Unless otherwise instructed, solicitor are not normally under a duty to advise their clients on the commercial wisdom of a transaction particularly if the client is an experienced businessman. The point that arose in Luffeorm Ltd v Kitsons LLP [2015] EWHC B10 (QB); [2015] PLSCS 219 was whether a law firm had been negligent because it failed to advise the purchasers of a historic public house, with a relatively high turnover, that they should ask the sellers to enter into covenants prohibiting them from competing with the business that was being sold.
There were four sellers in all. The couple that looked after the front of house explained that they wanted to retire. The chef, who had a loyal following in the area, informed the buyers that he and his wife wanted to go travelling. Consequently, the buyers, who had worked in the hospitality industry for many years, did not believe that they would lose the existing clientele. They paid £130,000 for the business – most of which was for goodwill. However, they soon faced stiff competition from the public house in the next village.
It emerged that the chef had taken over there and the buyers’ turnover plunged. In due course, the buyers had to sell their business at a substantial loss – and issued proceedings against their solicitors claiming that the law firm had failed to warn them of the risk that trade might be diverted if the sellers were free to compete with them.
The judge accepted that the buyers had instructed their solicitor to act on their behalf in connection with their purchase of the leasehold business. Consequently, the retainer went beyond mere conveyancing in respect of the lease.
It has long been established that, if in the course of doing that for which he or she is retained, a lawyer becomes aware of a risk or potential risk to the client, of which it is reasonable to assume the client may not be aware, the lawyer is under a duty to bring it to the client’s attention: Credit Lyonnais SA v Russell Jones & Walker [2002] EWHC 1310 (Ch); [2002] 2 EGLR 65. Consequently, although the buyers’ solicitor was not under any duty to advise the buyers of the commercial risks inherent in the transaction, the judge ruled that he should have noticed the absence of covenants in restraint of competition and drawn this to the buyers’ attention.
Fortunately for the law firm in question, the claim failed on the issue of causation. The judge decided that the buyers would not have acted any differently, had they been properly advised. Furthermore, on the evidence, the failure of their business was caused by the fact that the old clientele did not like their offering, or prices, and because they did not attract as many new customers as they had hoped.
However, practitioners can learn an important lesson from this case. When reviewing an agreement for the acquisition of a business, solicitors should ask their clients whether their business would suffer if the seller were to open a competing business nearby and, if so, should advise on the need for non-competition covenants to counter such risk.
Allyson Colby is a property law consultant