CONTINUING LEGAL EDUCATION CONFERENCE APRIL 11, 1987 SOLICITOR'S UNDERTAKINGS - AN OUTLINE 1. The purpose of this paper is to outline some of the considerations a solicitor must have in mind when making and accepting undertakings in real estate transactions. During my preparation of this outline, a number of Bar Societies reported to me that problems arising from solicitors' undertakings in real estate matters are common. They include complaints against lawyers arising from breached undertakings, disciplinary proceedings against lawyers for the same, negligence claims against errors and omissions insurance, and claims against compensation funds. I think the best summation I received was the comment of our Insurance Adjuster, Warren Jollimore, who, after outlining insurance aspects of undertakings to me in a letter, stated: "In summary, I'd suggest that solicitors have to be awfully careful about giving undertakings. They certainly do cause trouble from time to time." 2. Undertakings or trust conditions as they are known in some jurisdictions have been defined as follows: "An undertaking is a promise given by a lawyer, either by a written statement, a verbal communication or by
-2 implication from his (her) acts, or by any combination of the foregoing and in reliance of which, the recipient of the undertaking gives up to the lawyer or to another party a document or right or performs an act which that recipient would not have done were it not for the receipt of the undertaking from that lawyer." 3. The Nova Scotia Barristers' Society has no guidelines for members in the giving or accepting of undertakings other than the general rule set forth in the Code of Professional Conduct, Chapter XVI, Commentary 6 and Note 7 thereto: RULE: The Lawyer's conduct toward other lawyers should be characterized by courtesy and a good faith. COMMENTARY: 6. The lawyer should give no undertaking he cannot fulfill and he should fulfill every undertaking he gives. Undertakings should be written or confirmed in writing and they should be absolutely unambiguous in their terms. If the lawyer giving an undertaking does not intend to accept personal responsibility, he should state this quite clearly in the undertaking itself. In the absence of such a statement, the
-3- person to whom the undertaking is given is entitled to expect that the lawyer giving it will honour it personally. NOTE 7: (exerpts) "... the use of such words as 'on behalf of my client' or 'on behalf of the vendor' do not relieve the solicitor giving the undertaking of personal responsibility." "... difficulties may arise if (members) give undertakings on behalf of clients since clients may change instructions or solicitors." "An undertaking given by one solicitor to another can be released or altered only by the latter and not by his client." "The giving of an uncertified cheque is an undertaking, except in the most unusual and unforseen circumstances the justification for which rests upon the member, that such cheque will be paid..." 4. Undertakings have been looked upon with disfavour by the authors Orkin, in his book, Legal Ethics, and Donald H. L.
Lamont in Real Estate Conveyancing as well as the Courts, Knox et al v. are or (1881) 21 NBR 196 (N.B.C.A.). Undertakings, however, are a fact of life particularly in recent years as financial institutions will not provide releases of mortgage before being paid out. Two recent cases, Edward Wong Finance Co. Ltd. v. Johnson, Stokes & Masters (1984) 2 WLR 1 (P.C.), (the "Hong Kong Case") and Polischuk et al v. Ha art (1984) 49 O.R. (2d) 71 (Ontario Court of Appeal) have brought home the danger to a purchaser's solicitor in accepting a vendor's solicitor's undertaking to pay out a vendor's mortgage upon closing. 5. In the Hong Kong Case the Purchaser's solicitors followed the customary conveyancing practice in Hong Kong of forwarding the purchase price to the vendor's solicitor on his undertaking, inter alia, to pay out the existing mortgage and to forward the registered release of mortgage within a specified time. Without honouring his undertakings,-the vendor's solicitor left Hong Kong with the money. The bank refused to execute the release of mortgage and the purchaser's solicitors became defendants in a negligence action. 6. The House of Lords held that the loss to the purchaser by its solicitor placing money at the disposition of the vendor's solicitor was a forseeable risk, namely, the risk
of embezzlement by him; that, by following the general practice of completion in Hong Kong without taking precautions when they knew the property was subject to an existing mortgage, the respondents had failed to exercise the standard of care which they owed to the purchaser and accordingly they were negligent and liable to pay the purchaser's damages. The defence that the solicitor had been following the normal and customary conveyancing practice in Hong Kong fell to the side when the test of forseeable risk was applied by Their Lordships. 7. Their Lordships considered that the risk could have been avoided without in any way undermining the basic features of the Hong Kong style of completion. They stated that in such a case the purchaser's solicitor should take reasonable steps to satisfy himself that the vendor's solicitor has authority from his client to receive the purchase money and so much of the purchase price as is needed to discharge the prior mortgage should be paid by cheque or draft in favour of the mortgagee or his duly authorized agent, and not by a draft in favour of the vendor's solicitor. This simple precaution would ensure that the purchaser was placed by his solicitor in the favourable position which he ought to occupy when he parts with his money.
-6 8. Their Lordships further recognized that the Hong Kong practice could result in a departure from the terms of the agreement of purchase and sale signed by Vendor and Purchaser providing for the sale of the property free from encumbrances. They questioned whether the purchaser's solicitor was justified in departing from a contract by permitting a Hong Kong style completion without seeking the authority of his client, and, if he does so depart without authority, whether he might expose himself to liability in the event of the completion miscarrying, whatever precautions he may have taken. 9. In Polischuk the defendant solicitor had followed the "Hong Kong practice" accepting an undertaking from the vendor's solicitor to discharge a mortgage upon closing contrary to the agreement of sale without consulting his client. At the trial level, Polischuk et al v. Hagarty (1983), 42 O.R. (2d) 417 at page 425, Henry J. Stated: "Accepting that the defendant's solicitor acted on the closing of the transaction in accordance with the general practice of ordinarily competent solicitors, that does not end the matter. He was retained to carry out the terms of the clients' agreement of purchase and sale and not to substitute other terms for it. In my
-7 opinion there is no principle of law or professional dealing that justified him in failing to enforce the contract, as written by his clients, unless he received instructions to do so, or the matter was clearly left to his discretion, after he had given advice on it." 10. The nature of the advice to be given in the circumstance was discussed by Henry J. He referred to Major v. Buchanan et al (1975), 9 O.R. (2d) 491, 61 D.L.R. (3d) (46), (Goodman J.), in which it was stated that the solicitor's duty to his clients was to inform them that a departure from the contract of purchase and sale was being contemplated and to advise them as to the course that they should instruct him to pursue. It is at this point that the exercise of his professional skill and judgment comes into play - he must then inform them of the implications of the proposed course, apprise them of the risk inherent in it, and once having advised them in accordance with the standard of a reasonable, competent solicitor, and in being satisfied that they appreciated the risk, take and act upon their instructions. It is only when the clients have appreciated the risk in accordance with competent advice, and have nevertheless, decided to proceed with a proposed course, that they can be said to have assumed the risk of loss themselves. In Polischuk the defendent did not discharge this duty to his
-gclients and so was in breach of his retainer: he could not look to them to assume the risk of loss that they had no opportunity to appreciate and to accept. 11. The decision of Henry J. at trial was appealed. The appeal was allowed with respect to the amount of damages awarded however the principles cited above were approved, the Hong Kong Case being noted by Their Lordships. 12. Many of us in Nova Scotia, particularly in the rural areas follow the Hong Kong practice. I believe it is time to reassess our practice in light of these recent developments in case law and the guidelines of other Law Societies such as those in Ontario which clearly recognize the risks of Hong Kong style closings. 13. The Law Society of Upper Canada has prepared an excellent set of guidelines for REAL ESTATE TRANSACTIONS -UNDERTAKINGS ON CLOSING - MORTGAGE DISCHARGES, a copy of which is annexed for your consideration and guidance. These guidelines were cited by Henry J. in Polischuk. I have also annexed a copy of the guidelines provided to me by the Law Society of British Columbia respecting UNDERTAKINGS: A SERIOUS MATTER - AND A SERIOUS PROBLEM which deal, in the main, with holdbacks and mechanics' liens. Finally, I have
_g_ annexed a copy of guidelines and extracts from the Law Society of Manitoba minutes provided to me by that Society. I think each schedule is useful and instructive. 14. Another undertaking which is given, expressly or by implication upon closing, is the acceptance of documents "in escrow". When such documents are accepted, an undertaking is given by the solicitor receiving them that he will not release them until he or his client have fulfilled the requirements of the escrow conditions. Should the solicitor be in breach of such an undertaking, he is liable on his undertaking to have the requirements of escrow fulfilled. If the agreement is unambiguous and the terms are not. carried out, the receiving solicitor has an obligation to comply with the terms. See Witten, Vogel, Binder & Lyons v. Leung et al (1983), 148 D.L.R. (3rd) 418. If the receiving solicitor cannot comply with the terms of escrow, he should return the documents to the sending solicitor. 15. Undertakings are enforceable, summarily, against the solicitor who gives them. When a solicitor, who is acting professionally for a client, gives his personal undertaking in that character to the client, or to,a third person... that undertaking may be enforced summarily upon application to the court. Before this remedy can be pursued, it must be
-10 shown that the undertaking is given by the solicitor personally, and not merely as agent on behalf of his client: the undertaking must also be given by the solicitor, not as an individual, but in his professional capacity as a solicitor. 36 Halsbury (3rd ed) at page 195, paragraph 266. 16. Mr. Warren Jollimore has indicated to me that our errors and omissions insurance will cover negligent breaches of undertakings by solicitors arising out of their performance of professional services for others. Undertakings given by lawyers for their own purposes or undertakings which are deliberately not observed are not covered. There are of course the usual exemptions for dishonest, fraudulent, criminal or malicious acts or omissions of an insured. 17. In summary, to avoid difficulties arising from undertakings, a solicitor should follow the following guidelines: (1) The client should give his/her informed consent to the solicitor's undertaking and such consent should be in writing. This is particularly so if the undertaking will change the terms of the agreement of purchase and sale. (2) The subject of the undertaking must be possible and within the power of the lawyer to perform. (3) The undertaking must be given by a lawyer and should not be given by a paralegal.
(4) The terms of the undertaking must be unambiguous and any conditions upon the undertaking must be clearly stated. (5) Any changes in the undertaking must be agreed to by the party to whom the undertaking was given and ought to be in writing. (6) Whenever the act to be done or undertaken is within the power of the client and not the lawyer, the client should execute an appropriate undertaking. (7) Solicitors should keep an appropriate Log or Tickler System to follow up undertakings - given and accepted by themselves. I hope these remarks are helpful to you. Garth C. Gordon