Ipsofactoj.com: International Cases [2004] Part 9 Case 14 [PC]


THE PRIVY COUNCIL

Coram

Pickersgill & Le Cornu

- vs -

Riley

LORD NICHOLLS OF BIRKENHEAD

LORD HOFFMANN

LORD HOPE OF CRAIGHEAD

LORD SCOTT OF FOSCOTE

BARONESS HALE OF RICHMOND

25 FEBRUARY 2004


Judgment

Lord Scott of Foscote

(delivered the judgment of the Board)

  1. At issue in this case is the scope of the duty of care owed by Mr. Pickersgill, a solicitor and partner in the appellant firm, to the respondent, Mr. Riley, while acting for him as his solicitor in a commercial transaction. The transaction involved, first, the grant of a 28 year lease of business premises in Jersey to Magnet Publications Ltd, the shares in which were owned by Mr. Riley, and second, the sale of those shares to an English company, West of England Newspapers Ltd (“WEN”).

  2. The lessor of the Jersey property wanted a guarantee to be given by Mr. Riley underwriting the due payment by Magnet of the rent falling due under the lease. Mr. Riley agreed to give the guarantee and the lease was granted to Magnet accordingly. On the sale of his shares in Magnet Mr. Riley naturally wanted to be released from the guarantee he had given. But the lessor, for reasons that are not material, was not willing to accept the substitute guarantors that were on offer and so was not willing to release him. A solution to this difficulty was negotiated between Mr. Riley and the individuals who were representing the proposed purchaser of the Magnet shares. It was agreed that WEN, as a term of its purchase of the shares, would undertake to indemnify Mr. Riley against any liability he might incur under the lease guarantee. The sale of the shares, at a price of £125,000, proceeded to completion on that basis.

  3. At the time of the transaction both Mr. Riley and Mr. Pickersgill were under the impression that WEN was a company of substance. But neither of them carried out any investigation of WEN’s financial status.

  4. Several years later Magnet became insolvent and rent due under the lease fell into arrears. The lessor claimed against Mr. Riley and Mr. Riley had to pay the lessor a sum of £56,152 odd to discharge his liability under the guarantee. Mr. Riley then tried to obtain re-imbursement from WEN pursuant to the undertaking WEN had given on the sale of the shares. But it transpired that WEN had no assets. It had been a shell company with no assets at the time of the transaction and remained in that state. Mr. Riley could not expect to recover anything under WEN’s undertaking. So he sued his solicitors in negligence.

  5. Mr. Riley succeeded in his negligence action before the Royal Court of the Island of Jersey. The Commissioner, giving the judgment of the Royal Court on 26 July 2001, said that

    .... Mr. Pickersgill had a duty either to investigate West of England Newspapers Limited or to advise his client of the risk that he was running by not having the financial standing of the company investigated.

    [para 39 of the judgment]

  6. This conclusion was upheld and repeated in the Court of Appeal on 13 September 2002 (see para 19 of the judgment of Tugendhat JA). The solicitors’ appeal was dismissed.

  7. The solicitors have now appealed to their Lordships. A number of issues have been raised. First and foremost there is an issue as to the scope of the duty of care imposed on Mr. Pickersgill by the instructions he had received from Mr. Riley. Was it his duty to investigate the financial substance of WEN or to advise Mr. Riley of the financial risk he would run if that were not done? If that was his duty, there is no doubt that Mr. Pickersgill was in breach of it. The Royal Court and the Court of Appeal held that Mr. Pickersgill owed the duty as formulated in the passage cited above and that he was in breach of it. A number of other issues then arose and were decided in Mr. Riley’s favour. But unless the courts below were correct in concluding that Mr. Pickersgill was in breach of his duty of care, these other issues do not arise. Their Lordships will, therefore, address themselves first to the duty of care issue.

    THE DUTY OF CARE

  8. 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. It is a duty that it is not helpful to try to describe in the abstract. The scope of the duty may vary depending on the characteristics of the client, in so far as they are apparent to the solicitor. A youthful client, unversed in business affairs, might need explanation and advice from his solicitor before entering into a commercial transaction that it would be pointless, or even sometimes an impertinence, for the solicitor to offer to an obviously experienced businessman.

  9. As to the extent to which a solicitor should make enquiries or investigate matters that he has not been asked to enquire into or investigate, their Lordships think that para 10-160 in Jackson & Powell on Professional Negligence, 5th ed (2002) correctly states the position:

    In the ordinary way a solicitor is not obliged to travel outside his instructions and make investigations which are not expressly or impliedly requested by the client.

  10. In support of that proposition the text goes on to refer to Clark Boyce v Mouat [1994] 1 AC 428, a Privy Council decision, where Lord Jauncey of Tullichettle said, at page 437:–

    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.

  11. And in Reeves v Thrings & Long [1996] PNLR 265 Sir Thomas Bingham MR. said, at page 275, in a dissenting judgment:

    It will always be relevant to consider what the solicitor is asked to do, the nature of the transaction and the standing and experience of the client. Thus on the facts here Mr. Sheppard was not retained to advise on the wisdom of offering the price Mr. Reeves had informally agreed to pay .... But it was in my view Mr. Sheppard’s duty to draw Mr. Reeves’ attention to any pitfall, particularly any hidden pitfall, the contract might contain.

  12. Simon Brown LJ said, at page 279:

    I cannot accept that Mr. Sheppard was under any further duty to his client, any duty to advise him upon the commercial implications or importance of the access provision or to warn him against the risks that it might pose for the future development, operation or sale of the hotel. These matters are well within the client’s competence to appreciate and evaluate for himself, business considerations rather than legal ones.

  13. And, at page 285, Hobhouse LJ said

    Once Mr. Reeves was told what the legal position was, he required no further advice from Mr. Sheppard in order to evaluate its implications and commercial significance. Mr. Reeves was an experienced businessman and under no disability.

  14. These dicta, in their Lordships’ view, provide valuable signposts pointing the way to the right approach in the present case. Mr. Riley was an experienced businessman, whose business was the publication of “flyers”, i.e. free business newspapers. He carried on this business via the medium of a limited company, namely, Magnet. Magnet no doubt had potential for profit earning. Otherwise WEN would not have agreed to pay £125,000 for the shares. But it had not yet, under Mr. Riley’s management, made a profit. Mr. Riley was aware of the nature of the guarantee that he was to give to the lessor of the Jersey property. As the Commissioner said in the judgment (para 3):

    Mr Riley was used to personal guarantees. He had wide business experience in England.

  15. Mr. Riley knew that, potentially, the guarantee might remain in force for the full 28 years of the proposed term. He must have known, from his own experience, that Magnet’s future profitability was speculative. The guarantee had no “hidden pitfalls” for him.

  16. As to the share sale, this was a transaction that Mr. Riley himself had negotiated. Mr. Pickersgill, his solicitor, had been instructed to implement the transaction the terms of which had been agreed. Mr. Pickersgill’s non-participation in the negotiation of the terms of the share sale would not have relieved him of the duty of pointing out to Mr. Riley, his client, any legal obscurities of which Mr. Riley might have been unaware, of drawing the attention of Mr. Riley to any “hidden pitfalls”. But it was Mr. Riley who had brought WEN to the attention of Mr. Pickersgill as the proposed purchaser of the Magnet shares and as the company that would give the contractual undertaking to indemnify Mr. Riley against any liability under the guarantee. Mr. Pickersgill’s evidence was that he had had no prior knowledge of any sort about WEN or its financial state but that he had been given the impression by Mr. Riley that it was a company of substance (see para 26 of the Commissioner’s judgment). He was asked in cross-examination about a note he had written which said “Company thought to be substantial”. Advocate Thompson put to him:

    That’s really what you and [Mr. Riley] both thought in 1988 wasn’t it?

    Mr. Pickersgill answered:

    I’ve already said he thought that and he told me so and therefore I thought that because he told me so.

  17. It seems, therefore, to have been common ground that both Mr. Riley and Mr. Pickersgill took WEN to be a company of financial substance. 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.

  18. The evidence given at trial by Mr. Riley and by Mr. Pickersgill makes clear that Mr. Pickersgill gave clear warning to Mr. Riley of the potential danger of accepting a contractual undertaking from a limited company. The following passages seem to their Lordships worth citing. Mr. Riley, in giving evidence in chief:

    [Mr Pickersgill] did point out the main problem with [WEN’s undertaking], if ever there was going to be a problem, was if the company that had issued it ever became bankrupt, like any other creditor then to that bankrupt company I would suffer the consequences the same as the taxman and anybody else who was involved.

    [pages 30/31 of the Record]

    And in cross examination:

    .... I was then told it was as watertight as it could be, and my only consideration to be prepared for, is if ever the company became bankrupt, then I would become a creditor the same as everybody else, and that was the risk I had to take on that and I accepted that.

    [page 106 of the Record and see also page 108]

    Mr. Pickersgill, in giving evidence in chief:

    Q.

    When you say that you believe that you discussed the corporate indemnity, what do you think was said by you to Mr. Riley about the subject?

    A.

    It’s absolutely routine stuff, a guarantee given by a company can be avoided by that company by it divesting itself of its assets. I mean that’s absolutely routine.

    [page 147 of the Record]

    And in cross-examination:

    What I said [in evidence in chief] was that I’d told him that if the company had no assets then the guarantee, the indemnity, would be worthless.

    [page 191 of the Record]

  19. The conclusion of the Royal Court that Mr. Pickersgill’s duty of care to Mr. Riley required Mr. Pickersgill to investigate the financial substance of WEN or to advise Mr. Riley to do so seems to have been based on the proposition that a solicitor in Jersey becomes, on accepting instructions, the client’s “homme d’affaires”. The Commissioner said, in paragraph 38 of his judgment:

    It is clear that a client may well have high expectations of his solicitor, particularly when, as in Jersey, he is an ‘homme d’affaires’.

  20. The categorization of Mr. Pickersgill as Mr. Riley’s “homme d’affaires” may have been the reason why the Royal Court held him to be “under a continuing duty to advise on the financial adequacy of [WEN]” (para 46). Tugendhat JA in the Court of Appeal cited the Commissioner’s paragraph 38 and expressed his agreement with the reasons given by the Commissioner for holding that Mr. Pickersgill had a duty either to investigate WEN or to advise Mr. Riley of the risk he would be running if that were not done.

  21. Their Lordships regard this “homme d’affaires” categorization of Mr. Pickersgill as a misdirection. The scope of a solicitor’s duty is governed by the instructions he receives and the circumstances of the case. The scope of a solicitor’s duties may in some cases justify his description as an “homme d’affaires” but the bestowing of that description on him cannot alter or add to the extent of the duty of care that he would otherwise owe. In the present case, in their Lordships’ opinion, it was a positively misleading description and apt to suggest a duty to advise on the commercial implications and wisdom of the transaction, a duty that neither Mr. Pickersgill’s instructions nor the circumstances of the case warranted.

  22. In their Lordships judgment, Mr. Pickersgill, in giving clear and correct advice about the risk of taking a contractual indemnity from a limited company, discharged any duty he had to warn Mr. Riley of the risk he was taking in accepting the contractual undertaking from WEN. Mr. Pickersgill’s duty did not extend to investigating and advising on the financial substance of WEN or to advising on the commercial wisdom of accepting the undertaking from WEN or to advising Mr. Riley to investigate the financial substance of WEN.

  23. It is to be borne in mind that the undertaking to be given might need to be called upon at any time over a period of some 28 years. A company with assets originally might cease to have assets. A company with no assets originally might subsequently acquire them. Both Mr. Pickersgill and Mr. Riley had assumed WEN to be a company of substance but neither the Royal Court nor the Court of Appeal attributed Mr. Riley’s assumption to any representation made by Mr. Pickersgill.

  24. It was, in their Lordships’ view, a matter for the commercial judgment of Mr. Riley whether he was prepared to accept the protection of the contractual undertaking on offer from WEN. He decided to do so, but not in reliance on any advice to do so given by Mr. Pickersgill. It was his, Mr. Riley’s, commercial decision. His decision may, with hindsight, be regarded as imprudent and to have been based on a mistake as to WEN’s financial substance at the time of the transaction. But Mr. Riley cannot, in their Lordships’ opinion, 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 misjudgement.

  25. Mr. Pickersgill did not, in their Lordships’ judgment owe the extended duty of care as pleaded or as expressed by the courts below as the basis of their respective findings of liability. Their Lordships will, therefore, humbly advise Her Majesty that this appeal should be allowed with costs here and below.


Cases

Clark Boyce v Mouat [1994] 1 AC 428

Reeves v Thrings & Long [1996] PNLR 265

Authors and other references

Jackson & Powell on Professional Negligence, 5th ed (2002)


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