Lawyers' Liability and Indemnity Insurance in New Zealand

The Civil Liability Of Legal Advisors

Basis of liability

The professional liability of lawyers to their clients may arise under contract, in tort, in equity, or by statute. Some forms of liability are strict and other depend on the degree of skill and care exercised.

The professional liability of a lawyer can be analysed under four headings:

• the obligation to exercise reasonable skill and care
• fiduciary obligations owed to clients
• obligations owed pursuant to undertakings
• obligations imposed by specific statutes.

The duties in contract, tort and equity tend to overlap. The source of the duty is less important than the nature of the obligation.

In most cases the contract of retainer is oral, or a combination of part oral instructions and part written material. As with all contracts, a contract of retainer will be a combination of express and implied terms. In most cases, the only express terms in the contract will relate to the actual job entrusted to the lawyer. Even these may not be clearly defined. The retainer is not a general retainer in respect of anything that might concern the client's affairs. It is specific and limited to the particular job. Although the contract of retainer is analysed in the same way as any other contract, it is a contract for professional services and this fact cannot be ignored (see Consumer Guarantees Act 1993 below). In addition, the lawyer is an officer of the High Court whose practice is governed by a code of ethics (Rules of Practice). These ethical obligations may give rise to circumstances in which a contract of retainer may or should be terminated by the lawyer.

Sometimes the lawyer will have conflicting obligations to his client and the court. As an officer of the court concerned in the administration of justice, he has an overriding duty to the court, to the standards of his profession, and to the public, which may conflict with what the client thinks are his personal interests. The lawyer cannot be held liable for a breach of contract if it conflicts with his overriding duty to the court.

The obligation to exercise reasonable skill and care

An obligation is owed to the client, by virtue of an implied term in the contract of retainer (which will apply in the absence of any express term imposing a different standard), that the lawyer will exercise a reasonable degree of skill and care in performing the instruction undertaken. The obligation may also be owed to persons who are not clients in tort (see below).

The standard of skill and care expected of a lawyer is that which would be exercised by the reasonably competent and careful lawyer in the particular circumstances. The circumstances can, however, vary greatly and, as the cause of action is breach of contract for improper performance of the implied undertaking, the exact nature of the duty depends upon what it can be fairly be said the lawyer has been employed to do. The usual test of whether the particular actions or omissions complained fall short of the required standard of reasonable skill and care is whether the conduct is in accordance with the generally accepted practice of the profession. This is normally established by evidence of other experienced practitioners as to the usual practice (not merely their own practice). The court may nevertheless hold that a particular action, even though it accords with the general practice of the profession, is inadequate.

A lawyer's obligation to exercise reasonable skill and care is now embodied in statute in the form of the Consumer Guarantees Act 1993 ("CGA"). Members of the legal profession come within the definition of "supplier" in section 2 of the CGA which includes a person who, in trade, supplies services to a consumer. The CGA expressly includes "professions" in the definition of services, but maintains the existing rule of law conferring immunity from suit on a barrister or solicitor for work done "in the course of or in connection with proceedings before any Court or Tribunal".

Whether a particular service is subject to the CGA depends on whether the service is of a kind ordinarily acquired for personal, domestic or household use as defined in the CGA. Services supplied for resupply in trade or consumed in the course of production are excluded. Arguably this exclusion extends to a barrister's opinion to a solicitor who in turn incorporates the advice into a report to a client. However, it is also arguable that, in providing an opinion through a solicitor, a barrister may be using the solicitor as an agent in trade or supplying the advice to the consumer client by virtue of a contract of service with the solicitor. It is as yet unclear whether a barrister's services of this type attract the statutory liability.

The test for determining who is a "consumer" of legal services focuses on the purpose for which the service is ordinarily acquired rather than the purpose to which the actual client would put it. However, in the case of legal services which would ordinarily be domestic (such as a house conveyance) but which the client intends for business use, the lawyer may contract out of the provisions of the CGA. The agreement to contract out must be in writing.

The CGA imposes similar duties to those imposed by the common law in the form of statutory guarantees. At a minimum, a lawyer must:

• be competent in the relevant area of law;
• understand and record the client's desired purpose and result;
• carry out any instructions in a proper and timely manner; and
• give appropriate warnings as to likely results.

If a lawyer breaches any of the guarantees provided in the CGA, and the failure is able to be remedied by the lawyer, he must be given the opportunity to remedy it. The remedy must be provided within a reasonable time. If, by reason of neglect, failure or delay, the failure is not remedied, the client may have the failure remedied elsewhere and recover reasonable costs or may cancel the contract.

If the failure cannot be remedied or is of a substantial character the client may:

• cancel the contract; or
• obtain damages for reduction in the value of the product below the charge paid or payable for the service; and
• in all cases, the consumer may claim damages for loss or damage to the consumer which was reasonably foreseeable as liable to result from the failure.

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Fiduciary obligations owed to clients

A lawyer has a fiduciary duty to his or her client to act with the utmost good faith. A fiduciary duty is an equitable duty embracing the duty to act with absolute fairness and openness. Breaches of fiduciary obligation can arise from:

• a conflict of interest between clients;
• a conflict of interest between client and solicitor; and
• knowing the participation in a breach of trust by a person under a fiduciary obligation.

As a fiduciary, a lawyer must avoid a conflict between his duty to a client and any personal interest he may hold. Evidence of such a conflict of interest will make him prima facie liable for any loss that his client may incur. For example, if a lawyer advises a client to invest in a company in which he personally has a shareholding, without disclosing his interest, he will have to account to his client for any losses the client may incur if the company fails, even though he may not have caused that loss. The ability of one firm of lawyers to act for two clients in dispute is also limited by fiduciary obligations. It had been thought possible to do so through the use of a "Chinese wall", ie an arrangement separating some partners and fee earners in the firm from others. However, such arrangements do not meet the obligations owed by lawyer to the clients to use all their knowledge and abilities to benefit each client's particular affairs. The exception is where both clients consent to such an arrangement and to the inherent limitation on the duty.

In a recent decision of the Privy Council (Mouat v Clark Boyce [1993]) their Lordships overturned a decision of the New Zealand Court of Appeal which would have had the effect of extending the fiduciary obligations owed by lawyers. The Court of Appeal had imposed a duty on solicitors to refuse to act when they believed the transaction was not in the client's interest, even though the client had rejected that advice.

 

 

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Obligations owed pursuant to undertakings

In respect of undertakings, every lawyer has a professional duty to honour an undertaking, whether written or oral, given in the course of a legal proceeding or the course of his practice. This rule applies whether the undertaking is given by the lawyer personally or by a partner or employee in the course of the practice. If a lawyer breaches an undertaking, the New Zealand Law Society is able to discipline him in terms of the breach only. Insofar as civil liability arising from the breach of the undertaking is concerned, an undertaking may be enforced on normal contractual principles. In addition to this, the High Court has a summary punitive jurisdiction over lawyers as officers of the court and enforcement by this method is the most effective as a lawyer will not be able to raise the usual contractual defences. The principles are reasonably well established. The court can require that a lawyer who has defaulted on a personal undertaking to a third party with respect to his client's affairs pay:

• damages for the loss suffered by the third party in consequence; and/or
• the third party's cost on a solicitor and client basis.

If such payment is ordered the solicitor normally has the right of indemnity against his client.

In order for an undertaking to be enforced in this manner, it must be a personal undertaking given by the lawyer in his professional capacity. It is not sufficient if the undertaking is merely given on behalf of the client or if it is given by a lawyer in some capacity other than as a lawyer. Before such an undertaking can be enforced it must be clear in its terms and, in construing the meaning of such an undertaking, it will generally be assumed that the undertaking was intended to facilitate the successful completion of an essentially commercial dealing. It should not normally be construed in any technical or legalistic fashion but rather by reference to the evident substance and intention.

 

 

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Obligations imposed by specific statutes

The Fair Trading Act 1986 has, in very recent times, given rise to a number of decisions imposing, or potentially imposing, liability on lawyers for actions which can be categorised as misleading or deceptive. Such cases represent a significant additional potential source of liability for practitioners. Section 9 of the Fair Trading Act 1986 provides that no person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. It is clear from the authorities that lawyers carrying out their professional duties are acting "in trade" and that an intention to mislead or deceive is not required for liability.

Both the Commerce Act 1986 and the Fair Trading Act 1986 contain provisions whereby parties aiding or abetting a breach of either Act can be subject to remedy. There have been no reported cases finding liability of this sort in New Zealand, but there are a small number in Australia under the corresponding legislation (Trade Practices Act 1974).

Civil liability to clients in New Zealand is solely decided by the courts. However, the relevant District and New Zealand Law Societies have jurisdiction in disciplinary proceedings under the Law Practitioners Act 1982 in respect of ethical obligations.

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Restrictions on liability

Relief in tort and contract is restricted to compensation, although in certain cases damages may contain a punitive component which increases the damages payable to the plaintiff beyond mere compensation for loss. The jurisdiction of the New Zealand courts to award punitive or exemplary damages is less restricted than that assumed by the courts of England, although the breach must be contumelious and deserving of punishment beyond compensatory damages. Relief for breaches of fiduciary duty and under the Fair Trading Act 1986 may include mandatory or other orders which benefit the client. However, it would be unusual for the New Zealand courts to impose a mandatory order in respect of the performance of professional services. Compensation is payable for a breach of fiduciary duty, but the basis of calculation is different from that of damages, being based on equitable principles.

There are no specific financial limits but the compensation is limited by the principles of causation and remoteness under the common law. Recently the New Zealand courts have tended to view the assessment of damages in claims for professional negligence against solicitors as, in the end, a question of fact. Reasonable foresight or contemplation, while important considerations, are not the only considerations. Other factors including directness, "naturalness" as distinct from freak combinations of foreseeable circumstances, the magnitude of the claim and the degree of the defendant's culpability are also relevant.

Until comparatively recently, general damages for distress and inconvenience for claims in contract were not recoverable. There have, however, been a number of recent cases where such awards have been made, in both contract and tort. Generally the amounts have been relatively modest.

The Contributory Negligence Act 1947 applies principally to tortious claims. Nevertheless, the Court of Appeal has signalled that a contribution can be sought from a a plaintiff who is alleging breach of the implied contractual term of reasonable care and skill. It now seems clear that the Act can be applied even where the claim is in contract.

Immunity from suit in negligence is provided under the common law for advocates in respect of the performance of advocacy services. As the profession in New Zealand is "fused", the immunity is not restricted solely to barristers and extends to those practising as barristers and solicitors when performing advocacy services. The protection covers not only the conduct of the case in court but extends to work so intimately connected with the conduct of the cause and court that it can be fairly said to be a preliminary decision affecting the way the cause is to be conducted when it comes to a hearing.

It is not usual for lawyers to limit their liability by contract and their ability to do so is restricted by the Rules of Practice imposed by the New Zealand Law Society, their fiduciary duties to their clients and certain statutory provisions. The Rules of Practice require lawyers to accept legal responsibility for their actions and, subject to the provisions of the Rules, to meet any liability arising out of any act, error or omission in the course of their professional duties or business. Lawyers may not exclude by contract their liability to a client, except as provided by the Rules, which outline the minimum requirements for a contractual limitation of liability. The central requirement is the maintenance of professional indemnity cover for civil liability to a minimum of approximately USD1.2 million per claim. If such cover is in place, a practitioner may contractually exclude liability in excess of that minimum amount per claim, provided that the client is fully advised of the position and the limitation is fair and conscionable in all the circumstances. Only risks which are substantial or unusual should be the object of a contractual exclusion of liability and it is not regarded as appropriate to exclude liability in everyday transactions. The rule is subject to the general fiduciary obligations of practitioners (which may limit their ability to exclude liability) and certain statutory liabilities (Fair Trading Act, CGA) cannot be excluded by contract.

The foregoing restrictions do not affect the ability of lawyers to qualify their advice on a particular matter. It is often appropriate to do so if the law is uncertain or complex or where there is the possibility of unknown or material facts. It is rare for lawyers to restrict their liabilty by contract as provided for in the Rules of Practice.

Time limits are imposed by statute. The general time limit for claims in contract and tort is six years from the date that the cause of action arose. However, section 28 of the Limitation Act 1950 provides, inter alia, that in the case of an action based upon the fraud of the defendant or his agent, the period of limitation shall not begin to run until the plaintiff has discovered the fraud, or could with reasonable diligence have discovered it. In addition, the Court of Appeal has held more generally that, if damage forms part of the cause of action, the cause of action does not arise until the damage is reasonably discoverable. An action commenced under the Fair Trading Act 1986 has a three year limitation period from the date the matter giving rise to the contravention arose.

Limitation in respect of claims in equity arises both by the equitable doctrine of laches and by a statutory discretion of the court (conferred by the Limitation Act 1950) to apply the statutory six year limitation period by analogy.

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Liability to non-clients

Lawyers can be liable to non-clients arising out of the performance of their professional duties. In respect of breaches of fiduciary obligation, a lawyer can be liable as a trustee to a non-client, including liability as a constructive trustee for knowing receipt of money which is the subject of a breach of trust or for knowingly assisting another in a breach of the latter's trust. Breaches of undertakings to non-clients may be the subject of the summary jurisdiction of the High Court. Liability under the Fair Trading Act 1986 and Commerce Act 1986 is not restricted to clients and can extend to non-clients.

The duty in negligence of care to clients has already been discussed above. Lawyers may also be liable in negligence to non-clients when they act in a way that creates a duty of care to that person. There are several cases where such a duty has been upheld. For example, a solicitor has been held to owe a duty of care to a beneficiary under a will which he had negligently drafted. Where a claim was brought by a husband, a party to a matrimonial property agreement, against the solicitor for his wife, alleging that the solicitor had failed to advise the wife properly in relation to the agreement resulting in the wife being entitled to avoid the agreement, the Court of Appeal held that the wife's solicitor could in those circumstances be liable to the husband.

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Indemnity Insurance

Voluntary professional indemnity insurance

Indemnity insurance for the legal profession is voluntary in New Zealand. An estimated ninety to ninety-five per cent of the legal profession takes out professional indemnity insurance cover.

Insurance facilities

Insurance is currently available through policies issued by commercial insurers.

Insurance is usually obtained abroad for larger firms and internally for smaller firms and sole practitioners. Lloyds of London and the FAI/Justitia Mutual Association are the dominant sources of professional indemnity insurance cover for New Zealand solicitors.

Some practitioners in New Zealand practise solely as barristers. One insurer offers a policy on favourable terms to those practising as such and a substantial proportion of those so practising are insured under that policy.

Level of cover

The average level of cover is approximately USD3 million per claim. Usually a maximum for each claim is imposed by the insurer as well as the aggregate total liability being limited for the period of the policy.

Approximately three to five per cent of the annual expenses of a practice are represented by professional indemnity insurance premium.

Deductibles

The range of deductibles payable by insured lawyers is between USD31,000 and USD150,000, depending on the size of the law firm.

Recent developments with respect to insurance

The New Zealand Law Society is currently undertaking a review of professional indemnity insurance for the legal profession in New Zealand.

It is possible that there will be significant developments in the near future through a proposed compulsory insurance scheme. The New Zealand Law Society has proposed that USD150,000 cover be taken by the profession as a minimum based on prescribed minimum criteria.

Compulsory insurance cover in New Zealand, if it proceeds, is expected to be arranged by approved insurance policies and regulated by requirements set down by the New Zealand Law Society.

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