In brief - Learn to recognise the situations which can lead to claims
Property lawyers and conveyancers must learn to be consistent in their approach to risk management, provide letters of engagement stating who is (and who is not) the client, be clear on the scope of the advice they are providing, document any changes in the retainer and carry out identification checks when executing documents.
Why do lawyers and conveyancers get sued?
I have been working in professional indemnity law for over 20 years. My job is to defend professionals who get sued. Most of the professional negligence claims I have dealt with have arisen from conveyancing and lending transactions.
The case studies I am going to describe are not hypothetical, they are all real cases that I have dealt with. This article is about what the solicitor or conveyancer might have done differently and possibly avoided the claim.
What kinds of clients are most likely to make a claim?
My experience has helped me to identify a number of client types that carry with them an increased risk of a claim against the lawyer or conveyancer who deals with their matter.
The disappearing client - this is the client who fails to respond when you attempt to make contact.
The "don't involve me" client - they want you to make all the decisions.
The transferred client - this is a particularly important category - the client who has been transferred either from another law firm or another conveyancing company and typically has not paid the former service provider their fee.
The "close knit, extended family" client - where one person has engaged the professional for their matter, but their family members attend meetings with them and subsequently claim that the professional was acting for them also.
The "experienced" claimant - notorious for avoiding paying the professional's fees.
The non-English speaking client - this situation may be risky depending on who is doing the translating and interpreting.
The "family and friend" client - a personal friend or family member of the professional who is looking after their matter. Risks arise when the professional fails to follow their usual risk management processes because they are dealing with someone they know well.
What is risk management for property professionals?
For conveyancers and property lawyers, risk management involves:
- Reducing the chances of claim-prone situations arising in the first place
- Improving the way that such situations are handled when they arise
- Ensuring that there is evidence to defend a claim (especially when the professional has not been negligent)
- Taking a commonsense approach to client expectations and professional risk
Law graduate drafts loan contracts for her brother
In this scenario, a young law graduate agrees to draft loan contracts for her borrower brother. She does so outside office hours and without informing the principal of the firm that employs her.
The lender and borrower know each other socially. The solicitor meets the lender after hours and documents the transaction by a brief loan agreement that she prepares in the office.
When the borrower defaults, the lender sues the solicitor's firm, alleging that because the solicitor met with the lender, she had a duty to advise the lender of the financial risk of dealing with the borrower, her brother. According to the claimant, the solicitor knew of this risk but failed to pass that information on to the lender.
We were acting not for the solicitor, but for her employer. The proprietor of the firm that employed her was the one who was sued.
The shortcoming in terms of risk management was that there was no employment contract with that employed solicitor. For this reason, the employer could be found vicariously liable for her acts or omissions committed within the course of her employment, even though the proprietor knew nothing about what she was doing.
As a result, the proprietor was facing a big excess and an increased premium. If he had had an employment contract that clearly documented what this person's role was, what her obligations were, what her duties were - but more importantly, the fact that she wasn't able to do private work outside the firm, he may have been able to avoid the claim.
It's the kind of thing that happens quite a lot, especially in small businesses. You take somebody on and you don't really document what the employment arrangement is, you don't have an employment contract.
Especially where you are dealing with people who can go out and do private work on their own, if you don't supervise that carefully, you can find yourself the subject of a claim simply because you failed to document the arrangement you have with the employee.
Solicitor sued by unrepresented opponent
In this case, the solicitor involved was acting for a property developer. The purchaser of one of the lots in the development represented himself. The contract for sale was subject to registration of the plan of subdivision. A fairly standard arrangement.
There were delays by the developer in lodging the plan. Then there was a chain of correspondence between the unrepresented purchaser and the solicitor. The purchaser kept asking questions about what was happening with the development, when the plan was going to be registered and so on.
The purchaser at this stage was thinking about extracting himself from the contract and buying somewhere else. The purchaser eventually sought to rescind the contract and claim from the vendor a repayment of the deposit and a raft of other losses, including "I would have invested my money elsewhere".
The problem is that the unrepresented purchaser claimant then joined the solicitor to the litigation. This is an example of a situation where it's not your client who is bringing an action against you. In effect it's the opponent, who contends that the solicitor also owed him a duty to inform him of his knowledge of the developer's progress on the subdivision and when the plan of subdivision was likely to be lodged.
There have been a number of cases where solicitors have been found to owe a duty to people other than their own clients. The same can happen to licensed conveyancers. There is little doubt that in providing a professional service, property professionals who are dealing with an unrepresented opponent can fall into the trap of communicating with that person too much.
The risk management step which the solicitor in this case failed to take is clear. The solicitor should have sent a letter at the very outset to the unrepresented opponent, stating that he was only acting for the developer and he was not acting for or advising the purchaser; and that the purchaser should obtain his own representation. If the solicitor had done this, the claim might have been avoided.
Otherwise the claimant can come to court and say: "I kept on asking him questions and he kept answering them - so I thought he was also giving me advice."
Many observers might say: "Well that's pretty rich, because it must have been obvious that you were only acting for the developer/vendor". But when it comes before a court and you can't demonstrate that you've actually put that barrier between yourself and the opponent, you can find yourself the subject of a claim - not from a client, but from a non-client.
It's particularly frustrating when claims of this type succeed.
Fraudster client has another woman impersonate his wife
This is a case which I feel could particularly resonate with property professionals. The solicitor acted for husband and wife borrowers. The loan was secured by a residential property owned by them.
The wife went to a conference with her husband and the solicitor. Loan documents were executed and the loan was made. Eventually the borrowers defaulted on the loan and the lender made a claim for possession of the property.
Then... the real wife brought an action against the solicitor. The woman who was brought to the conference was not the borrower's wife! The real wife didn't know anything about it. The problem was that the solicitor hadn't undertaken any identification checks.
These days there are stringent rules for checking identification when executing documents - this was before that, but it’s still a really good risk management example. The solicitor knew the husband quite well. He had spoken to his wife many times but had never actually met her.
He had no reason to doubt the husband, who, as it turned out, had gambling problems. I know it's weird that somebody would go to a friend and say: "Can you please come to this lawyer's office and impersonate my wife and sign a document purporting to be her?" And that person saying: "Yes I will".
The shortcoming there in risk management was the lawyer's failure to obtain identification. He was effectively relying on what the husband said, assuming that he was truthful.
So the solicitor was the subject of a civil claim and had to spend a lot of money defending it just because he just failed to do the identity check. In NSW the judge will say: "You didn't follow the procedures in terms of identification, so you lose. I don't care that you might have trusted the husband who is a client of many years."
Vendor loses savings in investment scheme and sues solicitor
This case concerned a last minute request for advice. The solicitor worked from home doing conveyancing for friends and family. She acted on the sale of a residential apartment.
On the day prior to settlement, the client came to see the solicitor and gave instructions on the investment of the sale proceeds. It later emerged that the vendor's uncle was running a scam and he had persuaded the vendor to invest. She insisted to the solicitor that all of the sale proceeds go to her uncle and wanted advice on the investment scheme.
Everything had gone smoothly with the conveyance up until the day before the settlement, when the client brought the solicitor a large bundle of documents and said:"I'm going overseas and I want the money to go into this investment scheme. Can you advise me on this?"
The solicitor had known this client for some time and they were friends. She said to the client: "This is not what I do". But that was all she said, before literally just flicking through the documents and saying: "Yeah, it all looks pretty fine".
In a situation like that, where you're handed a bunch of documents to check, you've either got to do it properly or not do it at all. The investment went bad, the client lost everything and then sued her solicitor.
The risk management lesson here is - don't fall into the trap of being "the friend" or being all things to all people. This can be difficult when friends ask you to do their conveyancing for them. You've basically got to put your professional hat on and take your friend hat off, otherwise this is the kind of problem you can encounter.
The claim could have been avoided with a clearly worded letter or file note declining the last minute retainer to advise and confirming that investment advice was not the solicitor's area of expertise. Don't fall into the mindset of "helping out" a client at all costs, especially if it involves delving into areas where you don't have expertise. (For more information please see our earlier article Client engagements: are you clear about what you agreed to do?
Unexpected tax implications of buying property in a family trust
This case concerned a purchaser who initially wanted property to be purchased in his own name, then changed his mind and decided to put the property into a trust. The solicitor was eventually sued for not advising of the tax implications arising from that.
The risk management shortcoming in this case was the failure to document the change in the arrangements. The solicitor should have said in writing: "I cannot advise you on the tax implications if you are going to change this conveyance around to a company situation."
The solicitor should have clearly indicated that the retainer did not extend to giving tax advice and that the client should consult an accountant on that aspect.
Claim related to concrete cancer in residential unit within strata complex
In this case the solicitor was acting on the purchase of a residential unit within a strata complex. The usual strata report was commissioned. Towards the end of a lengthy report of about 100 pages, there was a reference to an unusually large amount of money being spent on a new balustrade.
What that actually meant was that there was a degree of concrete cancer, but the solicitor did not pick it up. The conveyance went ahead, the purchaser got a massive strata levy and eventually sued the solicitor.
The risk management issue here is actually reading the strata report. They are a bit like pest and building reports - once you start reading or advising on them, you will be deemed by the court to have read the whole thing. Some of them are quite lengthy and may contain a massive number of exclusions and qualifications.
This case was an example of where the solicitor had gone some way towards explaining the strata report, but not all the way. So in this kind of situation, if you are going to give advice on these reports, you have to agree to read the lot. This was quite a large claim because there was a considerable amount of concrete cancer.
The claim might have been avoided if the solicitor had suggested to the client that she make her own enquiries of anything arising from the strata report.
In summary - identify the client, document everything and be clear on the scope of the retainer
To minimise the risk of claims, property professionals should make sure they have properly identified and documented who they are working for and what they have agreed to do.
Any changes in the retainer should be documented, all protocols should be followed with diligence and formality even if you know your client well; and you should explicitly decline to provide advice outside your field of expertise.
This article is based on a seminar presented in Sydney in June 2013.
This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal or financial advice. Please seek your own legal or financial advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.