Retainer issues

The retainer letter is the most effective way of controlling risk on issues of solicitors' duty of care and two notable cases in 2016 dealt with issues of scope and retainer.

In Cathal Anthony Lyons v Fox Williams LLP [2016] EWHC 2427 QB, the court considered the issue of retainer drift. The claimant suffered significant personal injuries in a motorcycle accident. He had the benefit of cover under two insurance policies – one allowing for a one-off lump sum payment assessed by reference to disability and the other replacing/supplementing lost salary.

Advice was sought from solicitors in respect of one of the two policies, although the solicitors were aware of the existence of the other one. The claimant subsequently alleged he should have been advised about cover available under both policies.

The court disagreed, finding that the engagement letter had clearly identified the scope of the retainer to include only one of the policies. The terms of the retainer were clear and the solicitor had not been expected to analyse the scope and content of the second policy.

This decision is also helpful to solicitors and their insurers as the court relied on the commercial sophistication and previous experience of the client in limiting the scope of duty - an encouraging development which further limits solicitors' exposure.

Caliendo v Mishcon de Reya [2016] EWHC 150 (Ch) also considered the issue of a solicitor's retainer, this time in respect of a share sale. In this case third party shareholders argued that there was an implied retainer in their favour or, in the absence of the same, an assumption of responsibility. The shareholders asserted that, in addition to acting for the company, solicitors had acted for them. The court rejected the implied retainer argument - a further example of the courts seeking to ring-fence solicitors' obligations.

However, it should be noted that on the facts the court found that the solicitors had assumed a limited duty of care, but only insofar as the shareholders’ interests were aligned with the company’s interests and only in relation to matters where the shareholders were not separately advised.

Duty to warn

Barker v Baxendale Walker Solicitors and Paul Baxendale-Walker [2016] EWHC 664 (Ch) dealt with solicitors' obligations to warn clients of risk. It considered whether, in advising on statutory interpretation, a solicitor owes a duty to warn the client that his opinion could be wrong.

The claimant wished to minimise capital gains tax on the sale of his successful management consultancy and software business. The defendants advised on an employee benefits trust (EBT) under the Inheritance Tax Act 1984. They also advised that the claimant's family would be able to benefit from the EBT after his death. The accuracy of that advice depended on whether the EBT satisfied the requirements of Section 28 of the Inheritance Tax Act 1984. An HMRC investigation found that it did not and the claimant had no option but to settle the claim for tax in the sum of £11m, based on a trust fund valued in the region of £35m.

The claimant argued that the advice that the family could benefit from the EBT after his death was negligent and, if not, that the defendants had a duty to warn of the risk that the family might need to be excluded even after death.

One of the issues the court considered was whether a solicitor, exercising appropriate skill and care, ought to warn that his preferred interpretation of legislation might well be wrong. Several experienced tax specialists had independently interpreted Section 28 of the Act in the same way as the defendants in this case.

In any event the judge held that the defendants were in breach in failing to give a generic "health warning" of the possibility of challenge by HMRC. But, as a matter of causation, this was insufficient as such a warning would not have deterred the claimant in this case. To succeed on causation the claimant needed a finding that the defendants had failed to give a specific "high level warning" of the risk that an EBT which did not exclude persons connected with the claimant even after his death would not qualify for tax relief.

The judge found in favour of the defendants on this issue, commenting as follows:

"it is difficult to see that solicitors whose interpretation is likely to be correct are nonetheless in breach of duty for failing to warn the client that they might be wrong."

Cathal Anthony Lyons v Fox Williams LLP [2016] EWHC 2427 QB (reviewed above) also dealt with the issue of a solicitor's duty to warn. The court took the view that the duty did not arise on the facts of this case. Although in certain circumstances a solicitor might have a duty to warn his client of particular risks which may not fall squarely within the retainer, no duty to flag any such risks arose here as the solicitor had not become aware of any/potential risk to the claimant arising out of the second policy. The court found that mere knowledge of the existence of the second policy against the limited background of which the solicitor was aware would not have put him on alert that there was a risk to the client which should be flagged.

This article is for general information only and reflects the position at the date of publication. It does not constitute legal advice.