Solicitors’ liability and dishonest clients

The Inner House of the Court of Session (CSIH) (pictured) – the supreme civil court in Scotland – has given a judgment which, if followed by the English courts, could have an important impact upon solicitors’ liability where they act for dishonest clients.

In Frank Houlgate Investment Company Ltd v Biggart Baillie LLP [2014] CSIH 79, the pursuer was an investment company which lent money to the defender’s client on the security of a property purportedly owned by the defender’s client. The defender’s client did not in fact own the property concerned and so the security was worthless. In the course of acting for his client in the transaction, the defender discovered that his client was defrauding the pursuer.

Acting upon his client’s instructions, the defender did not warn the pursuer of the fraud. Money was advanced by the pursuer to the defender’s client on the strength of the worthless security after the defender came to know of the fraud.

The three judges of the CSIH all agreed that the defender was liable to the pursuer for the losses incurred by the pursuer after the defender discovered the fraud, although they were not unanimous regarding the basis for that liability.

Lord Menzies held, at paragraph 36 and following, that a solicitor in the situation of the defender gives a continuing implied representation to the other party to the transaction that they are not aware of any fundamental dishonesty or fraud which might make the security for the transaction worthless.

The solicitor was under an obligation immediately to tell the pursuer that the client had admitted fraud and that the security was worthless. That obligation flowed not from a Caparo-type duty of care, but rather from the duty of the defender as a solicitor and the obligation of honesty incumbent upon him as a result.

The effect of the defender’s contravention of the continuing implied representation was that he was liable for the losses incurred by the pursuer as a result of his failure to inform the pursuer. The defender was divested of his duty of confidentiality to his client by virtue of his client’s fraud.

Lord Menzies further held on the facts that he would have found the defender liable as an accessory to fraud in any event.

Lord Malcolm, at paragraphs 73-80, went all the way back to Donoghue v Stevenson and held that the defender was liable in negligence. He held, at paragraph 74, that it was ‘preferable simply to rely upon the broad concept of culpa [fault], in the sense of failure by a professional to use the care and skill required in the circumstances’. He continued, at paragraph 75, to hold that: ‘In the present case the actionable negligence arises because [the defender] came to learn of the fraud and knew, or should have foreseen, that further harm to the pursuers could ensue if he did not take care to protect them.’

The concept of solicitors’ liability to a third party on the basis of a representation is known to English law. However, I know of no comparable example of an implied representation giving rise to an obligation to break silence (and confidentiality) where a solicitor finds out that their client is a fraudster. Lord Malcolm’s conception of a duty of care on a Donoghue v Stevenson basis in these circumstances is one which, on the face of it, is difficult to reconcile with existing authorities on the duty of care owed by solicitors to third parties.

There is not necessarily a direct read-across from Scottish into English law in this or any other context. However, it is difficult to refute the basic proposition of Lord Menzies that all of the public is entitled to expect that a solicitor is honest and conducts themselves with probity accordingly.

The question is how far this duty might extend. The case of Frank Houlgate concerned a transactional relationship and unequivocal knowledge on the part of a solicitor of fraud by a client.

It is arguable that the context of contentious litigation alters the nature of any obligation upon a solicitor to the other side in that litigation, although it is impossible to argue with the contention that parties in litigation must be honest with one another.

The quality of knowledge required before this duty is engaged is also a live question. For example, if a solicitor has information in their possession which, if considered properly, would show that the client was dishonest, but the solicitor fails to read or to appreciate the importance of that evidence, is that enough to engage the duty to warn?

Whatever the answer to the above questions, the prospect of recovery against a solicitor backed by an insurer will be very attractive to victims of fraud, whether that fraud is perpetrated in the context of a transaction or in the course of litigation.

William Irwin is a barrister at Temple Garden Chambers