Solicitors must not act for both
vendor and purchaser in a contract race
Damages against the solicitor will
not include developers’ lost profits
Gazumping steals the headlines in a
healthy property market, but it is not the only questionable practice that
tends to emerge. Just as likely to lead to disappointment, frustration and
wasted expense is that old favourite, the contract race. At its starkest, a
vendor issues a contract to more than one prospective purchaser and instructs
his or her solicitor to exchange contracts with whoever is ready first.
Past concerns about the ethics of
contract races led the Law Society to amend the Solicitors’ Practice Rules
1990. Among other things, these provide that a solicitor who is instructed to
issue multiple contracts must inform prospective purchasers. If the client
refuses to allow such disclosure, the solicitor must immediately cease to act.
The solicitor cannot act for more than one of the rival purchasers (or for the
vendor and one of the purchasers) owing to the irreconcilable conflict of
interest that this would create.
In Jenmain Builders Ltd v Steed
& Steed [2000] PLSCS 60, the defendant firm of solicitors was
instructed to act for a parish council in the sale of a village hall. In
October 1995 the partner dealing with this matter (in office A) issued a
contract to the solicitor acting for a Mr Hall, who wished to purchase but was
unable to proceed until he could sell his own property.
In March 1996 the claimant property
developer expressed interest in purchasing the hall and instructed the
defendant (through office B). The defendant sent a new contract from office A
to office B, and, at the same time, wrote to Mr Hall’s solicitor asking for the
original contract. On 3 May 1996 the claimant delivered to its solicitor a
signed contract and a cheque for the deposit.
However, banking practice (exacerbated
by a Bank Holiday) meant that the cheque would not clear until 13 May.
Contracts could not be exchanged until that date. On 9 May Mr Hall reappeared,
and the parish council, suffering cash-flow problems, told the defendant to
exchange contracts with whichever purchaser was ready first. The claimant was
not told of this development, and was left high and dry when the parish council
exchanged contracts with Mr Hall on 10 May.
duty
Legal proceedings duly followed. The
claimant argued that the defendant, as solicitor for the vendor, was obliged by
r 6A(2) of the Solicitors’ Practice Rules to inform it of any instructions to
deal with a rival purchaser. It claimed that, armed with this knowledge, it
would have been ready for an immediate exchange of contracts. This was accepted
by the trial judge:
If [the claimant’s director] had
been informed of the contract race my money would have been firmly on him to
win it. As it was he never reached the starting blocks.
Having decided that the defendant
was in breach of a duty owed to the claimant as purchaser, the judge moved to
assess damages. Here, the claimant fared rather less well. Close analysis of
the purpose of the particular practice rule that had been breached convinced
the judge that the claimant was entitled to be reimbursed only for its wasted
conveyancing costs, not for the profit it alleged it would have made from the
proposed development.
It is a pity that, in dealing with
the claimant’s appeal against this meagre award of damages, the Court of Appeal
did not address the most interesting part of the case, namely whether r 6A(2)
does entitle a disappointed purchaser to sue the vendor’s solicitor. This was
because their lordships were satisfied that, on the facts, the defendant
(through office B) had undoubtedly been retained to act as the claimant’s
solicitor, and its failure to pass on to its own client the information that
the race was on was a clear breach of its contractual duty. Given that ruling,
the appeal judges wished to reserve for another occasion the possibility of a
duty in tort, although it must be said that neither gave any hint that they
would treat such a claim sympathetically if and when it arose.
at a loss
On the question of damages, the
Court of Appeal, like the trial judge, felt that it was important to identify
the purpose of the relevant practice rules. According to Chadwick LJ, this was
to avoid the risk of a prospective purchaser incurring expense in proceeding
towards exchange of contracts, in the false belief that no competition existed.
One might expect this line of reasoning to lead to the same conclusion as that
of the trial judge, namely that damages should be limited to the purchaser’s
wasted costs. Not so; Chadwick LJ regarded the crucial question to be what the
purchaser would have done had the solicitor provided the required information.
According to his lordship, if a court is convinced that, armed with that
information, the purchaser would have acted differently (withdrawing, raising
his offer or seeking to exchange contracts immediately), then damages should
seek to reflect the difference between the position in which the purchaser
would then have been and his or her actual position.
In this case, the evidence showed
that the claimant would have been able to win the race and acquire the
property. According to the Court of Appeal, it was therefore entitled to
damages based upon loss of the opportunity to do so. However, this did not mean
loss of all the projected developer’s profits, but merely the difference (if
any) between the price at which the claimant would have purchased the property
and its true market value. Unfortunately for the present claimant, that figure
was zero!
