Cleary v Ewart & Ewart  NZHC 39
In December 2015 In Brief reported on the successful strike out by a solicitor, E, of part of the claim against him by C. The claim went to trial last year and the Court has now found for E in a decision which addresses an issue that frequently arises in claims against solicitors – how ‘real’ does the client’s chance have to be before the loss of that chance will support a claim in negligence?
It also considers what the standard of care is when a lawyer is presented with a difficult strategic decision involving advantages and disadvantages to whatever course is adopted.
To recap the facts, C wanted to purchase a beachfront property in Fiji. He paid a deposit of US$165,000 and entered into a Deed of Option with VBFL, which was developing the land into a luxury hotel and residential complex. Later C negotiated an oral understanding with VBFL by which he would surrender his rights under the option back to VPFL for a refund of the deposit plus a further US$275,000.
C asked E, a solicitor, to prepare a written agreement to give effect to this deal. Once E read the Option Deed, he discovered something peculiar. The Deed, rather than conferring on C a right to purchase, gave VBFL the option to require C to purchase the land. The Option Deed, in other words, gave C no rights at all, not even a right to be refunded the money he paid as a deposit.
E told C the effect of the Option Deed and recommended that he call the lawyer acting for VBFL to suggest that the problem in the Deed be cured by VBFL first exercising the option in C’s favour. This would give C valuable rights which he could then surrender back to VBFL. A disadvantage to this strategy would be that VBFL’s lawyer would be alerted to the problem and the fact that VBFL could achieve the same outcome by simply not exercising the option. But E also did not see the point in withholding this, as it would be obvious as soon as VBLF’s lawyer read the Option Deed (which he was sure to do).
Ultimately VBFL decided that all it was prepared to do was refund to C the deposit he had paid.
C accepted the refund of the deposit and sued E in negligence, alleging that he had breached his duties by failing to present VBFL with a simple agreement surrendering his rights (whatever they were) and for giving “unsolicited advice” to VBFL’s lawyer as to the effect of the Deed.
Exercise of Judgment Not Negligent
The High Court held that, for lawyers to be held liable for errors of judgment, the lawyer must make a decision which is not only flawed, but one that no reasonably competent lawyer could reach.
In this case the Court considered that there were alternative approaches E could have taken, given the problem posed by the Option Deed. While the Judge accepted that “it is highly unusual for a solicitor for one party to reveal the weaknesses in their own client’s position to the solicitor acting for the counterparty,” she found that in light of the unusual features of this case, it was not a decision no reasonably competent lawyer could reach.
It was E’s belief that the problem with the Option Deed was so obvious that VBFL’s solicitor would not have missed it, and that it was better to have an open dialogue about the way forward, rather than attempt to hide the position. Having consulted with C’s accountants he was worried that a tax problem might be created if VBFL paid C for rights he did not possess. E also considered VBFL’s lawyer to be highly competent and was going to discover the problem for himself when he read the Option Deed, so that nothing was lost by being upfront.
VBFL’s lawyer gave evidence that carefully reading the documents behind such transactions is “an essential and basic step” in advising his clients and he was sure he would have seen the obvious problem in any event.
Loss of a Chance
The judge also considered the issue of whether the breach could be said to have caused C’s loss.
C’s claim against E was for damages resulting from the loss of a chance. Whether C sustained a loss involves assessing hypothetical scenarios of what a third party, in this case VBFL, might have done had the alleged breach not occurred. C also had to prove was that there was a “substantial chance” VBFL would have executed a written agreement with C had E not adopted the strategy he did.
C was unable to prove that there was a substantial chance VBFL would have signed the written agreement and paid C the sum of US$275,000. The Court considered that, had E simply presented VBFL with a simple written agreement, it would still have sought advice from its solicitor before signing, and he would have given VBFL the same advice about the effect of the Option Deed that he did. Consequently C would have been in the same position, come what may.
Philippa Fee and Lucin Fraser acted for E. Philippa Fee says that a lawyer is often placed in a dilemma not of his or her making and is expected to make a recommendation to the client as to which of two or more (risky and potentially disadvantageous) courses of action to adopt. The Court recognised that the standard of care reflects the difficulty of making such decisions. This was a case, Philippa says, where the Court held that the lawyer acted reasonably to achieve the best outcome possible for the client, given the disadvantageous terms of the Option Deed. The terms of the Deed, not any act or omission of his lawyer, meant that C had no realistic prospect of achieving the surrender payment he had negotiated with VBFL.
Read the full judgment here