Solicitor In The Soup. Funny? Or Scary?

Don’t know why, but most people find it funny when a Solicitor falls into the soup.

In my experience Lawyers are not the best loved professionals, although contrariwise, most people will not have a word said against their own choice of lawyer. No, it’s just the others we don’t like.

This week’s blog highlights a case in which it seems that a firm of solicitors – trying to assist their clients – have somewhat dropped themselves into trouble. Here is the link.
Whilst some will have a jolly good laugh, there are perhaps lessons which Solicitors can take – at the very least they can examine the circumstances of the case and wonder to themselves whether this was a trap they could have fallen into.

The circumstances of the case are that in 2008 a solicitor’s client had instructed that a new limited company should be set up as an SPV – that is jargon for a “special purpose vehicle” – the special purpose being the acquisition of development land.

What I envisage, as a former Solicitor myself, is that the solicitors acting for these clients were under a lot of pressure to enter into a Contract for the purchase of land.

Commercial legal work is always pressured. The pressure could derive from the Client, or from the Solicitor’s own feeling that, in 2008, there were not many land deals going on and so the pressure to earn money meant that the deal should go through at the earliest possible timescale.

Or it could be that there was inter-departmental pressure in a large firm of lawyers.
For example, the Company Department is in daily touch with the clients, the Commercial Property department working in the background is simply told to “get on with it”

In a time of recession, at any rate the solicitors were very quick to enter into a Contact which was to buy land in Kensington London for 20 million pounds.

Presumably in order to avoid delay the solicitor signed the contact on behalf of their client, so that the Directors of the “Company” did not actually sign it..

It turns out that shortly after exchange of contacts the solicitor’s client did not want to proceed with the transaction.

The problem here, as the solicitor soon found out, was that in fact that the special vehicle purpose company had never been incorporated. It is not explained how or why the Company was never actually formed.

Perhaps the Company lawyers had been told not to go ahead, and assumed that the Property Department would check the situation before proceeding.

Perhaps the company formation papers had been submitted to Companies House but returned because of slight error. This is all my speculation and the reported case does not explain.

BUT – the bottom-line is that the contact to purchase the land, was stated to be made on behalf of a Company WHICH DID NOT ACTUALLY EXIST.

If the solicitor who signed the contact did not know it beforehand, then s/he certainly has found out now that Section 36 (C) [1] of the Companies Act 1985 [then in force] applied to this situation.

That Act of Parliament has been largely superseded by the Companies Act of 2006, and the corresponding section is s51 with substantially the same words –link here-

The important bit is “A contract that purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and HE IS PERSONALLY LIABLE ON THE CONTACT ACCORDINGLY”

In the circumstances of this case this means that the solicitor who has signed the Contract is now personally liable to pay 5.1 million pounds.

Although solicitors are always willing to assist their clients’ affairs, this is probably more than the signing solicitor understood to be their personal exposure in the case. Do you think?

The obvious lesson is that any solicitor thinking of signing a contract on behalf of his client company would do well first to make a company search in order to establish that the company has actually been formed.

I do not think that this kind of situation would be likely to arise in a small high street firm where perhaps one man or woman is in charge of both the company formation and also the conveyancing.

I can quite see that in a larger firm where there are different departments and one set of solicitors will deal with company formations and another set will deal with property acquisition that a failure of communication between the departments can have this sort of result.

I do not know what happened in this case but my imagination visualises this Scenario – Company department says “we are forming an SPV please get on with the land purchase” – Conveyancing department does as it is told and gets on with it – and reaches exchange of contracts rather more quickly than the company department expected – the client changes his mind – result an expensive chaos.

I am not entirely sure what to say about this situation – it is not my place as a Notary to advise a large firms of solicitors how to run their business but if it were perhaps the message is:

1 Do not sign contracts on behalf of your client. Not Ever. Put it in your terms and conditions. Don’t be bullied.

OR
1A If you do sign contracts on behalf of your client perhaps make sure your client actually exists.

As so often the overriding lesson which solicitors may take from this case that trying to be helpful is fraught with risk. Doing things properly might take longer and might open your client to losing a beneficial transaction, it might lead you as a solicitor to the risk of losing a client but is rarely likely to leave you a bill of 5.1 million pounds.

Link here – Take Your Time Do It Right

If you would like to have your Notarial work done properly, do please get in touch – You can contact me or Louise here at AtkinsonNotary E7 Joseph’s Well Leeds LS3 1AB, phone 0113 8160116 and email notary@atkinsonnotary.com

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