45. Negligence and Breach of Duty Claims - Lavelle Coleman

45. Negligence and
Breach of Duty Claims
General
A lender may have relied on advice and
reports from independent service providers
in the underwriting process and in the
process of putting security in place.
Depending on the circumstances, there may
be a range of service providers such as
valuers, surveyors, accountants and
solicitors on whom the lender has relied. It
may latter emerge that the advice relied on
was negligent or that the required process to
create a valid security has not been properly
undertaken.
The lender may have a contract with the
advisor or service provider. The terms of the
contract specific, or implied, will determine
what obligations were owed by the service
provider. A breach of these obligation gives
rise to an entitlement to recover monies for
breach of contract or based on the civil law
of negligence. It may be that the adviser was
not retained by the lender but by the
borrower. In this case a breach of obligation
and duty which causes loss may entitle the
lender to sue for negligence under civil
law.
Negligence
In order to succeed in a negligence claim,
the following must be proved;
The lender may suffer loss or be likely to
suffer loss by reason of the failure to provide
the service to the proper standard. It may
claim that, had the advisor taken proper
care, the loan or the full loan amount would
not have been advanced.
A failure to put in place security may mean a
delay in or complete inability to enforce the
security, thereby causing loss. The security
may be in place but it may be impaired
because a defect in the title or in legal
compliance reduces the price that may
achieved on sale.
v the relevant person had a duty to the
lender to take proper care in their advice
or in performing the service (e.g. putting
the security in place);
v that the duty was breached;
v that the breach has caused financial or
other loss and that
v the loss was reasonably foreseeable.
A claim for breach of duty or negligence may
apply in the case of any service provider or
third party, on whom the lender relies in
underwriting the loan. The following looks at
claims against solicitors as they commonly
arise in property and development lending.

The same broad principles apply in relation
to the borrowers accountants, valuers, tax
advisers, surveyors and other parties on
whom the lender relies in advancing loan
monies as well as equivalent service
providers that the lender has itself engaged.
Where a solicitor provides services for a
client, there will generally be a contract or
retainer agreement setting out the terms
under which services are provided. Solicitors
must issue an engagement letter to clients
setting out the terms on which services are
provided.
circumstances where things go wrong
notwithstanding that the solicitor acted with
due care and skill. In these cases, there is
no liability.
A solicitor will generally be liable if he failed
to exercise the due care and skill that a
reasonably competent solicitor in that area
of work would have undertaken. However, a
solicitor can be liable in negligence, even if
he follows standard practice. If the standard
practice contains an obvious risk (even in
hindsight) then the solicitor may be held
liable.
The solicitors letter of engagement will
specify the scope of the solicitors
responsibilities. It may not specify the
standard of performance in which case, it
will be implied that the solicitor must perform
the services with due care and skill.
Even if there is no contract between a
solicitor and client, the solicitor may be liable
for negligent work or advice in accordance
with the above principles. A solicitor may be
liable to a person who is not a client, if he
knew or should have known that person was
likely to rely on his advice or on his work.
A solicitor is obliged to take due care in
relation to his services and advice. He is not
an insurer in this sense and does not have
absolute responsibility. There may be many
Other Duties
Some obligations undertaken by solicitor are
unconditional. This depends on how they
are worded. Certain parts of a certificate of
title and undertakings involve unconditional
obligations, rather than an obligation to use
due care and skill. In these cases the
solicitor guarantees a particular result or
position, rather than agreeing to use due
care and skill to do so. For example,
undertakings regarding handing of loan
monies etc. are unconditional.
A solicitor owes so-called fiduciary duties
to clients. This is a duty to act in good faith
and to disclose and avoid conflicts of
interest. A fiduciary duty involves stricter
duties than in the case of other professional

services. A solicitor may only act for both the
bank and borrower if there is no potential
conflict of interest or if the conflict is fully
disclosed and both consent to the solicitor
acting. Under the standard Law Society
Certificate of title, the bank is not the
solicitors client.
Basis of Liability
The cases illustrate the courts approach to
cases where the lender alleges it would not
have lent or would have lent less, but for
valuers negligence or the failure of a
solicitor to disclose some material defect or
matter. The cases indicate that there were
three scenarios:
v the lender would not have lent if it had
been known the true position. In this
case, the valuer and/or solicitor is
potentially liable for the entire loss
subject to issues of contributory
negligence and the lenders obligation to
mitigate.
v the lender would have been unwilling to
lend the same amount, if it had known
the true position. In this case, the valuer
and/or solicitor may be liable for a
maximum of the difference between the
amount lent and the amount if would
have lent, had it known the true position.
v The lender would have entered the
transaction anyway had it known the
true position. In this, there is no liability
because they have caused no loss.
The retainer agreement/contract will define
the liability in relation to the services
concerned. Liability may be limited by the
term of the agreement. In the case of some
advisors, the relevant professional rules may
restrict the extent to which liability may be
limited. An advisor may be liable to a client
both for breach of contract and for
negligence. If the contract validly limits the
level of liability, this cannot be circumvented
by claiming for negligence.
A lender may be guilty of contributory
negligence by failure to make its own
enquiries and ignoring obvious risks of
which it was aware. The lender may be
familiar with the market and may be aware
of partcular practices. If it is equally aware or
should have been aware of the risks, a court
may decide that the solicitors or valuers
negligence did cause the loss.
Alternatively, the court may decide that the
lender is partly responsible or guilty of
contributory negligent and that accordingly,
its entitlement to compensation should be
reduced.
Regulation of Solicitors
Solicitors are regulated by the Incorporated

Law Society of Ireland. Every solicitor must
hold a Practising Certificate, which must be
renewed annually. There are rules of
conduct and ethics which regulate the
manner in which solicitors must deal with
their clients and third-parties. A solicitor can
be investigated by the Law Society and is
subject to sanction by way of fine, censure,
suspension or strike off for failure to comply
with the requisite rules and standards.
Undertakings
Solicitors undertakings are unconditionally
binding on solicitors. They are enforced as a
disciplinary matter as well as by a court
claim for damages for loss for by reason of
compliance. Undertakings are generally
absolute and unconditional. They are not
just an obligation to use best endeavours to
comply. Any ambiguity in an undertaking is
interpreted in favour of the person to whom
it is given. There is a special summary court
procedure for enforcement of undertakings.
Solicitors undertakings are a critical part of
the procedure for putting security in place. In
residential investment and owner occupier
mortgage cases, security is generally put in
place by the borrowers solicitor under the
Law Society's standard undertakings and
certificate of title. See our separate chapter
on the standard form of undertakings and
certificates.
An undertaking by a solicitor to do a
particular thing, is
unconditionally binding
on the solicitor. It is enforceable in normal
legal proceedings in the same manner as
other civil obligations or debts. An
undertaking can also be enforced summarily
i.e. by a procedure which involves direct
application to the High Court. As part of this
power, the court has power to make a
summary order for compensation.
An undertaking can also be enforced in
personal disciplinary procedures against the
solicitor by the Law Society and ultimately
by the High Court. This is initiated by a
complaint can be made to the Law Society
which polices the solicitors profession.
Compensation for Breach of
Undertaking
A recent case has reaffirmed the inherent
power of the High Court to enforce
undertakings against solicitors. It confirms
the power to grant compensation for breach
of undertaking. The power is both a punitive
and compensatory jurisdiction. It is
discretionary and each case to be
considered on its own facts and
circumstances.
The court is concerned to uphold the
integrity of the system, and the highest

standards of honourable behaviour by its
solicitors, a standard higher than that
required by law generally. The order made
by the court can take whatever form best
serves the interests of justice between the
parties.
The court must consider the entire
undertaking in order to reach a conclusion
as to its real ultimate purpose. The court
may order compliance with the undertaking,
though late, where there remains a
reasonable possibility of so doing. Even
where the undertaking may still be complied
with, the court may nevertheless order the
solicitor to make good any loss actually
occasioned by the breach of undertaking,
which may or may not be the entire of the
sum which was the subject of the
undertaking.
Where compliance is not possible to achieve
by the time the court is deciding what order
to make, if any, it may order the solicitor to
make good any loss actually occasioned by
the breach of undertaking. Carelessness or
other form of negligence on the part of the
person affected by the undertaking, and in
relation to the matter the subject thereof,
may be a factor which the court will have
regard to when determining what order may
be fair and just.
Any order the court may make ought not be
oppressive on the solicitor. Nevertheless,
gross carelessness or other conduct
considered sufficiently egregious by the
court, though falling short of criminal
behaviour or even professional misconduct,
will entitle the court, should it consider it just
to do so, to order payment of the entire sum
which was the subject of the undertaking,
and not simply a lesser sum in respect of
loss actually occasioned by the breach of
undertaking.
Complaints
A complaint may be made to the Law
Society by a client only, subject to limited
exceptions. There is a five-year time limit. A
complaint may be made about misconduct,
including breach of undertaking. The
complaint should first be put to the solicitor.
The Law Society appoints an investigating
solicitor who investigates the complaint and
asks both solicitor and complainant for their
observations. He may require the solicitor to
take action to remedy the matter concerned.
If this does not resolve the matter, it is
referred to the Complaints and Client
Relations Committee.
The Complaints and Client Relations
Committee may interview the solicitor. It
makes a formal decision to either uphold or
reject the complaint. It can direct the solicitor
to take such steps as it requires as a result

of their decision. It can direct compensation
payment not exceeding 3,000.
The complaint may be referred to an
independent adjudicator, who can revisit the
file. Alternatively, the matter can be sent
directly to the Solicitors Disciplinary
Tribunal. The Disciplinary Tribunal
investigates allegations of misconduct
against solicitors. A complaint can be
referred directly to the Tribunal or can be
referred by the Complaints and Client
Relations Committee.
If the Disciplinary Tribunal considers the
misconduct to be sufficiently serious so as
not appropriate for the exercise of the above
sanctions, it may report to the High Court.
The High Court has an inherent jurisdiction
over solicitors. In referring to the High Court,
the Disciplinary Tribunal must form an
opinion as to the fitness of the solicitor to
practice and recommend sanctions. The
High Court may strike off solicitor, suspend
practice, limit practice, restrict practice or
censure or fine the solicitor.
conditions of insurance cover. The rules
were revised in 2008 to provide revised
minimum terms'.
Under the minimum terms, the insurer may
not disclaim liability under the policy by
reason of non-disclosure of material risks,
misrepresentation and even fraud. This
changes the utmost good faith principle
which usually means that an insurer can
avoid an insurance policy, if all material facts
are not disclosed. The insurer must cover
the risk even where the matter concerned
was deliberately withheld at the renewal of
the policy.
There is a proposal at present (September
2009) to further amend the minimum terms
for the next insurance period (commencing
December 2009) on account the difficulty
that the new minimum terms have caused in
procuring insurance for some practitioners
at a reasonable cost. There is also a
proposal to exclude cover for certain types
of solicitors undertakings in commercial
property loans.
Professional Liability Insurance
Every solicitor must maintain professional
indemnity insurance at a level of no less
than 2,500,000 per claim as a precondition
to obtaining an annual practising certificate.
The rules lay down minimum terms and
The Law Society has created the assigned
risks pool for solicitors who cannot obtain
insurance cover in the open market at a
reasonable cost. Once in the pool, the
solicitor is subject to Law Society
supervision and must undergo a risk
management assessment and audit. There

is a limited time during which a firm may
remain in the assigned risks pool. If they
cannot obtain insurance in the open market
after this period, they cannot continue to
practise as sole traders.
All commercial insurers must participate in
the assigned risks pool and carry a
proportion of its risks. If a solicitor is
discharged from the assigned risks pool, he
may no longer continue to practise unless
he obtains insurance in the open market
once again.
A solicitor is obliged to notify an insurer in
writing of any a possible claim once it comes
to his attention. This also applies to a
circumstance which may give rise to a
possible claim. Once notified the
circumstance will be dealt with under the
policy in force when notified, irrespective of
when the claim is made.
The Law Society keeps a record of
insurance cover, which is available for
inspection. This gives details of solicitors
and the qualified insurer
When a solicitor ceases to practice he must
maintain run off insurance for a period of
six years from the end of his last year he
ceases to practice. This is designed to cover
subsequently notified claims. Retirement is
sometimes dealt with by extending cover of
the remaining partners to cover retired
partners or employee for liability arising from
pre-retirement work.
Insurance Claims
Solicitors professional liability insurance is
on a claims made basis. This means that
there must be a policy in force when the
claim is made or when the circumstance
that might give rise to the claim is notified.
The insurance covers the solicitor's practice
as a solicitor rather his personal activities.
The insurer usually conducts the legal action
on behalf of the solicitor. It will appoint its
own solicitor and will be entitled to make the
key decisions in relation to the conduct of
litigation.
Compensation Fund
The Solicitors Compensation Fund is
financed by contributions by each solicitor. A
person seeking a grant from the fund must
apply within three months of the matter
concerned coming to his attention. The
purpose of the fund is to ensure that a
person who suffers loss due to a solicitor's
dishonesty is not left without a remedy. The
person may be required to seek recovery of
monies through all other available means
(e.g. by a negligence claim) first.

The Law Society has a discretion in making
grants from the fund. The grounds are that
a client of a solicitor has sustained loss in
consequence of the dishonesty on a
solicitors part or on the part of its employee.
The loss must be suffered by a client and
not a third-party. The fund does not cover
the losses arising from a solicitors personal
dealings. It must arise from practice as a
solicitor.
Where a payment is made, the Law Society
is entitled to subrogation in respect of the
payments. This means that it is entitle to
exercise the rights of the person it has
compensated to recover the sum paid from
a third party against whom the third party
might himself complain.
Legal Services Ombudsman
The recently established Legal Services
Ombudsman reviews decisions of the Law
Society in handling complaints. It also
reviews decisions in relation to payments
from the compensation fund.
This is an extract from our “Legal Guide to the
Management and Enforcement of Security in
Ireland” (2009). The Guide is intended as an
overview and broad outline of the matters
covered in it. Its purpose is to inform and raise
awareness. We are happy to offer specific legal
advice on particular circumstances. It should not
be relied on as a substitute for comprehensive
legal advice with reference to the particular
circumstances. While we have taken due care in
the preparation of this publication, we do not
accept legal liability as a result of any reliance
placed on anything in it. The reader should rely
only on specific legal or taxation advice. This
extract is based on the law as of 1 st
2009.
© Paul McMahon, Lavelle Coleman 2009
CONTACTS
Paul McMahon
October
pmcmahon@lavellecoleman.ie
Phone: (353) 1 6445800
Fax: (353) 1 6614581
Lavelle Coleman
Solicitors
20 On Hatch
Lower Hatch Street
Dublin 2
Ireland
www.lavellecoleman.ie