Advising on contracts

1 April, 2016
Download PDF

Giving full and proper advice about contracts will help you avoid a claim.

The LPLC regularly receives notification of claims where the main cause is giving no or poor advice on a contract.

Occasionally the need to fully inform a client about the contract is overlooked, especially during busy periods such as the lead up to the end of the financial year. Sometimes this occurs in circumstances where the client is applying pressure to prepare, issue and/or review a contract urgently.

One claim for failing to give advice arose where a client, who was unaware that a practitioner was going on leave, emailed a contract and section 32 statement signed on that day to the practitioner for advice. By the time the email was read by someone else in the office and the advice given the client had lost their right to cool off. If timely advice had been given, the client would have cooled off because the s32 disclosed substantial defects with the dwelling.

Other claims have arisen where a practitioner and client have a different recollection of what was said about the contract. In this sort of claim it is common that the practitioner has no or limited file notes.

In some claims the practitioner is acting for both sides of the transaction, such as the seller and buyer, and when a dispute arises one client usually alleges the practitioner favoured the interests of the other client. They invariably occur in commercial, property and mortgage matters. The claims arising from conflicts of interest averaged 13 per cent of the total cost of claims in the past six years and in one of those years they accounted for 20 per cent of the estimated cost of claims. Smaller practices are overly represented in these figures but larger practices also fall victim to conflict.

In one claim the practitioner acting for both the buyer and seller of a small business failed to advise the buyer about amendments made at the request of the seller to a restraint of trade clause. The amendment resulted in a reduction of the radius from 25kms to 5kms. The buyer expressed their concerns to the lawyer when the business failed to do as well as was represented by the vendor. The matter settled with a payment of more than $30,000 to the buyer.

Practitioners should also be aware that pursuant to clause 5.2 of the LPLC professional indemnity insurance policy a deterrent excess applies where the practitioner acted for or represented more than one party or interest.

Claims may also arise where a client has not been advised about a change in legislation which affects the content of the contract and/or disclosure documents, especially in conveyancing.

The LPLC has seen this occur when:

• the fire services property levy was introduced in 2012
• the need to disclose in a s32 statement that land is in a bushfire prone area was introduced in July 2013
• the new form of s32 statement was introduced from 1 October 2014.


Recommendations

  • Understand any relevant statutory obligations.
  • Keep good file notes of your communications. Also consider the need to confirm your advice and any instructions received in writing to the client.
  • Be on the lookout for any changes to the legislative requirements relating to disclosure and form of contract.
  • If any aspect of the contract is unclear notify the client and seek instructions as to whether the client requires you to investigate or whether the client will do this.
  • When acting for a seller, be extra careful when they demand the contract be issued urgently. One way to deal with this sort of client is to explain all the steps which usually need to be followed and why it is so important that you have time to properly consider all issues before handing over a draft.
  • When acting for a buyer, be on the lookout for contracts prepared by a business broker. The LPLC has seen an example of such a contract and it contained a number of unusual clauses.

Tips

• Be extra careful when asked to prepare or review a contract urgently.
• Ensure clients are informed well in advance about your availability or otherwise to act.
• Ensure you specify in your retainer what legal work you are providing and which matters the client needs to undertake.
• Check for any changes in the law, especially about disclosure.