PNBA

Karmjeet Singh Kandola v Mirza Solicitors LLP

Karmjeet Singh Kandola v Mirza Solicitors LLP
Chancery Division (HHJ David Cooke, sitting as a Judge of the High Court)
27 February 2015
[2015] EWHC 460 (Ch)

Subject: Professional Negligence—Solicitors—Conveyancing—Unusually structured transaction—Whether risks properly explained to client—Risks if vendor became insolvent—Whether structure of transaction gave rise to duty to investigate vendor’s solvency prior to exchange—Explanation of and advice about risks to client—Relevance of client’s sophistication to advice which must be given

Summary: An unusual arrangement whereby a 22% deposit would be paid and released to the vendor gave rise to a clear risk if the vendor failed to complete or became bankrupt. The solicitor was required to (and did) give proper advice about that risk. However, the mere existence of that risk did not impose a duty on the Defendant to investigate the vendor’s solvency prior to exchange of contracts, in circumstances where he had not been instructed to do so. At that stage of the transaction, the Law Society’s Conveyancing Handbook did not call for such enquiries to be made and this was an important contra-indicator of any duty to make them.

Abstract

The Defendant solicitors acted for the Claimant in his proposed purchase 40-42 Dymoke Rd, Hornchurch in Essex (“the Property”). It consisted of 3 adjacent plots and was owned by (or at least registered in the name of) Mr. Shahid Qamar Siddiqui (“the Vendor”).

The Claimant’s nephew Sukhvir was in business with the Vendor. After agreeing to cut out the selling agents, the Claimant and Sukhvir began to negotiate the contract terms directly. In the course of those discussions, they discussed the terms of a loan arrangement whereby the Claimant would lend Sukhvir and the Vendor a sum of money in order to buy and resell a separate property.

The Claimant and Sukhvir proposed that the loan payment be made by way of an increased deposit upon the exchange of contracts for the Property, and having that deposit released to the Vendor prior to completion instead of being held by his solicitors. On 9 June 2010, the Claimant met with Mr Elahi of the Defendant and informed him of these proposals, and stated that he wished to pay a deposit of £96,000 (approximately 22% of the price) to be released to the Vendor.

Mr Elahi advised the Claimant against this course of action. His attendance note of the relevant advice stated:

“Queried why 96k dep[osit] + to be released- exp[lained] previously offering 5%. Seller is Sukh’s business partner agreed this level of dep. To be released, normal practice dep. held by buyer’s sol. Advised cl[ient] too risky if seller goes bankrupt or unable to complete. Esp[ecially as] we don’t have total level of o/s charges.

Cl[ient] satisfied he is taking risk. Says should be ok, will pay more than 10% dep.

Getting good price and to help out Sukh’s business partner. Not doing anything illegal- exp[lained] will need to sign auth[ority] to proceed…”

The judge was satisfied that the notes recorded an accurate summary of the matters discussed with the Claimant, and in particular that the risk arising from the possibility of bankruptcy was mentioned. It followed that the Claimant was aware that the deposit would be released to Vendor, that if the transaction did not complete he would be at risk if the Vendor failed to repay it, particularly if he was insolvent, and that there was a risk that the Vendor would not be able to discharge the various charges against the property. He was further aware that his solicitor considered it inadvisable to take these risks.

Mr Elahi also requested the Claimant to sign a form of waiver, which the Claimant did, in these terms:

“I confirm that I have been advised by Mirza Solicitors not to exchange contracts in this matter without having sight of the replies to pre-contract enquiries. I have also been advised not to exchange contracts without having evidence of the total outstanding charges over the properties. I have also been advised against releasing the deposit of £96,000 to the seller. I am also aware that I risk losing my £96,000 deposit if the seller is unable to complete the sale… “

However, contracts were exchanged by telephone on 10 June 2010.

On 24 June Mr Elahi received updated documents from the Land Registry, having made a Priority Search with the intention of registering the contract. Those documents revealed, for the first time, that a bankruptcy petition had been presented against the Vendor on 1 June, resulting in a bankruptcy notice being registered against each title on 2 June. This had not been shown in the Office Copy Entries previously sent by the Vendor’s solicitors, because they had been obtained before 1 June.

The Claimant instructed Mr Elahi to request the return of the deposit from the Vendor. In response, the Vendor’s solicitors stated that:

“…it was agreed between us we will be holding the deposit monies as agent. Upon our client’s instructions, these monies were transferred to him. We are therefore not holding any monies at present…”

The correspondence dwindled. The vendor ignored a notice to complete. On 19 August 2010 the Vendor’s solicitors were intervened by the SRA. Completion did not take place. The SRA confirmed that there was no money the solicitors’ client account. The deposit was lost.

The Claimant alleged that the Defendant should have made a bankruptcy search or a Land Registry priority search prior to exchange of contracts, either of which would have disclosed the bankruptcy petition which by that time had been filed. He accepted that it would not be normal for either such search to be done by a buyer’s solicitor before exchange. There was no recommendation to do so in the Law Society’s Conveyancing Handbook, either generally or even if the deposit is to be released. However, the Claimant argued that the circumstances required that Mr Elahi should have gone “beyond the Handbook” and taken steps that could assist in gauging the extent of the credit risk being run.

The Defendant relied upon the decision of Millett LJ in Brown v Gold & Swayne [1996] PNLR 130. There, his Lordship had commented that if the court required evidence as to matters of conveyancing practice, the proper way of providing it would be by reference to textbooks.

As to this, HHJ David Cooke expressed a “note of caution”. He held:

It is plain [that Lord Millett] was speaking of matters of practice only, to be distinguished from questions of law such as whether a solicitor was obliged to inspect a property on behalf of his client. It may be a nuanced question in any instance whether a particular step should be taken as a matter of a duty to comply with accepted practice or by virtue of a legal duty to take that step specifically.”

Nevertheless, the Defendant submitted that the Law Society’s Conveyancing Handbook was plainly a good guide to accepted practice, and its recommendation was only that in a case where a deposit was to be released the client should be advised of the risks. No other work had been cited to suggest the solicitor should go further without instructions and investigate the extent of those risks.

The learned judge agreed that it was not, in general, a solicitor’s duty to check on the credit status of his client’s counterparty in a transaction unless instructed to do so. Such a duty could not arise merely because the client is incurring a risk of loss if the counterparty becomes insolvent, for that would be true in most if not all transactions.

Nor in the judge’s view did such a duty arise merely because the transaction took an unusual form which did involve a solvency risk (such as upon the release of a deposit), where the more normal form would not (if the deposit was held as stakeholder). In such cases the duty of the solicitor was to advise of the unusual risk, but not to seek to evaluate it unless specifically instructed to do so. The Judge said:

“In part that is because the decision whom to trust in business is a commercial decision for the client to take and not the solicitor. In part it reflects the submission that Mr. Wood [for the Defendant] made, with which I agree, that just because a solicitor (or other professional) could take a particular step does not mean that it is his duty to do so. His duty is always defined by his retainer.”

The Judge commented that the position would have been different if there was an established practice of obtaining particular types of information in the course of a particular type of transaction:

“Conveyancing is a process extensively set about with established procedure of this sort, for instance as to the making of searches and enquiries of local authorities and environmental registers which go well beyond the establishment of title to land and bear on its value and the costs and risks of ownership. But it is accepted that there is no established procedure to make either of the suggested searches at the time of exchange of contracts. [Emphasis added]

Even if the judge were wrong in his conclusions on liability, the Claimant had ultimately accepted in cross examination that if he had been told prior to exchange that a bankruptcy petition had been presented against the Vendor, and had been told that it related (as it did) to a debt of only £10,000, this would not have affected his willingness to proceed to exchange contracts. Accordingly, the Claimant had no viable case on causation in relation to the failure to investigate the credit risk in any event.

The learned judge concluded that the risks of this transaction were adequately explained to a person of the Claimant’s experience. Mr Elahi had positively advised his client against proceeding with the transaction, but the Claimant had elected to proceed nonetheless. The Defendant relied upon Yager v Fishman & Co [1944] 1 All ER 552 and Carradine Properties v DJ Freeman & Co [1999] Lloyd’s Rep PN 48, in support of the proposition that the solicitor’s duty to explain matters to his client takes account of the client’s own experience; the solicitor is not required to explain matters that should be obvious to a person with the client’s experience or background. This was particularly relevant in considering the extent to which a solicitor should explain matters such as the risks involved in taking a particular step. The judge agreed that the solicitor is not a guarantor of his client’s subjective understanding, and will have fulfilled his duty if he gives an explanation in terms the client reasonably appears to him to be able to understand, and to have understood, even if the client later alleges that he did not in fact understand what was said.

Comment

Despite the ‘note of caution’ sounded by HHJ Cooke in relation to Brown v Gold & Swayne, it is clear that the content of the Law Society’s Conveyancing Handbook had a decisive impact on this case. The absence of a procedure for investigating solvency prior to exchange strongly countermanded the Claimant’s argument that Mr Elahi should, without instructions, have investigated and evaluated the extent of the credit risk being run.

The decision fits into the wider demographic of cases which distinguish commercial risks, which a client undertakes as a party to any given transaction, from legal risks, about which a solicitor is required to advise. In this case, “…the decision whom to trust in business is a commercial decision for the client to take and not the solicitor”. Unless the client instructs the solicitor to enquire into whether that trust is well-founded, it is beyond the solicitors’ ordinary responsibility.

Simon Hale
4 New Square