Law firms: do you know what your solicitors are doing?

The English case of Nayyar and ors v Denton Wilde Sapte and Gauri Advani [2009] EWHC 3218 (QB), decided in December 2009, provides interesting reading for law firms whose solicitors might be tempted to engage in business activities which depart from the usual advisory role to be expected of a solicitor.  More broadly it is a useful illustration of the application of the legal ideas of the apparent and implied authority of an agent.  It exhorts us to remember that law firms are not necessarily liable for the activities of their employees only when the firm considers a client to be a client, all necessary form-filling having been completed.  A firm’s liability can arise before the point at which the firm has been formally retained by the client. 

The facts involving underhand dealings on all sides, and a full picture cannot be provided here.  In essence, Advani was a senior solicitor employed by Denton Wilde Sapte (“DWS”), principally to introduce business to their India Group, although clearly matters progressed so that she carried out some legal work for DWS.  It is noted in the judgment that Advani “…is a dual qualified lawyer who had contacts and connections with India , and was the ex daughter in law of the Deputy Prime Minister at the material time, Mr Lal Krishna Advani” (para 4).  Advani allegedly represented to the Claimants that she would be able to procure for them the award of Global Sales Agent status for the UK and Ireland (a “GSA”) from Air India.  GSAs are incredibly lucrative, the Claimants anticipating that the award of this GSA would yield net profits of over £2 million per year.  This was a highly attractive business opportunity for the Claimants who were, in effect, two businessmen running relatively small British travel agency businesses. 

Although payments extending to over £380,000 were made by the Claimants following a course of meetings and introductions allegedly effected by Advani, no lucrative GSA was ever awarded.  The Claimants raised an action against both Advani and DWS as her employers on several grounds including personal breach of duty on the part of Advani and vicarious liability on the part of DWS.  

The Claimants failed to recover any of their losses.  Mr Justice Hamblen applied the maxim ex turpi causa non oritur actio, which is translated in Trayner as “No right of action arises from a disgraceful or immoral consideration – that is, no action can be maintained on a contract or obligation, the consideration of which was disgraceful or immoral” (Trayner’s Latin Maxims, 4th edn, 1993).  The amounts to be paid as part of the deal were so large that they could not possibly have constituted either payment for the agency work or payment for legal fees.  They were nothing other than a bribe, a fact which must, according to Mr Justice Hamblen, have been known to the Claimants as experienced businessmen.

Although the Claimants’ case entirely failed on the issue of illegality, Mr Justice Hamblen proceeded to analyse the legal questions which would have been relevant had illegality not represented a fundamental bar to recovery.  In paragraphs 130 to 162 he identifies and applies the law of apparent authority, using Bowstead & Reynolds (para 8-013) as his primary authority.  The need for a representation from the principal is asserted (para 134).  DWS having made no direct representations that Advani was authorised to carry out the various actions which she carried out, the Claimants failed to establish that DWS as principals could be held liable for the Claimants’ losses on the basis of apparent authority. 

The case based on apparent authority having failed, the only basis on which DWS could have been vicariously liable was that Advani’s actions fell within her actual or usual role and business of a solicitor performing her role, i.e. her implied authority (para 136). 

DWS sought to distance themselves from Advani’s alleged activities by arguing that the Claimants could not have been DWS clients, none of the correct procedures having been completed by Advani e.g. formal letters of client care, letters of retainer, and no fee having been payable to DWS for the services rendered.  These submissions cut little ice with Mr Justice Hamblen who indicated: “…whilst there was never a formal solicitor/client relationship between the Claimants and DWS, a solicitor and/or his or her firm may well assume a duty of care to a potential client before that stage is reached.  For example, it would be no means uncommon for legal advice and assistance to be given to a potential client for the purposes of seeking to persuade him or her to become a client” (para 147). 

The case therefore provides a salutary reminder that a law firm cannot determine when its liability to a client begins.  If the actions fall within an individual solicitor’s implied authority, the firm will be liable, even though the firm would not consider the third party in question necessarily to have the status of a client. As Mr Justice Hamblen indicated: “Ms Advani could therefore have assumed a solicitorial and advisory role towards the Claimants prior to any formal retainer being made…” (para 148).

Finding that the deal-broking carried out by Advani went far beyond either her role as a marketing and business developer for DWS or as a solicitor for DWS, the judge concluded that her role was being carried out essentially for her personal gain rather than for that of DWS (para 158).  He further found that “…it would have been objectively apparent to reasonable and competent people in the Claimants’ position that she was not performing a solicitorial or legal advisory role, and that her allegedly negligent actions were not so closely connected with the employment that it would be fair and just to hold DWS vicariously responsible" (para 159).

Although DWS were not vicariously liable, that did not prevent Mr Justice Hamblen from finding that, had the Claimants not been barred by the issue of illegality, Advani would have been personally in breach of a duty of care towards the Claimants.  This would have resulted in liability on her part for 80% of their recoverable damages.