Legal Responsibilities to Lay Third Parties
A. Specific Causes of Action and Remedies
i. Negligence
The notion that lawyers might have legal responsibilities other than to their client is relatively recent. This was because the harm a lawyer might cause to a third party tended to be financial loss.
This was classified as ‘pure economic loss’, meaning it was independent of physical injury and visible only on a balance sheet. The courts of many jurisdictions were reluctant to allow recovery of damages for pure economic loss, for fear of opening up an uncontrollable vista of liability.a. Negligent Misstatements
In England, the possibility of liability for pure economic loss in the service sector was opened up by the case of Hedley Byrne v Heller.3- Here, financial loss was caused to a third party when a bank gave a reference confirming the financial stability of one of its customers. It was held by the House of Lords that a negligent, though honest, misrepresentation could give rise to an action for damages for financial losses it caused, even though no contract or fiduciary relationship existed.
The House of Lords conceived of the possibility of a duty of care on a party seeking information from a party possessed of a special skill. It held that a duty would be implied when the party seeking the reference trusted the other to exercise due care, and the party providing the reference knew or ought to have known that reliance was being placed on that skill and judgement.
The caution of the courts towards extending liability for pure financial loss in negligence is largely due to the spectre of indeterminate liability. In order to limit the number of people a defendant can be liable to compensate, the courts require that a third party claimant is distinguished by ‘proximity’. In one of the leading cases on statements causing loss, it was said that a potential claimant must be (i) the person directly intended by the maker of the statement to act upon the statement; (ii) in a specific transaction of which the maker knows; and (iii) the statement must be relied on for the purpose for which it was made.[2053] [2054] b. It was for some time thought that Hedley Byrne created a limited category of negligence limited to misstatements of opinion or fact. This was not thought to include statements or opinions on law, or advice, whether on law or fact, or acts or omissions. The decision was relevant to lawyers, but in a quite confined area of operations. In 1980, however, the developing tort of negligence took lawyers firmly within its compass in Ross v Caunters.[2055] In Ross v Caunters, a law firm sent a will for execution by their client without warning that the two required witnesses could not be spouses of beneficiaries. The husband of an intended beneficiary witnessed the will and it was held invalid for this reason. The intended beneficiary sued for a sum equal to the lost inheritance. The lawyers admitted negligence but denied that they owed the beneficiary any duty of care. The argument for not holding the lawyers liable was not cast purely on the ground that the loss caused to the intended beneficiary was purely economic. It was argued that a solicitor could only be liable to his own client and only for breach of contract. If solicitors could not be liable in negligence to their clients, how could they be liable to anyone else? The defendants argued that the overwhelming argument against liability to third parties was the nature of the relationship between solicitors and their clients. Lawyers are engaged to protect clients’ interests. If solicitors also owed a duty to third parties they would have to constantly consider the risk that they may claim against them. This would lead to a grave weakening of the duty to their client. This argument did not convince the court. Megarry VC found that the solicitors owed a duty of care since the beneficiary was someone within their direct contemplation. They could reasonably foresee that she would be injured by their acts or omissions. Accordingly, in the absence of any consideration to the contrary, the claim should succeed. Hedley Byrne had pointed to the fact that solicitors and their clients, like everybody else, could be liable for financial loss resulting from reliance on a negligent misrepresentation of fact. Ross r Caunters exploded the assumption that solicitors owed no general duty of care to third parties. Nevertheless, that duty could still be contained. The means of limiting the case was the special facts of the case. The judge said that the solicitors’ duty of care towards the testator included a duty to confer a benefit on the plaintiff. The duty to act with due care, binding the solicitor to his client, is one that could readily be extended to a third party beneficiary. Ross r Caunters based liability to third parties on a duty to use proper care in carrying out the client’s instructions to confer a third party benefit. As the judge said, ‘[i]f it is to be held that there is a duty that is wider than that, that will have to be determined in some other case.’ In this way, he consciously avoided the possibility that defendants would be exposed ‘to a liability in an indeterminate amount for an indeterminate time to an indeterminate class’.[2057] ‘Instead, there would be a finite obligation to a finite number of persons, in this case one’.[2058] The case of White r Jones[2059] involves a variation of the duty to a beneficiary under a will. A solicitor negligently delayed drawing up a will and the testator died before it could be executed. As neither the testator nor the estate had a remedy against the solicitor, only the intended beneficiary could seek a remedy. The House of Lords held that the beneficiary could sue the deceased’s solicitor for the value of the bequest. In Carr-Glynn r Frearsons,[2062] the principle in White r Jones was again extended. The testatrix was a joint tenant of a property with her nephew. She intended to leave her share to her niece, the plaintiff, and instructed the defendant solicitors to take the necessary steps. This involved serving a notice of severance of the joint tenancy on the nephew, so as to create a tenancy in common. The solicitors negligently failed to serve notice before the testatrix died, with the result that the nephew became beneficial owner of the whole property. The Court of Appeal noted that the nephew may have felt morally obliged to honour the testator’s intention, but had not offered to do so. It therefore reversed the first instance decision and held that the intended beneficiary could recover from the deceased’s solicitors. They owed a duty to intended beneficiaries under White v Jones. Although the failing did not involve negligence in drafting or arranging execution of the will, the task of severing the joint tenancy was a necessary part of carrying out the instructions regarding the will. Apart from avoiding negligence, solicitors must beware substituting their own moral judgement for that of their clients. In Feltham v Freer Bouskell,[2063] S, a solicitor with the defendant firm, received instructions to change the will of an elderly client (C) from L. L was to inherit the bulk of the estate at the expense of the former beneficiaries. S accepted the instructions subject to satisfying himself as to C’s testamentary capacity. S having done nothing, C asked L to prepare her will, which C then executed. S encouraged the beneficiaries to challenge the will and L settled out of court. L then sued S for losses she suffered by making a compromise settlement. S was held liable. The court understood S’ concern that C was suffering from dementia and that this might negate her testamentary capacity. This made it even more important that he establish the facts and acted on the instructions he had been given. Had he done so, any doubt as to C’s capacity would not have existed and L would not have had to surrender part of her inheritance to the disaffected former beneficiaries. Further, because S had created the situation, there was no break in the chain of causation, as S had argued, when C asked L to prepare her will. The case of Ross v Caunters opened the door to solicitors being liable to third parties for negligence. The courts have, however, been careful not to fling it wide. Extensions of the principle in Ross v Caunters have been relatively modest. The Court of Appeal has held that ‘it is quite impossible to extend the principles arising from the special situation of a beneficiary under a will’.[2064] There is, for example, no duty of care to a prospective beneficiary of a client’s disposition in a donor’s lifetime.[2065] The cases are, nevertheless, cautionary. In particular, as Feltham shows, solicitors should never strive to achieve ‘justice’ in the distribution of their client’s estate. Otherwise, they may find themselves compensating deprived beneficiaries. c. Negligence Causing Loss to Unrepresented Third Parties Lawyers must be careful when dealing with unrepresented parties. Any gratuitous advice offered that proves to be wrong could result in a negligence claim. d. Negligence Causing Loss to Witnesses A similar duty to offer accurate advice was imposed in a 2005 County Court case. A trainee solicitor advised one his client’s witnesses that he could not be sacked if, when giving his evidence, he admitted smoking at work. The witness was sacked. Damages were awarded for the loss caused by the negligent advice.[2068] e. Negligence towards Victims of Crime A possibility that is untested in English law is whether a professional owes a duty to warn a prospective victim whom a client has threatened to harm. Such a duty has been held to exit in the US.[2069] If a duty to third parties does exist, it would have to excuse a breach of a duty of confidentiality to a client. This is implicit in revealing information of this kind. It would need to cover the issue of whether disclosure can be made only to the victim or also to the authorities. It would also need to deal with the issue of whether disclosure is mandatory or permitted or whether this is dictated by the seriousness of the circumstances. Codes have allowed breach of confidence in such circumstances. For example, the Guide included as guidance the statement that information could be revealed if it was necessary ‘to prevent the client or a third party committing a criminal act that the solicitor believes on reasonable grounds is likely to result in serious bodily harm’.[2070] Since this was guidance it had dubious authority. Since the language was permissive, it is doubtful that there was a positive duty to warn a potential victim. The acid test would be whether a lawyer would be liable in negligence for a failure to warn. Such a finding would then be reflected in the codes. At present, there is no mention of this situation in any of the codes. ii. Breach of Undertakings An undertaking is a binding promise to do something. The important feature of undertakings given by lawyers is that the promise must be carried out. This is so even if the circumstances in which the promise was made totally change. If the change of circumstance was unforeseeable, and operates to the detriment of the person giving the promise, the promise must be fulfilled. Solicitors frequently give undertakings, usually to the other side in litigation or in relation to a transaction. They may promise to discharge mortgages, produce or return documents, hold monies to order or exchange contracts for the sale of land or facilitate some other event. Much business could not be speedily or efficiently carried out without reliance on undertakings. The courts have enforced solicitors’ undertakings in different ways, for example, as a basis for creating trusts, ordering performance and awarding compensation. a. Creation of Trusts The role of the court arose in the rather unsatisfactory case of Twinsectra Ltd v Yardley and others.[2071] A solicitor (S) acted for Y in connection with the purchase of land. The client needed to borrow £1m to complete the purchase. A lender (T) was found but it would only loan against a solicitor’s personal undertaking to use the monies as directed. S was unwilling to give an undertaking so Y approached a second solicitor, S2. S2 represented himself as acting for Y and received the money on the terms of an undertaking by his firm. The terms of the undertaking were that (1) The loan moneys will be retained by us until such time as they are applied in the acquisition of property on behalf of our client. (2) The loan moneys will be utilised solely for the acquisition of property on behalf of our client and for no other purposes (3) We will repay to you the said sum of £1m together with interest. S2 released the money to S, as instructed by Y, on assurances from Y that the money would be used for the purchase of the property. S released the money to Y, who used part of the sum to purchase a property and nearly £358,000 for other purposes. S took no steps to ensure that the money was only applied in the acquisition of property. S2 went bankrupt and the loan was not repaid. T commenced proceedings against S, alleging that he had dishonestly assisted in a breach of trust by S2. The Court of Appeal held that the undertaking given by S2 had created a trust. However, although S had deliberately shut his eyes to the implications of the undertaking given by S2, he had not been dishonest. The House of Lords held that S2 held the money on trust for the lender subject to a power to apply it, by way of a loan to the client, in accordance with the undertaking. The result was that the money remained the lender’s money until such time as it was applied for this purpose. The second issue was whether S was liable as an accessory to the breach of trust. To be so, he had to have acted dishonestly by the ordinary standards of reasonable and honest people. He also had to be aware that, by those standards, he was acting dishonestly. The House of Lords reversed the Court of Appeal finding that S was dishonest. It upheld the judge’s finding that S had honestly believed that the undertaking given to the lender was not his concern and that, once in his hands, the loan money was at the free disposal of the client. Lord Hutton considered that S took a ‘blinkered approach to his professional duties as a solicitor’, but was not dishonest.[2072] Only Lord Millett, dissenting, pointed out that S knew the terms of the undertaking given by S2 but appeared to take the view that the breach of undertaking was solely S2’s responsibility. He considered that S was liable as an accessory to the tort of wrongful interference with the performance of S2’s fiduciary and contractual undertaking and breach of trust. The undertaking in Twinsectra was unusual, rather vague in its terms and possibly unenforceable. This may explain the decision not to hold S liable. While it did not happen in this case, it illustrates the fact that, in some circumstances, courts could hold solicitors to strict standards in relation to third party interests.[2073] b. Ordering Performance and Awarding Compensation In relation to litigation, the court can exercise its inherent supervisory jurisdiction over solicitors and order the performance of an undertaking. If this is not possible it can award compensation. An illustrative case is Udall v Capri Lighting Ltd.[2074] A solicitor acting for the defendant company sought to adjourn appointments to hear judgment summonses against it. He gave an oral undertaking to secure charges in favour of the claimant, covering property of the directors of a company. Judgment was entered against the company, but it went into liquidation and could not be enforced. The charges had not been executed by the solicitor and could not now be executed. The plaintiff claimed that the defendant’s solicitor was liable on the breach of undertaking. The Court of Appeal held that failure to implement an undertaking was, prima facie, misconduct, even where the solicitor had not acted dishonourably or could not implement it. The court could, in the exercise of its inherent jurisdiction, either order the implementation of the undertaking, where possible, or order compensation from the solicitor where it was not.[2075] The case illustrates the proposition that a solicitor’s undertaking is binding even if discharging it proves to be outside his control.[2076] c. Causing Loss to Opponents Breach of an undertaking to a third party may be actionable in negligence. An example arose in the matrimonial case of Al-Kandari v Brown.[2077] The solicitor for the husband undertook not to release his passport to him. On this basis, the husband was granted access to the children of the family. Owing to the solicitor’s lack of care, the husband obtained the passport and took his children out of the country. The wife sued in negligence and succeeded. The solicitors, in giving the undertaking, had ‘stepped outside their role as solicitors for their client and accepted responsibilities towards both their client and the plaintiff and the children’.[2078] iii. Wasted Costs Wasted costs orders were introduced to provide a remedy for parties in litigation affected by the unsatisfactory work of opposing lawyers.[2079] Wasted costs are defined as costs incurred by a party as ‘a result of any improper, unreasonable or negligent act or omission on the part of any legal or other representative or any employee of such representative’.[2080] The court may, at the instigation of either the client or the other side to the litigation, order the lawyer to pay the whole or any part of any wasted costs. The source of the responsibility imposed on lawyers by costs orders can be conceived as a manifestation of the obligation to uphold the proper administration of justice. Lawyers required to pay the costs of the other side are given a stark reminder that it is not only their client’s interests that they need to consider. At the time that the Courts and Legal Services Act 1990 was debated, the Law Society was very concerned that wasted costs orders would be used by the opposing side to intimidate or prevent a solicitor from acting properly for his client. This is an issue that the courts have grappled with in deciding whether to make such orders. It is considered in more detail in chapter seventeen: ‘Litigation’. B. General Obligation of Fairness Apart from giving specific remedies the courts impose a general obligation of fairness on lawyers, particularly in litigation or other situations of conflict. This tends to be when an opponent is disadvantaged in a situation and it would be unconscionable for a lawyer to take advantage. This may be because the other person lacks knowledge or skill, for example because they are acting as a litigant in person, or because the situation is unfair. i. Other Side’s Client a. Taking Advantage of Errors A well-established example of taking unfair advantage is where privileged papers are disclosed in error. In Ablitt v Mills & Reeve (A Firm) and Another,[2081] a solicitor (S) received seven files containing privileged information which had been sent in error by the other side’s counsel. S consulted the Guide to Professional Conduct of Solicitors (sixth edition, 1993), paragraph 16.07 of which required a solicitor in his position to stop reading, inform the other side and then return the documents. It also advised, anomalously in the view of the court, that before returning the documents, the solicitor should consider whether to seek instructions from his client about the matter. Once S realised that the documents were privileged, he stopped reading them and sought further instructions from the client. The client instructed S to read all the files and then return them to the other side. Subsequently, S’s firm offered undertakings not to make use of information derived from the files. An injunction was granted restraining the firm from acting in the action. It was held that the firm could have gained an accurate perception of the view of A’s advisers as to the merits of his claim. To allow it to take advantage of such information would be contrary to the requirements of fairness and justice. Parties must be free to communicate with their legal advisers without fearing that such privileged information may be used by the opposing side. An injunction preventing the lawyer who has read privileged information from acting is not inevitable in such circumstances. The critical factor is the degree of prejudice likely to be suffered. In English & American Insurance Co Ltd & Others v Herbert Smith,[2082] counsel’s papers for P were accidentally sent to solicitors for D, whose clients instructed them to read the papers. They returned the papers having read them. P was granted an injunction restraining D from making use of any of the information. It was held that, if the privileged information had not yet been tendered in evidence, the person entitled to legal professional privilege could restrain any use by the other side, including use in pending proceedings. b. Limited Responsibilities in Other Situations Apart from the law of negligence, and situations where it would be unconscionable to allow someone to take advantage, the common law recognises limited professional obligations to third parties. This is illustrated by Re Schuppan (A Bankrupt) (1996).[2083] A solicitor for a petitioning creditor acted in litigation against S, who was found guilty of fraud and dishonesty. S could not satisfy the judgment and was made bankrupt. In the aftermath, S brought an action in slander against the creditor’s solicitors. The solicitor was then retained by the trustee in bankruptcy to advise him on the administration of the S’s estate. S objected to the appointment of the solicitor on the ground that, having acted for a petitioning creditor in the previous litigation, he was in a position of conflict of interest. It was quite conceivable that the solicitor might be prejudiced against S. Even without the slander action, it was likely that the solicitor’s experience of S as an opponent would affect his attitude towards him as an adviser to the trustee in bankruptcy. Nevertheless, the court held that it was not unreasonable for the trustee to retain creditors’ solicitors in such circumstances. They would have the advantage of knowing of the difficulties relating to the tracing the bankrupt’s assets. The court proposed quite elaborate measures to overcome any disadvantage to S. It suggested that any conflict of interest that might arise from the trustee’s solicitors having access to the bankrupt’s litigation documents could be resolved. One solution, for example, would be for the solicitor to give an undertaking not to use those documents without leave of the court. The decision can be contrasted with the stringent requirements laid down for solicitors’ own client conflicts of interest. Any obligation of fairness to an opposing third party is set considerably lower than that standard. ii. Unrepresented Opponents Another example of the court’s willingness to impose an obligation of fairness arises when lawyers are dealing with unrepresented parties. In Haiselden v P & O Properties,[2084] a litigant in person mistakenly set down a case for trial in the County Court when it should have been dealt with as a small claim. The claimant lost the case, which the judge commented had been brought in good faith. The trial judge awarded costs to the defendant that could not have been recovered on a small claim. The Court of Appeal noted that the defendant did not alert either the court or the unrepresented claimant that the claimant had made a mistake. Lord Justice Thorpe thought that, faced with a plaintiff [claimant] in person the defendants had some obligation to draw to his attention and/or to the attention of the court the error that had been made... and particularly to draw to the attention of the plaintiff the beneficial consequence which the defendants intended to harvest from the error. The defendant’s costs on the County Court scale were therefore disallowed. There are situations where courts may intervene to prevent lawyers taking advantage of unrepresented parties. One is where lawyers assert untenable claims. An example of this was the practice of solicitors in Employment Tribunal cases sending letters threatening costs applications where employees brought cases against them. These letters were improper because costs are awarded in only very limited and exceptional circumstances in Employment Tribunals. An example of pressure being improperly applied to an opponent in relation to costs occurred in one Employment Tribunal case. The tribunal had been unduly influenced by a QC’s threat to seek costs against the applicant and had issued the applicant with a warning on costs. The applicant settled, but the case was remitted for re-hearing after the Court of Appeal held that this put the applicant under undue pressure.[2085] In 2001, the rules were changed to prevent the intimidation of applicants.[2086] This is intended to preserve the character of Employment Tribunals as accessible to all, including the unrepresented employee. iii. Other Third Parties Affected by Proceedings a. Children as Third Parties Some proceedings involve third parties who may be indirectly involved but not represented. The obvious case is children who are not separately represented in proceedings that affect them, such as divorce or guardianship proceedings. The Children Act 1989 created an exception to legal privilege, whereby expert reports, and possibly other documents bearing on the welfare of children were required to be disclosed.[2087] [2088] This could involve lawyers acting against the wishes of client parents or guardians and in favour of a third party, the child. This is a relatively rare example of an obligation imposed on lawyers for the benefit of third parties. b. Other Side’s Non-professional Representative While the conduct of reserved activities by unqualified persons is strictly prohibited, there have been inroads into the idea that people can only be assisted by qualified professionals. In McKenzie v McKenzie,61 it was held that an unrepresented litigant could receive support and advice from a friend.[2089] Such a person, a so-called McKenzie friend, has no right to address the court unless the court allows. Lay representatives can, however, speak on behalf of a party in the Small Claims Court and in tribunals, the Lord Chancellor having granted this right under section 11 of the Courts and Legal Services Act 1990. Lay representatives can even sometimes obtain the costs of representation. There is now a finer line between unlawful practice on the one hand and providing lawful assistance and advice. Such activity must be distinguished from acting as a solicitor. As Lord Justice Potter put it, [T]he words ‘acting as a solicitor’ are limited to the doing of acts which only a solicitor may perform and/or the doing of acts by a person pretending or holding himself out to be a solicitor. Such acts are not to be confused with the doing of acts of a kind commonly done by solicitors but which involve no representation that the actor is acting as such.[2090] This situation is quite complicated for lawyers acting against a party represented by someone who is unqualified. c. Other Sides’ Professional Representatives The courts tend to impose a duty of fairness on lawyers acting in litigation. In Ernst & Young v Butte Mining Co,[2091] the court had approved a consent order setting aside a judgment by default. The defendants were permitted to serve a defence and counterclaim within a set time. The plaintiff’s solicitor had the carriage (ie drafting and issuing) of the order and, immediately after obtaining it, filed a notice to discontinue the action. This was intended to prevent the defendants from filing their counterclaim. It was held to be an abuse of process. The plaintiff’s solicitors had misled the defendants as to their intentions. They had sought an unfair advantage by obtaining the defendant’s agreement to their having the carriage of the order. VI.