UK: Pickersgill v Riley - The Duty to Advise on Commercial Issues

Last Updated: 18 August 2004

We live in an increasingly litigious society; when things go wrong, invariably people look for someone to blame and more often than not they turn their attention to their solicitors and their professional indemnity insurers. The recent Privy Council decision in Pickersgill v Riley (2004) illustrates the court’s reluctance to impose on solicitors duties to advise on commercial aspects of a transaction so as to protect the client from his own commercial misjudgement.

THE DECISION IN PICKERSGILL

Mr Pickersgill was a partner in a Jersey firm of lawyers. He was instructed by Mr Riley to act in connection with the grant of a lease of business premises in Jersey to Magnet Publications Limited, a company whose shares were owned by Mr Riley. At the Lessor’s request, Mr Riley gave a personal guarantee in respect of the rent due from Magnet. Subsequently, Mr Riley instructed Mr Pickersgill to act for him in the sale of his shares in Magnet to West of England Newspapers Limited ("WEN") and in doing so, wanted to be released from the guarantee he had given. The Lessor was not willing to accept a substitute guarantor and was not willing to release him. A solution was agreed whereby WEN agreed to indemnify Mr Riley against any liability he might incur under the lease guarantee.

At the time of the share sale, Mr Riley and Mr Pickersgill were both under the impression that WEN was a company of substance and neither carried out any investigation of WEN’s financial status. Several years later Magnet became insolvent and rent under the lease fell into arrears. Mr Riley had to pay the lessor £56,152 to settle his liability under the guarantee. He then tried to claim this back from WEN under the indemnity but it became clear that WEN was a shell company which had had no assets at the date of the share sale and which had remained in that state. Mr Riley had no prospect of recovering anything so he sued Mr Pickersgill’s firm.

Mr Riley succeeded before the Royal Court of Jersey. The decision was upheld in the Court of Appeal. On appeal to the Privy Council the judges examined the scope of the duty imposed on Mr Pickersgill and in particular whether it was Mr Pickersgill’s duty to investigate the financial circumstances of WEN and the financial risk Mr Riley would run if enquiries were not made.

The judgment was given by Lord Scott who concluded that Mr Riley was an experienced businessman who was aware of the nature of the guarantee. However, the fact that Mr Pickersgill was not involved in the negotiations of the share sale transaction did not relieve him of the duty of pointing out "legal obscurities" and drawing attention to any "hidden pitfalls".

Lord Scott found that Mr Pickersgill had discharged any duty he had to warn Mr Riley of the risk he was taking in accepting a contractual undertaking from WEN by warning of the risk of accepting an indemnity from a limited company. Mr Pickersgill was not under any duty to investigate and advise upon the financial substance of WEN (or advise Mr Riley to do so) or advise on the commercial wisdom of accepting an undertaking from WEN. Lord Scott concluded:

"Mr Riley cannot … extend Mr Pickersgill’s role from that of his solicitor acting on his instructions to that of his commercial adviser, or to that of his insurer against commercial misjudgement"

LIMITS ON THE DUTY TO ADVISE

The retainer

Lord Scott stated in Pickersgill;

"It is plain that when a solicitor is instructed by a client to act in a transaction, a duty of care arises. But it is also plain that the scope of that duty of care is variable. It will depend first and foremost, upon the content of the instructions given to the solicitor by the client. It will depend also on the particular circumstances of the case… The scope of the duty may vary depending on the characteristics of the client, insofar as they are apparent to the solicitor".

In any case when establishing the scope of the solicitor’s duty the starting point is to examine what the solicitor is instructed to do.

Paragraph 12.08(i) of the 8th edition of the Law Society’s Guide to the Professional Conduct of Solicitors states:

"It is essential at the outset for a solicitor to agree clearly with the client the scope of the retainer and subsequently to refer any matter of doubt to the client".

An engagement letter is crucial to record clearly what the solicitor has agreed, and been instructed to do, so as to remove dispute or ambiguity as to what the solicitor is not expected to do. The problem for solicitors is that the nature of so many instructions is conducive to ambiguity particularly in complex commercial transactions. Further, in many instructions, the solicitor becomes aware of information - either at the outset or during the course of the retainer - which may give rise to a duty to point out some issue to the client i.e. the "legal obscurity" or "hidden pitfall" referred to by Lord Scott.

A solicitor has a general duty to explain legal documents to ensure that a client understands the material parts. The obligation to do so is reflected in the Guide to the Professional Conduct of Solicitors but the solicitor is not obliged to go beyond his instructions by offering unsought advice on the wisdom of a transaction. The Privy Council in Clark Boyce v Mouat (1994) stated that:

"When a client in full command of his faculties and apparently aware of what he is doing seeks the assistance of a solicitor in the carrying out of a particular transaction, that solicitor is under no duty whether before or after accepting instructions to go beyond those instructions by proffering unsought advice on the wisdom of the transaction. To hold otherwise could impose intolerable burdens on solicitors".

The distinction between legal and commercial advice

In practice it is often very difficult to distinguish between legal and commercial advice. The earlier case of The Guild (Claims) Ltd v Eversheds and others (2000) discussed in the Winter 2000 edition of the SLB is a useful illustration of this. The case arose out of the acquisition by Airbreak Leisure Group Plc of Sunsail International Limited. As Airbreak was listed on the Unlisted Securities Market it had to issue a circular to shareholders to obtain their approval of the acquisition. The transaction was duly approved but difficult trading conditions caused the enlarged group to make substantial losses. Sunsail was eventually sold by Airbreak’s administrators for a substantially reduced price and the claimant, as assignee of Airbreak’s cause of action, subsequently pursued claims against the solicitors, accountants and bank who had advised on the acquisition.

The allegations against the solicitors focussed on the advice they had given in relation to the circular. They had advised in general terms on the information which the directors were obliged to include in the circular. The professional advisers had provided the directors with all the pertinent information.

The claimants alleged that two items in particular (of which the directors had been aware) were material and should have been included in the circular, namely Sunsail’s title to certain Greek yachts and details of their banking arrangements. It was alleged that had the professionals advised properly they would have pointed out the material omissions, the circular would not have been issued and there would have been no increase in the share capital and therefore no acquisition of Sunsail.

Before going on to deal with each item, Mr Justice Jacob stated:

"I think that it is not possible to deal with the question of duty in relation to quasi commercial matters in the abstract. Solicitors concerned with assisting parties in relation to commercial transactions are often faced with commercial considerations. Ultimately, commercial matters are for the client but things are not so simple that one can say the solicitor’s duty simply stops at questions of law…"

In relation to the items which were said to have been material and which had been omitted from the circular, the judge found that the directors knew of the relevant facts and the "omissions" were essentially matters of commercial judgment.

As a general rule, therefore, what emerges from Pickersgill and other cases is that solicitors are under a duty to advise clients of the legal consequences of important documents and transactions so that they are equipped to evaluate their implications and appreciate their commercial significance for themselves.

The characteristics of the client

In determining how much explanation and advice a client will need before entering into a commercial transaction the characteristics of the client will be a relevant factor. In Carradine Properties Limited v D J Freeman (1999), Donaldson LJ stated that in relation to the solicitor’s duty of care to his client:

"the precise scope of that duty will depend inter alia upon the extent to which the client appears to need advice. An inexperienced client will need and be entitled to expect a solicitor to take a much broader view of the scope of his retainer and his duties than will be the case with an experienced client".

CONCLUSION

Although the precise scope of a solicitor’s duty of care will depend upon the circumstances of each particular case, the decision in Pickersgill is helpful in illustrating how a distinction can be made in practice between legal and commercial advice. It reinforces the solicitor’s duty to point out legal obscurities of which the client is unaware and to draw attention to "hidden pitfalls" so that the client can form his own view of their commercial significance. However, it makes clear that unless expressly instructed to do so, solicitors are not required to advise on the commercial wisdom of a transaction. In the words of Lord Scott in Pickersgill;

"The possibility that WEN might be a company with no or little financial substance was a commercial risk that Mr Riley an experienced businessman, could have been expected to be aware of. It was not a risk arising out of any legal complexity. It was not a "hidden pitfall" that Mr Pickersgill had a duty to warn Mr Riley about". 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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