Credit status: need specific instructions
Solicitors are not under a general duty to check the credit status of parties in a commercial transaction unless instructed to, the High Court has ruled.
Who to trust in a business situation is “a commercial decision for the client to take and not the solicitor”, HHJ Cooke described said.
He went on: “It is not, in general, a solicitor’s duty to check on the credit status of his client’s counterparty in a transaction unless instructed to do so.
“There may be circumstances in which a solicitor should check specifically for the commencement of bankruptcy proceedings, since that may affect a party’s ability to complete a transaction or give a good title. But that is not the same as a general duty to make checks about risk of future insolvency.”
Judge Cooke said such a duty would not arise merely because the client was incurring a risk of loss if the counterparty became insolvent “for that will be true in most if not all transactions”.
Ruling in Kandola v Mirza Solicitors [2015] EWHC 460 (Ch), the judge said he agreed with the defendant’s counsel that “just because a solicitor (or other professional) could take a particular step does not mean that it is his duty to do so.
“His duty is always defined by his retainer. If he advises his client of a risk, it is a matter for the client to decide whether he wishes to take that risk, or to obtain further information or security before doing so. The solicitor is not, in general, obliged to seek out such further information unless instructed to do so.
“The position would be different if there was an established practice of obtaining particular types of information in the course of a particular type of transaction.
“Conveyancing is a process extensively set about with established procedure of this sort, for instance as to the making of searches and enquiries of local authorities and environmental registers which go well beyond the establishment of title to land, and bear on its value and the costs and risks of ownership.”
The case involved the sale of a property, where a deposit of £96,000 was paid on the unusual terms that it was held by the seller’s solicitor as agents for the seller. The seller failed to complete and the deposit was lost.
The court heard that the seller was later made bankrupt and the solicitors acting for him disappeared.
Judge Cooke said the Solicitors Regulation Authority had intervened in their firm and the two principals had been struck off, “the Law Society having found allegations of fraudulent misuse of client money (not in relation to this transaction) proved in their absence”.
The buyer, Karmjeet Kandola, claimed that he should have been received better advice from his law firm about the risks of the transaction. Judge Cooke dismissed the claim.
