Professional Negligence

Does a solicitor have a duty to advise on the commercial risks of a transaction?

The Supreme Court will revisit the Court of Appeal’s decision in Gabriel v Little & Ors [2013] EWCA Civ 1513, which considered whether a solicitor has a duty to advise clients on the risks involved with commercial transactions.

The decision will add further guidance to the scope of a solicitor’s duty and the application of the principles laid down in South Australia Asset Management Corp v York Montague Ltd [1997] AC 191 (“Saamco”).

The Supreme Court has recently given permission to a lender, Mr Gabriel, to appeal the decision of the Court of Appeal which held that his solicitor was not under a duty to advise him as to the commercial risks inherent when making a loan.

Mr Gabriel’s claim against his solicitors arose out of a loan for £200,000 he made to a close friend and business man, Mr Little. Mr Gabriel intended that the money was to be solely applied by Mr Little to the development of an airfield in Gloucestershire. However, Mr Little subsequently used the money to pay off a personal bank debt. The development did not take place, the loan was not repaid and Mr Gabriel ultimately recovered just £13,000 after the property was repossessed and sold.

Mr Gabriel argued that his solicitors should have warned him as they knew that Mr Little was going to use the money for personal use.

At trial the Judge held that the solicitors were aware that the money was going to be used by Mr Little for his own personal use and were negligent on the basis that they should have warned Mr Gabriel of this. The Judge held that the solicitors had breached their duty of care to Mr Gabriel because they had failed to appreciate (because they did not clarify their instructions) that Mr Gabriel’s loan was to develop the property. This was compounded by the fact that when they drafted the facility letter it was expressly recited that development was the purpose of the loan.

The solicitors appealed arguing that there was no duty on them which extended beyond the drawing up of the facility letter and charge competently.

In SAAMCO, the House of Lords drew a distinction between providing information to allow someone to decide on a course of action (“a category one case”) and advising someone as to what course of action to take (“a category two case”).

The Court of Appeal held that the solicitors were under a duty to provide Mr Gabriel with information for the purpose of enabling him to decide what commercial course of action he should take (i.e. it was a category one case). However, there was not a duty to advise Mr Gabriel as to what course of action he should take or as to the commercial risks inherent in the loan (so it was not a category two case).

The Court of Appeal said that the commercial aspects of the deal, and the value (if any) which each party was going to contribute to it, whether by way of proposed building works, development expertise, property or cash, were not within the remit of the solicitors.

Further, Mr Gabriel had never sought advice from his solicitor as to the commercial wisdom of the proposed transaction and, given the circumstances surrounding the loan, it could not be said that the losses suffered fell within the scope of the solicitor’s duty of care. The solicitors were not to be equated to the position of an adviser whose duty it is to advise as to what course of action should be taken.

With permission to appeal now granted the Supreme Court will, in due course, consider the scope of the solicitors’ duty. The scope of the duty is of vital importance as in a category two case a negligent advisor will be responsible for all the foreseeable loss which is a consequence of that course of action being taken whilst, in a category one case, an advisor is only responsible for the consequences of the information being wrong.