Solicitors' responsibility for conveyancing credit risk denied by the High Court

In a transaction the claimant's own counsel described as 'murky', the High Court has dismissed a negligence claim against solicitors for the alleged failure to make further enquiries regarding the solvency of the vendor:

Kandola v Mirza Solicitors LLP, [2015] EWHC 460 (Ch).

Background

The 'murky' facts were as follows. The claimant was a businessman who regularly instructed the defendant firm. In this case, he had sought to instruct the defendant to act in relation to a loan to a client of a separate firm, Ashtons, to purchase a property with the only security being an undertaking from that firm. The defendant refused to act because it had a previous client who lost money in this way. Unknown to the defendant, the claimant agreed with his nephew (the borrower) that an alternative way to make the loan would be to increase the deposit to be paid by the claimant for this property and on the unusual basis that the deposit would be held by the vendor's solicitors as agent for the vendor (usually deposits are held by the purchaser's solicitors until completion). The defendant agreed to act on the transaction but warned the claimant that it should not exchange contracts on this basis as it was too risky.

The transaction failed to complete, the sellers went bankrupt, the solicitors disappeared and the deposit was lost. The claimant brought a claim against his solicitors alleging that he should have been advised in more detail about the risks, including that there was a bankruptcy petition outstanding against the vendor.

Judgment

His honour Judge Cooke found that it was not part of the firm's duty to make checks about the credit status of the counterparty in a property transaction, unless specifically instructed to do so. Mr Kandola understood the risks in the transaction and if he wanted to check the solvency of the vendor, he could have done so himself.

RPC says…

It is tempting to think that this case is simply a reflection of the time honoured principle that solicitors, unless otherwise instructed, are not giving commercial advice about the risks of a transaction. In reality, there were particular facts about this case which meant that the principle was never really going to be challenged.

The claimant was an experienced commercial operator and he had hidden some of the facts about the transaction from the firm.

The risks were adequately explained to a person of the claimant's experience and recorded in a solicitor's file note and the claimant had also signed a waiver confirming it had been advised of the risk that the deposit might be lost if the vendor went bankrupt. To hold the firm liable in these circumstances would have been inconsistent with the solicitor's retainer where the firm had advised the client of the risks but had no wider duty to go beyond that and investigate the extent of the risks by making the searches itself. There was no established conveyancing practice of making the searches as to the solvency of the seller at the time of exchange of contracts.

The message is clear: where claimants enter into such transactions with their eyes open then cannot blame their solicitor when it all goes badly wrong.