Solicitors' Duties

Solicitors' duty to Mortgagors

The duty of care of solicitors to the mortgagors was demonstrated in the recent case of Wing Hang Bank Limited v Kwok Lai Sims & Anor (7 May 2009, Court of Appeal, Hong Kong).

Wing Hang Bank Limited v Kwok Lai Sims

The defendants were two sisters who lived in a property with their 85 years old mother. The plaintiff bank provided banking facilities to a company (Forkids) owned by their brother and, to secure the banking facilities, the property was given to the bank as collateral pursuant to a first legal charge dated 24 June 2003. The third parties are partners of a firm of solicitors (the "solicitors"), who acted for both the bank and the sisters in relation to the first legal charge.

Misrepresentation and Setting aside Mortgage

The sisters sought to set aside the first legal charge on the ground that they were induced to execute the same by the misrepresentation of, inter alios, the third party to the effect that the sisters would incur no personal liability and their liability would be limited to the value of the property (under the first legal charge they were in fact "principal debtors" and their liability were unlimited).

Judgment

The court of appeal (Tang VP, Yeung JA and Yuen JA) set aside the legal charge and dismissed the bank's claim against the sisters. The court of appeal also held that (in case it was wrong), the sisters were entitled to be indemnified by the solicitor in respect of any claim by the bank against them under the first legal charge.

The court of appeal found or confirmed the findings of the lower court that the solicitor handling the case (Ms Seatwo, a partner of the solicitors):

• did not see the mortgagors separately from the principal borrower (the brother) and did not see the need to see them separately
• did not tell and the acknowledgement letter signed by the mortgagors did not state that the solicitors were also acting for the mortgagors
• did not use the Law Society model letter Appendix D and the warning notice was not signed one working day before execution of the mortgage pursuant to Para 26 of the Law Society Guidelines dated 19 May 2003
• did not seek authorisation from the mortgagors to give the confirmation to the bank
• did not advise the mortgagors as to the risk of making themselves liable for an unlimited amout
• did not ask the mortgagors whether they had the financial ability to repay the bank
• failed (and did not accept that there was a duty) to disclose to the mortgagors that fact the debtor company was being sued in a number of legal actions

Etridge (No 2)

Under the principles set out in Royal Bank of Scotland plc v Etridge (No 2) [2002] 2 AC 773

"where the relationship between the surety and the debtor is non-commercial, unless the creditor takes reasonable steps to bring home to the surety the risks involved, the creditor may be held to have constructive notice if the surety had been induced by the undue influence, misrepresentation or other wrong doing of the debtor to stand as surety. However, ordinarily the bank should be able to rely upon confirmation from a solicitor, acting for the surety, that he has advised the surety appropriately. Furthermore, unless there is any real risk of conflict of interest, the solicitors acting for the surety may be the solicitors acting for the bank as well as the debtor. "

If the mortgagee bank wishes to protect itself against such claim for rescission, it should (in the words of Lord Nicholls), insist that the mortgagor attend a private meeting with a representative of the bank and explained the extent of the mortgagor's liability as surety, warned of the risk the mortgagor is running and urged to take independent legal advice. Alternatively, the bank is also able to rely on a confirmation from the solicitor acting for the mortgagor that appropriate advice has been given to the mortgagor.

Misrepresentation

The issue the Court of Appeal had to decide was whether there was a breach of duty of care by the solicitors to the mortgagor sisters. The mortgagors were represented by the third party solicitors and there was no question of misrepresentation on the part of the bank (the misrepresentation of the brother was not an issue). The bank also issued a request to the solicitors and supplied the necessary information pursuant to the Hong Kong Association of Banks' Circular dated 28 April 2003, including the financial information of the principal debtor and request the use of the Appendix C warning notice to "potentially unduly influenced persons".

Duty of Care

Tang VP in Wing Hang Bank also explained the scope of the solicitor's duty to the mortgagor by quoting the relevant passages in Lord Nicholls in Etridge:

"…in short, the solicitor has brought home to [the mortgagor] the risks involved in the proposed transaction. As a first step the solicitor will need to explain to [the mortgagor] the purpose for which he has become involved at all. He should explain that, should it ever become necessary, the bank will rely upon his involvement to counter any suggestion that [the mortgagor] was overborne by [the principal borrower] or that she did not properly understand the implications of the transaction. The solicitor will need to obtain confirmation from [the mortgagor] that she wishes him to act for her in the matter and to advise her on the legal and practical implications of the proposed transaction."

The minimum that the solicitor needs to drive home to the mortgagor includes:

• the purpose of the proposed banking facility, the amount and principal terms thereof, and that the bank might increase the amount of the facility, or change its terms, or grant a new facility, without reference to the mortgagor
• the nature of the documents and the practical consequences for the mortgagor.
• the mortgagor could lose the only substantial asset, as well as the family's home if principal debtor fails.
• the mortgagor could be made bankrupt
• the mortgagor has a choice whether to proceed to negotiate with the bank on the terms of the transaction, including the limit of liabilities.

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