High Court: solicitors had duty to advise on commercial element of deal

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13 July 2015

High Court: solicitors should have drawn absence of covenant to clients' attention

High Court: solicitors should have drawn absence of covenant to clients’ attention

The High Court has dismissed a claim against a firm of solicitors, despite finding it negligent in failing to raise the absence of a covenant in restraint of competition during the purchase of a commercial property.

In Luffeorm Limited v Kitsons LLP, which considered the lengths that a solicitor is expected to go to beyond facilitating the immediate transaction, Recorder Acton Davis QC, sitting in Bristol as a deputy High Court judge, dismissed the claim from the purchasers of a pub.

The previous owners took over a rival pub in the next village some three miles away, a fact which the purchasers blamed for their pub generating less than the expected income. The claimants sold the property for £60,000 less than the £130,000 they had paid just over a year earlier.

The claimants argued the solicitors should have proposed including a covenant in the contract of sale from the vendors, restraining them from operating a competing business within a radius of five miles for two years.

The law firm denied that advising on the business component of the transaction was within the scope of its duty and argued it was a “borderline question whether a solicitor acting carefully would have brought the absence of a covenant to the clients’ attention”.

The judge considered a range of case law on the extent of a solicitor’s duty to his client to advise on the commercial implications of a transaction.

The cases included Clarke Boyce v Mouat [1994] 1AC 428, in which Lord Jauncy of Tullichettle said that a solicitor approached by a sophisticated client “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”.

But the Recorder said: “Nevertheless the principle that a solicitor’s duty is strictly circumscribed by his instructions must not be taken too far.”

His attention had been drawn to the observation of Laddie J in Credit Lyonnais v Russell Jones & Walker [2002] PNLR 2, who said: “However, if in the course of doing that for which he is retained, [the solicitor] becomes aware of a risk or potential risk to the client, it is his duty to inform the client. In doing that he is neither going beyond the scope of his instructions nor is he doing ‘extra’ work for which he is not to be paid. He is simply reporting back to the client on issues of concern which he learns of as a result of, and in the course of, carrying out his express instructions.”

In conclusion, the judge found that while the solicitor had no duty to advise “of the commercial risks inherent in the transaction”, he added: “Nevertheless, he should have noticed the absence of any covenant in restraint of competition and drawn that absence to the attention of [his clients]. He failed to do so. It follows that the defendants were negligent and in breach of contract.”

However, on causation, noting that the purchasers were in haste to conclude the transaction, he found as fact that even if the solicitor had drawn his clients’ attention to the issue, “they would nevertheless have proceeded with the acquisition at the same pace. They would neither have tried to negotiate for a covenant nor withdrawn from the purchase”.

The judge accepted evidence from the defendant’s expert that the difference in the value of the property with a restraint of trade covenant and without one was just £5,025, which he said he would have awarded had the issue arisen, adding: “However, in the event the claim is dismissed.”

In finding the solicitors negligent but dismissing the claim nevertheless, the case bore similarities to another recent judgment in which a firm escaped a payout when no causation was found.

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