No duty owed by conveyancing solicitors to investigate the solvency of a vendor

News | Mon 23rd Mar, 2015

No duty owed by conveyancing solicitors to investigate the solvency of a vendor: Karmjeet Singh Kandola v Mirza Solicitors LLP [2015] EWHC 460 (Ch)

The High Court has recently dismissed a negligence claim brought against solicitors for the alleged failure to investigate the solvency of a party in the context of a property transaction. 

The claimant, a businessman and owner of several buy to let properties, instructed the defendant firm in 2010 in relation to the purchase of a property.  The circumstances of the transaction were unusual, with the claimant paying the deposit of £96,000 to be held by the vendor’s solicitors as agents of the vendor (rather than as stakeholder).  Unknown to the defendant, the arrangement was intended to facilitate a loan by the claimant to the vendor.
The defendant advised the claimant against proceeding in any event (on the basis that a former client of theirs had lost money in similar circumstances), although did not undertake further investigations into the vendor’s credit status.  Such searches would have revealed, prior to exchange, that a bankruptcy petition was outstanding against the vendor. 

The claimant ignored the defendant’s advice and paid the deposit.  The vendor was subsequently made bankrupt and his solicitors struck off by the SRA for fraudulent missuse of client money.
The key issue to be determined at trial was whether the defendant had owed a duty to (1) provide the claimant with specific advice as to the risk of a vendor becoming insolvent and (2) further investigate such risk by conducting bankruptcy and/or Land Registry priority searches on the vendor prior to exchange.

HHJ David Cooke, sitting in the High Court, held that the defendant had not owed a duty in either respect:

(1) The fact that the transaction had taken an unusual form did not justify the imposition of duties beyond the recommendations contained in the Law Society’s Conveyancing Handbook (which referred only to the need to advise a client as to general risks associated with the release of a deposit). 

(2) The duty of a conveyancing solicitor is to “advise of the unusual risk, but not to seek to evaluate it unless specifically instructed to do so” [at 51].  Over and above this the scope of a solicitor’s duty does not include pursuing all lines of investigation that are open to him, merely those that he has been instructed to.

(3) The above is particularly pertinent where, as in this case, advice is provided to a businessman with significant experience of property and/or financial transactions.  In this respect:

“…the solicitor is not a guarantor of his client’s subjective understanding, and will have fulfilled his duty if he gives an explanation in terms the client reasonably appears to him to be able to understand, and to have understood, even if the client later alleges that he did not in fact understand what was said” [at 47].

The judgement provides a succinct restatement of established principles. A solicitor owes a “nuanced” duty to advise on transactional risks based on an objective assessment of his client’s experience and understanding.

Conveyancing practitioners in particular will be reassured to hear that, absent specific instruction, following guidance provided in the Conveyancing Handbook will usually suffice to fulfil their professional obligations.