-executive director of Q and had executed documents on behalf of Mr C (and the other claimants) under a power of attorney.

The Claimants alleged they had instructed M to act on their behalf in the sale and that M had breached its duty to them by executing Transaction Documents which deviated from their instructions, and without advising them properly (or at all).

Damages were sought from M on a loss of a chance basis, plus recovery of costs incurred by Mr C in defending proceedings brought against him by Q.

The Decision

No retainer letters were in place and the Court found that the Claimants did not express instructions to M to act on their behalf. The pertinent question therefore was whether an implied retainer had arisen i.e. whether the existence of a retainer could be inferred from the acts of the parties.

The leading authority on determining implied retainers is Dean v Allin & Watts [2001], from which the Judge quoted: "an implied retainer can only arise where on an objective consideration of all the circumstance an intention to enter into such a contractual relationship ought fairly and properly to be imputed to the parties".

The Court looked at the following factors in reaching its decision.

Retainer letters

The Claimants argued that M had previously acted for them without an express retainer in place for other matters and therefore the fact that there was no retainer letter in place did not mean that M had not been instructed on their behalf.  The Court disagreed with this argument and was satisfied that the previous instructions were in relation to distinctly separate matters and that no general or longstanding relationship existed between Mr C and M.

Remuneration

The fact that M was not paid for its work in respect of the transaction was represented as evidence that there was no implied retainer. The Court indicated that often with an implied retainer, remuneration is not agreed and this does not preclude the existence of a contract. However, the Court noted the lack of monetary remuneration did not mean that there was no consideration for its work. In fact, M benefited from the provision of match tickets, the use of a box and also invitations to the Directors' box at matches. These benefits were of monetary value and were benefits only Q could provide, and not Mr C or the other Claimants.

There was, on the other hand, no evidence that the Claimants ever expected to have to pay M for its work. The Court considered that it was reasonable for Q not to expect to pay because it was providing the other benefits, but the same did not apply to the Claimants. This was held to be a factor against there being an implied retainer.

Advice from other advisors

The Court also considered it important that the Claimants did not necessarily have to receive advice from solicitors in respect of the transaction, as they could take advice from other professional advisors, such as accountants and financial advisers. Q, conversely, required legal representation due to the fact the takeover code applied and that the transaction involved substantial secured loans by the purchasers to Q.

Furthermore, the Court noted that Mr C did not retain solicitors when he purchased his shares in Q in the first place but had taken advice from the T&F Group. The Court held that the T&F Group also acted for the Claimants in this transaction and although this did not conclusively mean that the Claimant could not have also instructed M, it was another factor which pointed against any implied retainer with M.

Belief of the purchasers' solicitors

The Claimants also argued that the purchasers' solicitors, W, thought that M were acting on their behalf in the transaction. However, the Court did not consider that the documentation disclosed to the Court supported this argument.  

Conclusion

The Court found that the "actions of the parties are not consistent only with M being retained as solicitors for the Claimants. Rather, they are at least equally consistent with M acting as solicitors for Q and its directors in their capacities as directors of the company" (para 713).   No implied retainer was therefore found to exist.

Assumption of Responsibility

Although the Court was not prepared to imply a retainer in these circumstances, it did find that M had assumed a level of responsibility for the Claimants' interests, and thus owed the Claimants a limited duty of care. This duty extended only to exercise reasonable skill and care in the negotiation and execution of the transaction documents, but only in so far as (a) the Claimants' interests were aligned with those of Q and (b) the Claimants were not advised by the T&F Group.

The Court found that M owed no duty of care to the Claimants where there was a conflict between the Claimants' interests and those of Q.  They also found that M was not under a duty to advise the Claimants in respect of the nature and effect of the transaction documents, as they were entitled to assume that T&F Group would perform that function. 

In addition, the Court found that Mr S owed a duty to ensure that the information and drafts from W were passed to the T&F Group and vice-versa.

The Court held that M had not breached that limited duty, and in any event, the Claimants filed to show that any breach would have caused them loss.  In the circumstances, therefore, the claim was dismissed.

Comment

It is evident from this decision that the existence of an implied retainer can only be determined on the specific facts of each case and only arises where the conduct of the parties is clearly consistent with the solicitor having been retained by a claimant. It also shows the relevance of whether a party has instructed another professional, as this can be used as evidence that no retainer can be implied with the solicitor.

More importantly, however, it shows that the Courts are increasingly ready to find duties where none would have been imposed before, particularly where a third party can show that the solicitor has assumed responsibility for its interests in some way.  Solicitors should therefore be very careful to analyse any instructions received and consider the full ramifications of the retainer before accepting it. Wherever possible, they should attempt to limit the scope of their role in their engagement correspondence and, most important of all, they should ensure that their conduct during the transaction goes no wider than the role they have agreed to perform.