New Zealand: the solicitor’s contractual duty of care in advising guarantors

Pages353-355
DOIhttps://doi.org/10.1108/13590790410809301
Date01 October 2004
Published date01 October 2004
AuthorMohammed B. Hemraj
Subject MatterAccounting & finance
New Zealand: The Solicitor's Contractual Duty of
Care in Advising Guarantors
Mohammed B. Hemraj
INTRODUCTION
What are the duties of a solicitor who undertakes to
advise a guarantor? In the majority of the cases liti-
gated in courts the clients tend to complain that
either no advice was given or the advice was inade-
quate for the guarantor to appreciate the risky
nature of the guarantee. Some solicitors erroneously
think that they are only required to explain the
terms contained in the guarantee and to witness the
signature. The clients, without the bene®t of hind-
sight, are not in a position to elicit more information
about the principal debtor from their solicitors or the
lenders. In most cases clients' expectations do not
match what appears in the guarantee forms they are
required to sign.
1
More confusing is the scenario
where in a few months after the loan is approved,
the business collapses.
TRUSTEES' ACTION AGAINST A
SOLICITOR
In Bindon v Bishop
2
the appellants were trustees in
the estate of Mr Upton, an elderly man (who had
since died) who had agreed to guarantee a loan of
$91,000 to Mr McCullough, a younger friend and
neighbour. Within a year the borrower defaulted
and the lending institution recovered the amount
from the guarantor's estate. The lawyers for Mr
McCullough had arranged for Mr Bishop, the
respondent, to advise Mr Upton independently
with regard to the guarantee. When the loan obliga-
tions of Mr McCullough were not met the lender
recovered the amount from the estate of Mr Upton.
The trustees of the estate brought an action against
both the solicitors for McCullough, who had pre-
pared the guarantee and associated documentation,
and Mr Bishop, who had advised Mr Upton. The
plainti at the trial in the District Court called an
expert witness to narrate how his own practice
would handle such a situation, but the action was
dismissed. The trustees settled with the solicitors for
Mr McCullough and appealed against the District
Court's decision with regard to Mr Bishop. The trus-
tees' present action was to seek reimbursement from
the solicitor who acted for the guarantor when he
executed the guarantee. The question before the
court was whether the solicitor was negligent in per-
forming his professional duties to the guarantor. The
District Court dismissed the trustees' action against
both the solicitors, one acting for the lender and the
other the guarantor.
THE DECISION OF THE DISTRICT
COURT
At the trial Mr Bishop accepted that at all relevant
times he was acting as Mr Upton's solicitor and
owed a professional contractual duty to Mr Upton
to exercise the standard of care expected of a compe-
tent, experienced and skilled practitioner. The ques-
tion of fact to be determined by the appellant court
was whether Mr Bishop had breached his obligation
when advising on the guarantee transaction. The
trustees' primary cause against the solicitor was for
breach of ®duciary duty. The ®ndings of the trial
District Judge Perkins was that breach of ®duciary
duty added nothing to their alternative claim for
breach of contract.
3
Harrison J, the appellate judge,
while admitting that a solicitor always stood in the
®duciary relationship with a client, stated that the
particular duties at issue in this case were not
®duciary, but were contractual in nature, requiring
the solicitor to exercise the standard of care of a com-
petent, experienced and skilled practitioner, such as
loyalty or ®delity.
The trial judge opined, based on evidence, that Mr
Upton was aware of the extent of borrowing against
equity being made by the borrower and the risk he
was taking. The solicitor went through the guarantee
with the guarantor and emphasised the salient points,
although the guarantor was losing patience. The trial
judge found that throughout the attendance the
solicitor acted as a careful and competent solicitor
to the guarantor.
The trial judge examined the question of solicitor's
negligence and found the solicitor to be a very
credible witness who had given his evidence honestly
and who from memory and his notes was able to
Page 353
Journal of Financial Crime Ð Vol. 11 No. 4
Journal of Financial Crime
Vol.11,No. 4,2004,pp. 353 ±355
#HenryStewart Publications
ISSN 1359-0790

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