How far does a solicitor's obligation to inform a client of an emerging risk extend? Norton Rose's Andrew Wanambwa examines two recent cases that have tested this ground

The onset of the financial crisis led to speculation that there would be a flood of large claims against solicitors. For the most part, that prediction has not materialised.
Where claims have been advanced, some have been the subject of robust judicial scrutiny. For example, in recent cases involving questions about the scope of a solicitor's duty of care, the courts have handed down judgments that were favourable to the profession.

The scope of a solicitor's duty to their client is ordinarily agreed in a letter of engagement. However, questions can arise as to the extent of a solicitor's duty, even where express instructions are agreed. This is particularly so where circumstances change during the course of a retainer. Developing events may, for example, create new risks for the client or render previous advice inaccurate or incomplete. The question in each case is whether the relevant change in circumstances requires the solicitor to warn the client of a new risk or revisit previous advice.

Duty to warn?

On the one hand, a solicitor is under no obligation to expend time and effort considering new issues or risks that fall outside the retainer. On the other hand, it has been held that if, in the course of performing his retainer, a solicitor becomes aware of a relevant potential risk, it is his duty to inform the client.

An example of this duty to warn was provided by Mr Justice Laddie in the case of Credit Lyonnais SA v Russell Jones & Walker: "If a dentist is asked to treat a patient's tooth and, on looking into the latter's mouth, he notices that an adjacent tooth is in need of treatment, it is his duty to warn the patient accordingly.

"So, too, if in the course of carrying out instructions within his area of competence, a lawyer notices or ought to notice a problem or risk for the client of which it is reasonable to assume the client may not be aware, the lawyer must warn him."
The 'rotten tooth' analogy illustrates well the idea that solicitors may, during the course of their work, come under a duty to warn clients about emerging or previously unknown risks.

However, the extent of that duty will depend on the nature of the risk and the circumstances in which the risk comes to light.

Revisiting advice

While the Credit Lyonnais case demonstrates that solicitors may be liable to draw the client's attention to risks discovered during the course of a retainer, the courts are generally reluctant to impose a duty on solicitors to update or keep under review advice that was given in a previous engagement.

While the situation may be different if a solicitor and client expressly agree that past advice should be kept under review, a number of reasons have been given for not imposing such a duty on solicitors. Among other things, it is thought that a continuing duty to keep past advice under review would entail an indefinite and unrealistic obligation to undertake expensive periodic reviews of archived files.
Two recent cases, Swain Mason v Mills & Reeve and Shepherd Construction Ltd v Pinsent Masons, have involved claims that touch on the above issues.

Swain Mason v Mills & Reeve

Swain and his daughters owned shares in Swains International. Swain was the majority shareholder. By 2006, Swain was interested in selling the shares in the company. Mills & Reeve was engaged by Swain and his daughters to advise, among other things, as to the tax consequences flowing from a proposed management buy out (MBO). Mills & Reeve was not engaged to advise Swain and his daughters on how the transaction fitted into their personal financial and tax planning positions.

A key feature of the case was that Swain had a history of ill health. On 13 January 2007, Swain blind copied Mills & Reeve on a chain of emails. One of the emails confirmed that Swain was due to have a heart procedure in the near future. Mills & Reeve took no action following receipt of the email and the MBO completed on 31 January 2007. Shortly after completion, Swain underwent his heart procedure and then died within hours of the operation.

Swain's death had significant adverse tax consequences, among them an inheritance tax charge of about £1m. It was common ground that Mills & Reeve had not given advice as to the potential adverse tax consequences in the event of Swain's death.
One of the key issues was whether, given that Mills & Reeve was not expressly engaged to advise on personal tax matters, the receipt of the email chain (referring to an impending heart operation) triggered any duty to warn or advise in respect of the potential tax risks should Swain die as a result of the operation. On this issue both the court of first instance and the Court of Appeal agreed that no such duty arose.

While the 'rotten tooth' analogy was accepted in principle, on the facts of the case it was found to be inapplicable. In particular, it was found that Mills & Reeve did not come under a duty to warn of the potential tax consequences because they were only blind copied on the email concerning Swain's forthcoming operation.
Swain did not ask for personal tax advice in connection with the operation; nor was there any indication in the relevant email that the proposed procedure carried any great risk. The Court of Appeal noted that it was "pure happenstance" that the relevant email chain included information about the heart procedure, and on that basis found that the claimant's case did not even begin to correspond to the 'rotten tooth' example in Credit Lyonnais.

Shepherd Construction Ltd v Pinsent Masons

Shepherd Construction was a national building contractor based in North Yorkshire. Between 1998 and 2008 Pinsent Masons and its predecessors (Masons and Pinsents) were engaged on several occasions by Shepherd Construction. In 1998, Masons provided advice in connection with a 'pay when paid' clause. The purpose of the clause was to allow Shepherd to avoid making payment to its sub-contractors until it received funds from relevant third-party payors.

The advice given by Masons in 1998 was correct and reflected the law then in force, which was that 'pay when paid' clauses were ineffective unless the third-party payor had an administration order made against it under the Insolvency Act 1986 (ie, by order of the court). Following this advice, the Enterprise Act 2002 added another route by which a company could go into administration, namely by it or its directors passing a resolution to that effect (a 'self-certifying' administration).

The effect of this legislative change was to render Masons' previous advice incomplete, in the sense that it only provided for a 'pay when paid' clause in circumstances where the relevant third-party payor was subject to an administration order.

In 2004, the separate practices of Masons and Pinsents merged. Pinsent Masons then started to trade in March 2008. In late 2007, Shepherd was engaged by a main contractor on a shopping centre development. Shepherd in turn engaged three sub-contractors in 2008, but it did so using the form of sub-contract prepared by Masons in 1998. Thereafter a problem arose.

In 2009, the main contractor went into administration following a resolution passed by the board of directors – the self-certifying route. Shepherd attempted to avoid paying its sub-contractors on the basis that there had been an 'administration' within the meaning of the 1998 contract. However, Shepherd was eventually forced to make the payment because the clause drafted by Masons was not apt to catch a self-certifying administration and did not reflect the changes made by the Enterprise Act 2002.

Had different wording been used in Shepherd's 2008 sub-contracts, it could have avoided paying substantial sums to its sub-contractors. In May 2011, Shepherd brought proceedings against Pinsent Masons. In essence, the allegation was that the legislative changes in 2002 should have prompted a review of the previous 'pay when paid' advice.

Shepherd's argument was unsuccessful. On 19 January 2012, its claim was stuck out. It was found that there was no continuing duty to keep previous work under review in the manner suggested. Mr Justice Akenhead observed that: "There is something commercially and professionally worrying if professional people are to be held responsible for reviewing all previous advice or indeed services provided.

"There is a difference to be drawn between a specific retainer or commission which imposes a continuing duty on a professional to keep earlier advice or services under review, and some sort of obligation which requires the professional to review and revise previous advice given or services provided on commissions or retainers which are complete."

It was accepted that different considerations may apply if the professional knows or actually becomes aware that his earlier work has become deficient, but even in that scenario it was indicated that the obligation of review might not be indefinite.
Overall, the general reasoning in Shepherd Construction appears to militate against an overall obligation to review advice given during previous engagements.

It will be appreciated from these cases that solicitors can, in principle, become subject to a duty to warn of potential risks that arise during the course of a retainer.
In the right circumstances, a solicitor might even come under a duty to review previous advice. For the time being, however, the above cases indicate that the courts will approach these issues in such a way as to keep solicitors' duties within what are regarded as reasonable limits.

Andrew Wanambwa is of counsel at Norton Rose.