Know your client

It is well established that the duties owed by professionals to clients vary according to the instructions given, type of client and particular circumstances. In a welcome decision for professional firms, the courts have decided that a professional was not obliged to go beyond his instructions and investigate or advise on the wisdom of a transaction when dealing with an astute, commercial client. But, warns Naomi Park, Leeds, a professional’s duty may not be so limited where clients are less commercially-aware.

Pickersgill & Le Cornu, a firm of solicitors, were instructed by Mr Riley in 1988 to implement a commercial transaction negotiated by him. Magnet, a company owned by Mr Riley, was to be granted a 28 year lease, following which Mr Riley would sell his shares in Magnet to another company, W. As part of the deal Mr Riley was required to guarantee that Magnet would pay the rent due under the lease. He agreed, but only on the basis that, once he sold the shares, W would indemnify him against his liability under the guarantee. Mr Riley was an experienced businessman, well used to giving personal guarantees. Whilst he knew Magnet had not yet made a profit so that he could not be certain it would meet its obligations, he considered W to be a substantial company which could indemnify him.

Some years later, Magnet became insolvent and Mr Riley paid the rent arrears under the terms of his guarantee. Thereafter, Mr Riley looked to W, but he discovered his indemnity was worthless: W was just a shell which had never had any assets. Looking elsewhere for redress he claimed against his solicitors.

Not a commercial adviser

In the claim it was common ground that Mr Riley had been advised of the risk of accepting an indemnity from a limited company that might become insolvent. But Mr Riley went further and alleged that his solicitor should have investigated W’s financial worth or advised him to do so. The Privy Council disagreed: the solicitor was not acting as a commercial advisor. Indeed Mr Riley had taken his own commercial decision to accept W’s indemnity. Their Lordships found that Mr Riley could not "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 his commercial misjudgment".

The Privy Council’s decision in Pickersgill & Le Cornu v Riley (February 2004) is certainly to be welcomed in a climate where clients increasingly look to professionals for recompense when a commercial transaction does not produce the expected results. It seems the experienced business person will struggle to claim that their solicitor should have advised them as to the commercial wisdom of a transaction: it is for the client to assess the commercial risk. However, a court may be loath to find such a limited duty where clients are not so worldly-wise and it will be important for professionals to ensure that they do, indeed, know their client.

Professional and Financial Risks Focus is published on the basis that no liability is accepted for any errors of fact or opinion it may contain. Professional advice should always be obtained before applying the information to particular circumstances.

Beachcroft Wansbroughs Professional & Financial Risks Focus, Issue 03, July 2004