RISK WATCH
Financial Certificates: Why Take the Risk? GRANT FEARY, DEPUTY DIRECTOR, LAW CLAIMS
O
ne of the most common questions received at Law Claims goes like this: “A client is looking to [borrow some money/ refinance/go guarantor] for their [son/daughter/ nephew/niece/family/trust/company] and the Bank wants me to sign a certificate about giving the client independent legal advice… I seem to remember that there is some issue with these sorts of things. Does my insurance cover this?” There are indeed “issues with these sorts of things”—issues which go back over twenty years and which might not be known to less experienced practitioners, or which might have been forgotten by more experienced practitioners1. For present purposes, the story starts with the important High Court judgment in Commercial Bank of Australia v Amadio [1983] HCA 14 where a mortgage and guarantee provided by Mr and Mrs Amadio to support borrowings by their son’s building company was set aside, in summary because Mr & Mrs Amadio had no proper understanding of the effect of the documents they signed. This led to financiers seeking from borrowers’ security providers (i.e. mortgagors, guarantors, indemnifiers etc.—collectively referred to herein as security providers) greater comfort from those security providers that they did in fact understand the documents they were signing as a regular part of their lending procedures. The financiers may seek a certificate from a lawyer engaged by the security provider that the lawyer has given the security provider legal advice about the nature and effect of the transaction being entered into. Some certificates even go so far as having the lawyer certify that the security provider “understood” the transaction. The very fact that the financiers are seeking such certificates should raise alarm bells—why do the financiers want these certificates? Two reasons spring to mind—the financiers are (1) seeking to outsource to the lawyers the task of explaining the documentation to the security providers and (2) looking to have someone else (i.e. the lawyer) to sue if
36 THE BULLETIN October 2020
the borrower doesn’t pay and the security provider seeks to set aside the transaction based on Amadio type considerations. The result of all this was, in the mid1990s, a number of legal practitioners were sued—by both financiers and security providers—in respect of the provision of these certificates—see, for example, Micarone and Bechara v Perpetual Trustees (SA Full Court) (1999) 75 SASR1 and Citibank v Nicholson; Pirrotta v Citibank (1997) 70 SASR 206. The effect of these and other cases was to set a very high standard required of lawyers providing these certificates and resulted in Law Claims issuing warnings about the extreme risks involved in such work. The cases make it clear that advice on financial transactions goes beyond “traditional” legal advice on the nature of the transaction, the terms of the documents, and the rights of the parties. It extends to advice which takes into account commercial and personal matters, so that the client understands the actual legal, financial and personal risks he or she is undertaking. Such a high standard of care for solicitors is set that it continues to be the view of Law Claims that it is better not to give certificates of independent advice in
financial transactions. It has often proved the case that where security providers have gone back to the financier saying that “my lawyer won’t do this sort of work” the financiers may not insist on the provision of the certificates. Notwithstanding this, however, problems for lawyers continue to arise—see the recent Victorian case in this area of Jams 2 Pty Ltd v Stubbings [2020] VSCA 200 (5 August 2020) where one of the several lawyers involved in various financing transactions gave a financial certificate and was forced to settle the claim against him. The settlement was, in all probability, required in order to avoid findings of breach of duty. There may, however, be occasions in practice where it is necessary to give independent advice on financial transactions, and where appropriate give a certificate of independent advice. Where that advice is unavoidable, the relevant cases make it very clear that, to fulfil his or her duty, a solicitor must: • make whatever investigations are necessary to fully understand the transaction, the interests of the parties involved in it, and the prudence of entering into it; and • give careful and substantial advice.
