The scope of a solicitor’s duty of care to a third party

Feb 2022 | Insurance

The New South Wales Supreme Court recently considered the extent to which solicitors may owe a duty of care to third parties.¹ In this case, the plaintiff unsuccessfully sought damages for negligence and misleading and deceptive conduct against the defendant solicitors, in relation to their representation of his former de facto partner in a property transaction.

Background

The plaintiff sought to gift funds by way of a deed poll to his then de facto partner, Ms Ward, to purchase a property she was renting.

The funds were given by the plaintiff to Ms Ward who purchased the property in her own name. The rationale for gifting the funds (as opposed to the plaintiff purchasing the property, or loaning funds to Ms Ward to purchase the property) was to prevent the property from forming part of the plaintiff’s estate. The couple were concerned to avoid any claim by the plantiff’s adult children regarding the property in the event that he died before marrying Ms Ward.

A friend of the plaintiff and Ms Ward recommended that the defendant solicitors act for Ms Ward in the property settlement. That friend provided instructions to the defendant solicitors, which were subsequently outlined by the defendant solicitors in an email to Ms Ward. The email did not mention the plaintiff, he alleged that he believed the defendant solicitors were also acting for him in the transaction.

At that time, the plaintiff already had a solicitor (plaintiff’s solicitor) who had liaised with the vendors of the property regarding the plaintiff potentially purchasing the property prior to the defendant solicitors’ engagement.

The defendant solicitors recommended a deed poll gift and deed of indemnity (documents) be prepared to protect Ms Ward’s interest, ensuring that the deposit paid by the plaintiff was treated as a gift (as opposed to a loan).

The plaintiff and Ms Ward attended the defendant solicitors’ office to sign the documents, having not previously seen drafts of the documents. The Court accepted the defendant solicitors’ evidence that at the commencement of the conference, the relevant solicitor followed his usual practice and told the plaintiff that he acted only on behalf of Ms Ward.

The plaintiff subsequently contacted the plaintiff’s solicitor, informing him that he had attended the defendant solicitors’ office and signed various documents regarding the purchase of the property (which he did not have copies of) and that settlement was to occur shortly.

The plaintiff’s solicitor requested copies of the documents from the defendant solicitors, advising the plaintiff to defer the settlement until he could review the documents. The plaintiff did not follow that advice and settlement occurred as scheduled.

Following the breakdown of the plaintiff’s and Ms Ward’s relationship, the plaintiff asked Ms Ward to return the property to him. Over the following years, there were a number of proceedings commenced in relation to the plaintiff’s and Ms Ward’s interest in the property and refinancing the property (in circumstances where the plaintiff’s business had receivers appointed).

Decision

In 2017, the plaintiff commenced the current proceedings against the defendant solicitors on the basis that they either acted for both him and his de facto partner in the property transaction, or that they owed him a duty of care as a third party.

The plaintiff alleged that, by failing to advise him to obtain independent legal advice or that they only acted for his de facto partner, the defendant solicitors were negligent and engaged in misleading and deceptive conduct.

The Court considered whether the factual matrix of the property transaction meant that the plaintiff was the defendant solicitors’ client, ultimately concluding that he was not. The factors supporting that conclusion included the Court’s acceptance of the defendant solicitors’ evidence that they told the plaintiff they only acted for Ms Ward, and the fact that the plaintiff was not copied into correspondence between the defendant solicitors and Ms Ward.

The Court then considered what duty (if any) the defendant solicitors had to provide advice to the plaintiff as a third party.

The Court found the plaintiff’s and Ms Ward’s interests were opposed, which militated against the defendant solicitors owing a duty to a third party. Further, the Court found that the plaintiff was not in any relevant sense vulnerable to the economic consequences of any negligence of the defendant solicitors because he was represented by his own solicitor.

The Court therefore concluded that the defendant solicitors did not owe a duty of care to the plaintiff.

The Court did however note:

‘This is not to say that the defendants did not owe a duty (whether at common law or as a fiduciary) to Ms Ward to encourage the plaintiff to obtain independent legal advice. Indeed, the exercise of reasonable care and skill may well have required the defendants to insist on proof that either the plaintiff had been advised by [his own solicitor] or some other solicitor as to [the documents] or that he had refused to obtain independent legal advice.’ ²

The Court found that such a duty would be owed to protect Ms Ward’s interests ‘by minimising, if not eradicating, the risk of [the documents] being set aside at the suit of the plaintiff if there was an allegation of undue influence, unconscionability or improvidence (of which there is no evidence in the present case).’³

The plaintiff’s allegations of misleading and deceptive conduct failed on the same basis, with the Court finding they were not supported by the facts.

The Court also considered causation issues, finding that the plaintiff had already made up his mind about the money being a gift and that independent advice would not have changed his mind.

That finding was supported by the fact that the plaintiff did not follow the plaintiff’s solicitor’s advice to defer settlement until he had reviewed the documents. The Court therefore found that even if a duty was owed and breached by the defendant solicitors, the plaintiff had not established that he would have been in any different position but for the defendant solicitors’ conduct.

Conclusion

This decision confirms the established principle that a solicitor generally only owes duties to their client in a transaction and is unlikely to owe a duty to a third party when the alleged duty conflicts with their duties to their client.

However, the decision also serves as a useful reminder for solicitors to ensure they make it clear for which party in a transaction they act and to advise an unrepresented third party to obtain independent advice. While there may be no duty to the third party to provide that advice, it may more easily fall within the scope of the solicitor’s duty to its own client. That duty will likely be heightened where there is an imbalance of bargaining power or the transaction is one-sided.

¹ Loumbos v Gray as a named partner of ClarkeKann (ABN 92 990 809 254) [2021] NSWSC 1579
² Ibid [87].
³ Ibid.

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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.