Duty Bound: solicitor’s duty to beneficiary of incapable testator after inter vivos transfer

It was in the context of preparing for the delivery of my recent presentation for The Tax Institute’s Death…and Taxes Symposium on the Gold Coast recently that I come to read a recent case of solicitor negligence in the context of estate planning.

In the appeal decision of McFee v Reilly [2018] NSWCA 322, a solicitor appealed an earlier decision where it was found that the solicitor had a duty to a disappointed beneficiary of an incapable testator after an inter vivos transaction that was carried out by the solicitor, acting on instructions from the principal’s attorney (under an enduring power of attorney), to transfer the bequeathed property to someone other than the beneficiary.

In this case, the solicitor received instructions from the wife of the principal, as the principal’s attorney under an enduring power of attorney, to transfer a property known as Boronga to the daughters of the wife and principal among other matters relating to the creation of two partnerships (which was to replace the existing partnership). The scope of the retainer for the principal was “estate planning” and sadly, the principal had lost capacity to manage his own affairs.

In 2000, the principal had made an enduring power of attorney nominating his wife and his son, Joseph, as attorney and appointed them to act severally. In 2003, the principal had made a Will (through a different solicitor to the solicitor involved in this proceeding) where he purported to give the Boronga property specifically, but the Will failed to nominate a beneficiary of the gift. The rest of his estate was to go to his daughters equally.  The primary judge in this case had relied on a handwritten note by the solicitor who drafted the Will for the testator that Boronga was to go to Joseph.

In 2009, the wife of the principal caused Boronga to be transferred to the daughters for $1.00. The market value of the property was said to be approximately $815,000.

The principal died in 2012.

I will preface the below by saying that the below is a summary of the decision as it relates to the solicitor’s liability in negligence to the disappointed beneficiary (i.e. Joseph). There were various other factors considered by the Court (including causation and breach etc) and grounds for appeal and as such, I highly recommend you read the case.

At the outset, the Court recognised the general rule in Badenach v Calvert (2016) 257 CLR 440 that a solicitor owes a duty of care in negligence solely to his or her client and noted the exception to that rule in Hill v Van Erp (1997) 188 CLR 159 where the solicitor may be held to owe a duty to a disappointed beneficiary in respect of drawing and execution of a Will where the Will has failed to confer a benefit that the testator had intended. (Side note, for those interested, I wrote a post on Badenach v Calvert you can read here.)

The Court acknowledged that much of the jurisprudence on liability to disappointed beneficiaries and duties of solicitors with regard to will making and never in relation to where a testator had lacked the capacity.

The primary judge started by considering the nature and the scope of the retainer between the solicitor and the client, citing authorities such as Hawkins v Clayton (1988) 164 CLR 539 and Badenach v Calvert.

There was no written retainer between the attorney and solicitor (only a cost estimate) and the parties agreed there was no contractual relationship between the testator and the solicitor. Notwithstanding this agreement, the Court of Appeal noted that the parties took no issue with the following comments by the primary judge (at [368]-[369]):

“At a general level of abstraction, there is no dispute about the nature or scope of the [solicitor’s] retainer. He was retained, in the language of the statement of claim, to facilitate a transfer of ‘Boronga’ by the deceased (acting through [Peg] as his attorney) to the [sisters]. The complexity of debate arises, at a lower level of abstraction, from the facts that: (a) the [solicitor’s] retainer arose from instructions of an attorney who, as I have found, exercised her power as an attorney for a purpose of her own, foreign to the power; (b) the [solicitor] ought reasonably to have known that the attorney was acting beyond power; and (c) [Joseph], as a prospectively disappointed beneficiary of the principal, sues the [solicitor] through, although not on behalf of, the principal’s deceased estate.

In the language of the [solicitor’s] costs estimate dated 22 April 2009, that transfer was seen by the [solicitor] as an exercise in ‘estate planning’ involving professional services (for example, a consideration of capital gains tax implications) more sophisticated than a mechanical conveyancing transaction. The [solicitor’s] costs estimate described his retainer as: ‘Attending to all aspects of inter-generational transfer of land’, coupled with preparation of a partnership deed ‘for farm management incorporating provisions on death’ and a second partnership deed ‘for management of investments including similar provisions’.”

The primary judge’s reasoning on the existence of a duty of care was as follows (at [384]-[386]):

“In the current proceedings, although the [solicitor’s] core instructions emanated from [Peg] as attorney for the deceased Mr Maccallum was bound to consult the interests of the deceased as the firm’s ultimate client. Those interests were coincident with the interests of [Joseph] insofar as an ultra vires exercise of the deceased’s power of attorney by [Peg] was not in the interests of either of them.

Recognition that the [solicitor] owed a duty of care to [Joseph] in connection with performance of a retainer by [Peg], as attorney for the deceased, imposes on the deceased’s will, the existence of [Joseph], [Joseph’s] family and commercial interest in ‘Boronga’ and the determination of [Peg] to bypass [Joseph] by an inter vivos transfer of the property to her daughters. He ought reasonably to have known that the plaintiff was, or was likely to be, the deceased’s intended recipient of ‘Boronga’ although not named in clause 3 of the will. The subject matter of clause 3 was an identified, single property.

The [solicitor] was bound to exercise reasonable care in performance of his retainer, recognising that he was (relevantly) retained by [Peg] in representative capacity that required him to protect the interests of the deceased (and, incidentally, [Joseph] as an intended beneficiary of the deceased).”

When it came to the legal authority on the topic of “duty”, but parties conceded there was no real binding authority on point for this matter. This caused the Court of Appeal to consider the assistance it could derive from similar cases, including Badenach v Calvert. The Court noted that the High Court in Badenach v Calvert held that the solicitor owed no duty of care to the claimant in that case and that the central point to that finding was that “the interests of the claimant were no coincident with the interests of the testator” (para 123).

In working through this conclusion, the Court quoted the passages of that judgement to demonstrate the centrality of the client’s instructions to the question of duty of care, referring to comments by Gageler J at para [62] of that judgement:

“Unless there is some further factor affecting the relationship of the parties, however, a solicitor retained to prepare a will can have no duty to a person whom the testator intends to benefit other than to act in the matter and to the extent identified in the testator’s instructions. That is because, outside the scope of the testator’s instructions: there can be no requirement for the solicitor to act for the benefit of the person; there can be no damage to the person if the solicitor fails to act for that person’s benefit; there can be no relevant vulnerability on the part of the person to the action or inaction of the solicitor; and there can be no necessary coincidence between the person’s interests and those of the client.  Where the testator’s instructions stop, so does the solicitors’ duty of care to the intended beneficiary.”

In reflecting on this passage, the Court said (at para 124):

“The centrality of the client’s instructions creates a difficulty in the present case, where the ‘ultimate client’, Frank, was incapable of giving instructions, and was represented by an attorney.  The solicitor never received any instructions directly from Frank, although he was bound to protect his interests and he undoubtedly owed him a duty of care directly.”

Returning again to Badenach v Calvert, the Court noted a further passage by French CJ, Kiefel and Keane JJ summarising the effect of the decision in Hill v Van Erp as follows (at para [18] of that judgement):

“It must be conceded, as the appellants point out in the present proceedings, that the approaches taken by members of the majority to the question of whether a duty existed differed in some respects. Nevertheless it may be seen from most of the judgements that the duty found to be owed by the solicitor to Mrs Van Erp as the intended beneficiary had its source in the solicitor’s obligations arising from the retainer between the solicitor and her client. The solicitor was obliged to exercise care and skill in giving effect to her client’s testamentary intentions. The interests of the testatrix and the intended beneficiary in those intentions being carried into effect were relevantly the same.  Recognising a duty to the intended beneficiary would not involve any conflict with the duties owed by the solicitor to her client, the testatrix.”

In this case, there were two particular matters pointed out:

  1. that the solicitor did not prepare the Will; and
  2. that Frank’s will left his devise of Boronga blank.

To address the first, the Court said (at para 134):

“Dealing with the first matter first, let it be assumed that the will which the solicitor received on around 6 May 2009 was in a form as rectified, and left Boronga to Joseph. In circumstances where the solicitor was retained for estate planning, was receiving instructions from the donee of an enduring power of attorney to enter into an inter vivos transaction which would subvert the transmission of assets in the will, and where the testator was incapable to the solicitor’s knowledge, I consider that the solicitor owed a duty of care to the beneficiary under the Will.

The issue resolves to how the rule and its exception apply when the testator has become incapable.  That is to say, bearing in mind the importance attributed to consistency or coincidence of interest between testator and intended beneficiary, how do those principals apply when the testator is no longer capable of forming a testamentary intention, and can no longer effect an inter vivos disposition, save through a statutory mechanism (such as a statutory will or an enduring power of attorney)?

None of the authorities involving a subsequent inter vivos transaction was one in which the testator was incapable, while the principal explaining the duty owed to a disappointed beneficiary by a solicitor retained to draft a will rests on consistency. It is in this respect that Badenach is of some importance. The general proposition that a duty is owed is clear from Hill v Van Erp, but the divergent strands of reasoning in that case present a difficulty in determining whether the extension identified by the primary duty is warranted. “

The Court went on to reiterate that the “Badenach confirms the significance of the consistency and coincidence of interest to which reference is made in Hill v Van Erp, making it plain that consistency between the duty to the client/testator and duty to the client’s intended beneficiary is central to the duty owed by the solicitor to that intended beneficiary.” (para 137).

Distinguishing and articulating the importance of the lack of capacity by the testator in this case, the Court said (at paras 140-141):

“Hence, these cases of subsequent alterations to the will, or inter vivos transactions, are ordinarily outside the scope of any duty of care owed by the solicitor retained by the testator.  That is because the current intention and instructions of the testator are necessarily inconsistent with the interest of the beneficiary, which depended upon the testator’s former intention.

The position is different when the testator has become incapable. First, in such a case there is no conflict between the former and current intentions and instructions of the testator; the testator in such a case has validly made a will but has no current legally effective intention (whether consistent or inconsistent). ” (paras 140-141)

“Secondly, in such a case there will inevitably be another natural person with authority to effect the transaction (typically, pursuant to an enduring power of attorney) who is a vital participant in the transaction and who will invariably owe fiduciary (or fiduciary-like) duties to the incapable person.

Contrary to the solicitor’s submissions in this appeal, I do not regard the coincidence of interests in a case where the testator has become incapable as merely coincidental. There are two reasons for this:

  1. First, the coincidence of interests is a necessary and inevitable consequence of the loss of capacity by the testator.
  2. Secondly, the incapacity of the testator has strengthened the interest of the beneficiary under the will. In the ordinary class of case represented by Hill v Van Erp and White v Jones, the disappointed beneficiary can sue the negligent solicitor who was retained by the testator, even though the beneficiary’s interest was at all times subject to the testator’s power to alter the will or dispose of the asset inter vivos. But where the testator has become incapable, the interest of the beneficiary, whilst still contingent (because, amongst other ordinary contingencies, the beneficiary may predecease the testator) is no longer liable to being extinguished by those mechanisms.

Those considerations point to a conclusion that, given that the law recognises a duty owed to a beneficiary by a solicitor retained to draft a will, the position of a solicitor retained for the purpose of estate planning who acts for an incapable person entering an inter vivos transaction which will affect the interests of the beneficiary under the will should be under the same duty.” (paras 143-145)

In conclusion and addressing some of the appellants claims regarding the impact of the Will requiring rectification, the Court said:

“Accordingly, I would conclude that the solicitor owed a duty of care to Joseph. I do not regard this as inconsistent with anything said in Badenach, nor in Clarke v Bruce Lance & Co or Vagg v McPhee. The general statements in those cases are not to be understood as applying to a case where the testator has become incapable, because those general statements are premised upon an inconsistency between the posited duty and the current instructions of the testator. the fact that neither the parties nor my own researches have identified any decision squarely on point – in which a disappointed legatee sued a solicitor whose retainer extended to estate planning and who was sued following an inter vivos transaction by an incapable testator effected pursuant to an enduring power of attorney – tends to confirm that the position is exceptional.

Turning to Mr Sheldon’s second point of distinction, I consider this makes no difference. There is a factual complexity in the present case, arising from the obvious defect of Frank’s will, which as liable to be rectified. That factual complexity should not unduly interfere with the analysis of whether a duty of care is owed to the disappointed beneficiary who may (albeit in subsequent court proceedings) discharge the burden of establishing that rectification by inserting the words “to Joseph” should be ordered.

I discount the rhetorical flourish to the effect that it took “several days” of trial and a “long, reserved judgement” to determine that the will was to be rectified. The length of the trial and the judgement was principally attributable to other issues. Conscious as I am of the advantages of hindsight, it is nonetheless plain on the face of the will that there is a clerical error. Mr Maccallum accepted that he recognised as much shortly after receiving it.

It was plain that whatever Frank’s intentions were, they were being subverted by the instructions from Peg. The answer to the question of common law as to whether a duty of care is owed should not be distracted by the need for intervention (by a statutory expansion of equitable doctrine) to rectify the will so as to identify the devisee of Boronga.  That said, I readily acknowledge that there may be other cases where the failure of the will to identify the devisee might tend against the imposition of a duty, or (perhaps more likely) make it harder or impossible to establish breach; I return to this issue below.

In the facts of this case, where Mr Maccallum knew that Joseph was one of five children of Frank and Peg, and the only child not mentioned in the will, and the only son, and the man who was in fact working Boronga, I do not see the fact that the will needed rectification in order to identify Joseph as the devisee of Boronga as standing in the way of the solicitor owing him a duty of case. Other cases may not be so straightforward.”

In determining that the solicitor had breached his duty to Joseph, the Court said where there was such a clash between the instructions given by the attorney and the client’s expressed intentions (i.e. the Will), “a competent solicitor would have advised against proceeding and ceased to act”. (para 176).

You can read the full case here.

Whilst this case is very specific to the facts, as they all are really, what this case demonstrates is an extension of professional liability for practitioners where the testator/principal/client is incapable. I would go so far as to say that this case demands, by it’s extension of such liability, that practitioners properly consider and identify correctly who their client is, the scope of their retainer and what that truly means, and in the context of estate planning, considering the consistency of the interests between an incapable testator and a possibly disappointed beneficiary.  In a modern society where incapacity is of growing concern along with the prevalence of elder abuse, this case also, for me, highlights the importance of committing to thorough, continuing and meaningful professional development, both in substantive law and legal practice generally.

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