The importance for solicitors to explain the risks and uncertainties of early settlement

Oct 2021 | Insurance

In Johnson v Firth,1 the New South Wales Court of Appeal considered whether a solicitor breached their duty of care by recommending a client settle his claim prior to obtaining medico-legal evidence in circumstances where the client was in a perilous financial position.

The appellant argued the claim was settled (on advice from his solicitors) prematurely, and at an undervalue. 

Background 

Underlying claim

The underlying claim was commenced by the appellant in relation to back injuries he suffered in a motor vehicle accident, against the insurer of the other vehicle involved in the accident. The respondent law firm (solicitors) did not represent the appellant when that claim was commenced, but was retained approximately three months later. 

The parties to the underlying claim agreed to participate in an informal settlement conference, prior to the appellant having obtained medico-legal evidence, but after the defendant had obtained evidence. 

In the lead up to that conference the:

  • appellant instructed the solicitors that he wanted to settle for no less than $600,000, but preferably for $700,000 plus costs; and
  • solicitors advised those expectations were unrealistic but also cautioned the appellant against accepting an offer due to financial need and stated that it was ultimately the appellant’s decision whether to accept any offer. 

On the day of the conference, the appellant indicated to the solicitors he would accept $500,000 inclusive of costs. 

The solicitors dissuaded the appellant from accepting the following offers, even offering to loan him $5,000 to alleviate financial pressure following the settlement conference:

  • at the settlement conference, the defendant’s highest and final offer of $400,000 all inclusive; and
  • the following day, an offer of $475,000 all inclusive.

The appellant, on advice from the solicitors, made a counter-offer of $525,000 all inclusive, which elicited a final offer of $500,000 all inclusive from the defendant.  

That offer was accepted by the appellant, following advice from the solicitors that if the matter proceeded to trial it was uncertain whether the appellant would achieve a better result. 

Decision at first instance 

The appellant commenced proceedings against the solicitors, alleging the solicitors advised him to settle the underlying claim prematurely and at an undervalue.
At first instance, the District Court dismissed the appellant’s claim on the basis that:

  • The solicitors had not breached their duty of care because, within the meaning of s 5O of the Civil Liability Act 2002 (NSW), they conducted the claim ‘in a manner which would be widely accepted in Australia, and in New South Wales as competent and professional’; and 
  • The appellant did not establish the solicitors had caused any loss because the claim was not settled at an undervalue. In reaching that conclusion, the District Court preferred the solicitors’ expert’s assessment of the quantum of the claim as it more accurately accounted for the appellant’s past earnings and lost earning capacity. The District Court found the appellant’s expert did not sufficiently account for the appellant’s drug addiction, criminal history and driving disqualifications, which (in circumstances where has had previously been employed as a truck driver) would have affected his earning capacity had he remained uninjured.

Court of Appeal’s findings

Breach of duty of care

The appellant argued that the solicitors should not have allowed the settlement conference to proceed prior to obtaining further medical evidence, which would likely have revealed more serious impairment. The appellant also alleged the solicitors should not have advised him to settle until they had been able to form and express an opinion as to what the claim was worth.

Prior to the conference, the appellant made multiple inquiries about the date of the settlement conference, multiple requests for loans and threatened to take his instructions elsewhere if the matter did not settle. The appellant also conceded on cross-examination that he was ‘desperate’ to obtain the settlement money as soon as possible.

Prior to the settlement conference, the solicitors explained to the appellant that:

  • ordinarily they would have more time to prepare for the matter and medico-legal opinions would usually be obtained prior to participating in a conference;
  • however, there had not been time to obtain such reports as the conference had been arranged at less than one week’s notice; and 
  • the appellant may improve his position by waiting, but his position might also be adversely impacted by the discovery by the defendant of certain information (such as his drug addiction and criminal record).

In light of the matters outlined above, the Court of Appeal found that the solicitors discouraged the appellant from settling at an undervalue prior to the final offer in circumstances where the appellant was in a poor financial position and desired a quick settlement.

The Court of Appeal also held that, although it is prudent to have an estimation for a claims assessment prior to a settlement conference, it was not imprudent to proceed with the settlement or not advise the appellant against accepting the offer in light of the:

  • urgency expressed by the appellant to settle the matter;
  • appellant’s dire financial circumstances; and
  • advice provided by the solicitors to the claimant, as outlined above, which made it clear that the appellant did not have to accept any offer. 

The Court of Appeal therefore upheld the decision at first instance, finding that the solicitors had not breached their duty of care. 

Causation 

In considering causation, the Court of Appeal found (assuming the solicitors had not properly advised the appellant) the question of what would have eventuated involved considering:

  • if the matter did not settle, what the quantum of the claim would have been;
  • what advice the appellant should have been given; and
  • whether the appellant would have accepted the defendant’s offer, regardless of advice that he may have recovered more on assessment. 

In relation to what the quantum of the claim would have been assessed as, the Court of Appeal found that the District Court did not err in preferring the solicitors’ expert’s evidence, which took into account the impact of the claimants’ drug addition, criminal history and licence suspension in assessing economic loss. 

The Court of Appeal found that the offer of $500,000 which was accepted by the appellant was far from being one that was so insufficient that he ought to have been warned against accepting it and was well within the range of potential outcomes. The Court of Appeal noted that the offer was close to the appellant’s own expert’s estimation of a mid-range value of $475,000 all inclusive.

The Court of Appeal held that (consistent with the solicitors’ advice) while the appellant may have obtained a better outcome if the matter proceeded to trial, he might also have received less and his legal costs would have increased, commensurately decreasing the net amount received by him.  

In addition, the Court of Appeal agreed with the District Court’s determination that even if the appellant had been advised not to accept the offer, it would have made no difference as the appellant would have accepted the best offer the solicitors were able to extract from the defendant in the short term.

Conclusion 

Mediations are often conducted based on a number of assumptions and prior to the parties obtaining all available evidence. Plaintiffs regularly settle claims for amounts less than they would have obtained at trial, and defendants sometimes pay more than they would be ordered to pay at trial, in order to avoid ongoing costs and to achieve certainty. 

It is not unusual for a solicitor to recommend their client participate in a settlement conference at an early stage, prior to obtaining expert evidence or all available material becoming available, to explore whether settlement can be reached prior to significant legal costs being incurred.

The Court of Appeal’s decision confirms that when parties attend mediation prior to obtaining all relevant evidence and that evidence is likely to have a material impact on a party’s settlement instructions, it is prudent for a solicitor to bring that to the client’s attention and to advise the client of the risks. If the solicitor does not provide that advice, a court is likely to find that the client’s settlement instructions were provided based on a misapprehension of the client’s position. However, if a solicitor properly explains the risks and uncertainties involved, the solicitor will have discharged its duty of care to its client. 

 

1 [2021] NSWCA 237.

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The material contained in this publication is in the nature of general comment only, and neither purports nor is intended to be advice on any particular matter. No reader should act on the basis of any matter contained in this publication without considering, and if necessary, taking appropriate professional advice upon their own particular circumstances.