In brief – Lawyers should confirm unusual risk advice in writing
The conduct standard established in the Citicorp Ltd v O'Brien case regarding commercial transactions is well known among lawyers. However, a recent case in the United Kingdom highlights the problem in practice, particularly when dealing with unusual transactions. Practising good risk management and confirming unusual risk advice in writing is the best course of action.
Citicorp v O'Brien sets conduct standard in Australia
Most solicitors will know the rule in Citicorp Ltd v O'Brien  NSWSC 514 without any real need to refer to Riley's. This is because the rule in Citicorp has been woven into the fabric of legal training and practice in Australia since 1996.
When a client proposes to enter into a transaction, his or her solicitor should refer to the Citicorp case as the conduct standard, and advise the client that:
- the financial aspects of a transaction are not a matter in respect of which the solicitor can advise, and
- the client should obtain independent financial advice as to the merits of the transaction.
Citicorp rule reconsidered but ultimately reinforced in Dominic v Riz
The NSW Court of Appeal came to consider Citicorp again in Dominic v Riz  NSWCA 216, at  after a trial judge had suggested:
The Court of Appeal in Riz rejected that finding and reinforced the Citicorp rule:
An unusual transaction case highlights problem in practice
A recent decision of the High Court of England and Wales in Kandola v Mirza Solicitors LLP  EWHC 460 (Ch) is a very good example of the problem in practice.
The transaction was unusual because the deal involved the purchaser of a property paying the deposit to the vendor's solicitors as agents for the vendor (only). The vendor did not complete, and the deposit was lost because the vendor's solicitors disappeared amidst allegations of fraudulent misuse of client money.
The conveyancer advised the purchaser of the risk that:
- the deposit would not be recoverable if the vendor did not complete,
- the vendor might not be able to complete if the vendor could not obtain releases of relevant charges, and
- since the conveyancer did not know how much was secured by those charges, the purchaser could not know if they could be paid off from the purchase money.
Importantly, in view of the unusual nature of the transaction, the conveyancer also obtained written confirmation of the advice from the purchaser as follows:
The court in Kandola summarised the position as follows:
Good risk management practice is key
A lawyer can adopt a simple risk management practice in commercial transactions by considering the following questions:
- What could go wrong and what are the consequences of things going wrong?
- What is the likelihood of things going wrong?
Question (a) is a legal question, and the solicitor has a duty to advise on that.
For a sophisticated client, the duty would more likely be to advise that the loan was unsecured and the client would rank as an unsecured creditor (assuming the lawyer knew the client understood these terms).
For an unsophisticated client, proper advice might extend to pointing out the practical consequences of the legal obligations arising from the document. For instance, if the borrower's business, of which the client knew nothing apart from representations made by her son (principal of the borrower), failed, the client could lose her home and livelihood (see Provident Capital Ltd v Papa  NSWCA 36).
Question (b) is a question for a non-legal expert (eg a financial adviser). Whether or not the client asks this question, it may be prudent to advise the client to obtain the relevant non-legal advice.
Confirm advice on unusual risks in writing
As usual, a lawyer should document advice in a file note. A lawyer could do worse than using the two questions in the file note. For more unusual risks, the advice should be confirmed in writing, as the conveyancer did in Kandola.
A slightly modified version of this article first appeared in the August 2015 edition of Law Society Journal.
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|Colin Biggers & Paisley|
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