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LPLC: Beyond the limit

Every Issue

Cite as: (2007) 81(7) LIJ, p. 88


Practitioners acting in the sale and purchase of small businesses must document their instructions, especially where the client tries to limit the retainer.

An increasing number of claims concern solicitors who are accused of not advising either purchaser or vendor clients on the contract documentation.

These claims arise in many instances because the clients are in a hurry and often want to save money, so put the solicitor on a limited retainer.

Typically, the clients ask the solicitor to deal with only one aspect of the transaction, which does not include advising on the wording of the contract.

The clients later complain that certain aspects of the contract were not pointed out to them.

The best course of action for solicitors to take is to set out in writing at the start what they have been retained to do and what they will not be doing and any consequences of those choices the client has made.

Here are some examples of issues missed in contract documentation.

Acting for the purchaser

Worthless vendor’s warranties

The purchasers of a small business had come to see their solicitor to arrange for a new lease over the business premises. They had already retained an accountant to look at the figures and all they wanted the solicitor to do was negotiate the lease.

After entering into the business the clients tried to enforce the vendor’s warranty in the contract but it soon became apparent that the warranty was worthless as it referred to a blank section in the contract.

The clients complained that the solicitor should have advised them that the warranty was worthless unless the figures were included in the contract. The solicitor maintained he was not asked to advise on the contract but there was no correspondence setting out the limit of the retainer.

Employee entitlement definition missed

In another matter, the definition of “employee entitlements” in the contract excluded long service leave and annual leave. So while the contract said that the vendor would be responsible for employee entitlements, this did not include the long service and annual leave entitlements.

The solicitor failed to read the definition and was otherwise distracted leading up to settlement sorting out the licensing requirements. He did not look further at the employee entitlements issue. As a result, the client was unexpectedly saddled with the liability for long service leave and annual leave.

While in this case the retainer was not limited, the transaction was undertaken in a short timeframe, making it harder to pick up all the subtleties of the contract.

Leaving staffing matters to the client

In another matter involving employee entitlements, the purchaser clients told the solicitor that they had operated 18 restaurants and they knew about staffing issues and he was not to be involved in the staffing matters. Not surprisingly, the solicitor did not make inquiries about adjustments for leave entitlements before settlement.

After settlement it became apparent that the clients were liable for long service leave and annual leave entitlements. The clients then complained that the solicitor should have given them better advice. While the solicitor had a few file notes of some discussions with the clients, the solicitor’s preliminary advice and the clients’ instructions to the solicitor not to deal with employee matters were not documented in any way.

Acting for the vendor

Non-refundable deposit clause removed

In a claim involving a vendor’s solicitor, the non-refundable deposit clause was removed from the contract on the vendor client’s instructions during negotiations. The sale did not go ahead, despite the drawn out negotiations, and the purchaser recovered his deposit.

The vendor complained about the removal of the non-refundable deposit clause, forgetting he had given instructions to remove it. The solicitor did not have a file note of the instructions and had not confirmed the instructions in writing to the client.

Allocation of purchase price between goodwill and assets

In another contract of sale, the goodwill was set at $1 and the plant and equipment was $90,000. In fact, the written down value of the plant and equipment was $5000. As a result the vendor received a large tax bill.

The vendor’s solicitor had no recollection or written records of any discussion concerning the allocation of the sale price or advice given to the client concerning the issue. It was alleged that the solicitor should have referred the client to an accountant to determine the appropriate allocation.

Risk management strategies

Where your client wants to limit your retainer:

  • The best strategy is to be direct and honest with your client in establishing the limits of your retainer:

– provide clear advice as to how the transaction should be handled to ensure your client’s interests are protected;

– obtain clear instructions as to how you are to proceed and warn your client of any risks involved in limiting your retainer; and

– confirm your advice and your retainer in writing.

  • When drafting or reviewing sale contracts pay careful attention to:

– schedules;

– definitions, particularly “employee entitlements”; and

– default mechanisms and the consequences of default.

For more information on acting in small business transactions see the LPLC’s booklet Small Business – Big Risks (May 2007 edition).


This column is provided by the LEGAL PRACTITIONERS’ LIABILITY COMMITTEE. For further information, ph 9670 2001 or visit the website http://www.lplc.com.au

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