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Solicitor Breach Of Duty To Inform Over Use Of Business Loan

Property solicitor with clients
16th July 2015

The claimant had provided a substantial loan to a company, which had been specifically established for the purpose of a property development by a close friend and businessman. However, the money was instead used to pay off a personal bank debt and the development did not take place. The company failed to repay the loan and the claimant only received back around 6 per cent of his money from the sale of the property after it was repossessed and sold.

At the initial court hearing, a claim was made for fraudulent misrepresentation against the businessman over the use, to which the loan money was to be put. The claimant also argued that his solicitor was in breach of trust or breach of duty, and should have warned him that the money was for personal use.

No duty extended beyond drawing up of the letter

However, the trial judge dismissed the claims except for the claim of breach of duty against the solicitor in the drawing up of a ‘facility’ letter, which clearly stated that development was the purpose of the loan. The judge held that the solicitors had breached their duty of care to their client because, as a result of not clarifying their instructions, they had failed to appreciate that the loan was to be solely used to develop the property. In addition, the solicitors knew that 75 per cent of the loan was to be paid to acquire a property and repay a bank mortgage but they had failed to inform the claimant of the intended use.

The solicitors appealed, arguing that there was no duty on them, which extended beyond the drawing up of the facility letter.

The Court of Appeal upheld that the solicitors were in breach of duty to inform but ‘not to advise’ on a course of action, and the losses suffered by the claimant did not fall within the scope of a solicitor’s duty. The appeal court also found that the loan had always been of a “highly speculative” nature. The claimant had never sought advice from his solicitor as to the commercial wisdom of the proposed transaction and the solicitor was not responsible for the losses suffered from the foreseeable commercial risks taken by the claimant.