Unsatisfactory conduct: Practice to pay compensation for clients lost house deposit
This is a summary of a decision by a Lawyers Standards Committee under the Lawyers and Conveyancers Act 2006. This summary was published in LawTalk 781, 23 September 2011.
An Auckland practice that acted for both sides in an unsuccessful property sale failed to advise the buyers competently when a conflict arose, causing them to lose their deposit of over $50,000.
The Lawyers Standards Committee ordered two lawyers from the practice to pay the buyers $45,000 in compensation. It also censured them and ordered them to apologise.
The committee observed that the lawyers had evidently seen one client – the seller – as more important.
The buyers were a couple who lived overseas and understood little English. They decided to buy a property in New Zealand as they hoped to settle here. In December 2006 they signed a sale and purchase agreement for an inner-city Auckland apartment, conditional on them obtaining finance. By May 2007 they had paid a total of $53,900 as a deposit.
The lawyer who was the subject of the complaint was the principal in a practice – ABC – that employed several staff lawyers. ABC began acting for the buyers in October 2007. However, it was also acting for the seller in this transaction, a developer with whom it had a longstanding relationship. ABC also held most of the buyers’ deposit ($46,925) as stakeholder.
The buyers struggled to obtain finance, and their loan application was turned down in early November 2008. The following March they contacted ABC seeking a refund of the deposit on the basis that they had been unable to satisfy the finance condition. However, ABC told them it no longer represented them, as in October/November 2008 it had been notified by another firm that it was now representing the buyers. The buyers denied having appointed the other firm, just one instance of the recurring confusion in this case about which firm acted for whom and when.
It emerged that ABC had served a settlement notice on the other firm in December 2008 on instructions from the seller, despite the finance condition not being satisfied. Later that month, after the notice had expired but with the agreement still conditional, ABC transferred the entire deposit to the seller’s mortgagee bank.
Concerned about their deposit, the buyers laid a complaint in April 2009 against ABC’s principal. The committee hearing the complaint decided also to begin an own-motion investigation into the conduct of a staff lawyer at ABC who had worked on the file. The committee dealt with the conduct of the two lawyers together.
The committee considered whether the lawyers had breached any of the relevant rules of conduct by acting for both parties in the transaction. This particular case spanned the change from the old Rules of Professional Conduct to the new Conduct and Client Care Rules.
The committee found that when ABC had begun acting for the buyers in 2007, it had discharged its duties under the old Rules. Rule 1.04, less stringent than the new Rule 6.1, permitted a lawyer to act for more than one party in a transaction if the parties had all given prior informed consent. The committee found that the necessary consent had been given, as ABC had explained the conflict to the buyers, informing them that it also acted for the seller.
By November 2008, however, the situation was very different. When the buyers were refused finance on 3 November, what had arguably been only a potential conflict now “crystallised”, the committee said.
The new situation was also now governed by the more restrictive and more detailed provisions of the Conduct and Client Care Rules. These specify that if a lawyer is acting for two parties in the same transaction and it becomes apparent that the lawyer will no longer be able to discharge his or her obligations to both, the lawyer must immediately inform both clients of this and terminate both retainers (Rule 6.1.2). The committee found that the two ABC lawyers had failed to do this. They continued to act for the seller and, until at least mid-November, also continued to act for the buyers.
The lawyers argued that it would not have been reasonable to have expected ABC to stop acting for the seller. The committee said this objection showed that ABC saw one client as more important than the other, and this highlighted the risks faced by a lawyer who acts for more than one party in a transaction. The committee stressed that Rule 6.1.2 is not optional, and that complying with it may well mean losing a valuable client.
The committee also found the lawyers had breached Rule 6.1.3. As an exception to the duty to terminate both retainers when a conflict arises, this permits a lawyer to continue acting for one party if the other gives informed consent after receiving independent legal advice, and if no duties to the consenting client have been or will be breached. The committee found that the buyers had not given consent.
The committee agreed with the buyers that they had not been properly advised. When they were refused finance, ABC should have advised them on their rights and obligations under the contract – in particular on any possible avenues for cancelling, as the contract was still conditional.
The true magnitude of the conflict ABC faced became evident at that point, for ABC was also trying its utmost to complete the transaction for the benefit of the seller. The committee found that the lawyers’ failure to give the buyers competent and diligent advice was a direct cause of the loss of their deposit.
As a preliminary issue, the committee rejected ABC’s argument that claims of negligent advice should not be considered in the context of complaints of unsatisfactory conduct. The 2006 Act in fact specifies that unsatisfactory conduct includes not just breaches of the Conduct and Client Care Rules, but also any conduct falling short of the standards of competence and diligence that the public is entitled to expect of a reasonably competent lawyer (section 12(a)).
The committee also found several other breaches:
The two lawyers had failed to terminate their retainer with the buyers in a proper and professional manner in compliance with Rule 4.2.4, which required them to give the buyers reasonable assistance to find another lawyer. The committee said that when the other law firm informed ABC it was now acting for the buyers, a prudent lawyer would have contacted the buyers to confirm this. This kind of contact with a former client is, in fact, specifically permitted by Rule 10.2.3. The confusion about who was acting for whom would then have been avoided.
ABC’s principal had breached his stakeholder obligations (under Rule 10.3.2) by transferring the buyers’ deposit to the seller’s bank when the agreement was still conditional.
Finally, the principal had failed to supervise and provide appropriate guidance to his staff in identifying and handling conflicts of interest, a breach of Rule 11.3.
The two lawyers were found guilty of unsatisfactory conduct. The committee ordered the principal to pay $25,000 compensation to the buyers (the maximum that can be ordered) and the staff lawyer to pay $20,000. It also ordered them to pay costs to the New Zealand Law Society of $2,000 and $1,000 respectively.
This is a summary of a decision by a Lawyers Standards Committee under the Lawyers and Conveyancers Act 2006.