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Don’t bite the hand that advises you

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07/05/2015

When an unusual business arrangement with family associates went wrong, a claimant looked to his solicitors’ professional indemnity insurance policy to try to recover lost funds. The case provides a helpful summary of the key principles for establishing the extent of a solicitor’s duty to advise a client of risks in any transaction.

Kandola v Mirza Solicitors [1]

The claimant, Mr Kandola, was a businessman with a significant real estate portfolio. He regularly instructed the defendant firm in relation to his dealings. In this particular case he instructed the firm on the purchase of a development property from a family friend. The family friend needed a short term loan for another, unconnected, transaction and so Mr Kandola agreed (a) to pay an unusually large deposit; and (b) for the deposit to be paid to the family friend’s solicitors as agent for the seller (so that the family friend could immediately use the money as he wished). The defendant firm advised Mr Kandola not to proceed on that basis. The firm advised that the proposed deal was too risky. They explained that the deposit would not be recoverable if the vendor went bankrupt or was unable to complete and they further advised that there were charges outstanding on the property, which the purchase monies may not cover and discharge. Nevertheless, Mr Kandola wanted to proceed and indeed he read and signed a waiver to say that he was doing so against advice.

When the vendor did then go bankrupt and the transaction failed to complete, Mr Kandola sought to recover his lost deposit from his solicitors, alleging that their advice had been negligently inadequate. In particular, he alleged that, had a bankruptcy or Land Registry priority search been carried out immediately prior to exchange, the bankruptcy petition would have been discovered and Mr Kandola would not have gone ahead.

Decision

The Law Society’s conveyancing handbook advises solicitors to warn clients of the dangers of paying a deposit as agent for the seller; it does not advise solicitors to carry out searches as Mr Kandola had contended. In a narrow sense, therefore, the defendant firm had discharged its duty.

In a wider context, the court explained that the extent of a solicitor’s duty to explain matters to his or her client takes account of the client’s experience in the relevant area. An inexperienced client, or one dealing in matters with which he or she was unfamiliar, might need more explanation and advice; a more experienced or sophisticated client may need less, if any. Furthermore, the court indicated that this is an objective test: a solicitor’s duty will be discharged if advice is given in terms suitable for the particular client’s experience in the area even if, in fact, the client did not subjectively understand.

Mr Kandola’s attempt to recoup his bad business loss from his solicitors failed.

WM Comment

The case is a helpful summary of the general principle that a client’s knowledge and experience in any given area will be relevant to the nature and extent of legal advice that a solicitor is professionally obliged to provide.

The principle is comforting to solicitors and their insurers, that indemnity policies will not be seen as an easy target to cushion clients’ bad business decisions; and it is equally convenient for commercial clients, who do not want to receive reams of back-covering legal advice every time they want to quickly and cost-effectively complete a deal.

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[1] Kandola v Mirza Solicitors LLP [2015] EWHC 460

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