Reliance on legal advice

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You may see this sort of clause, especially in a custody or agency agreement:

Agent may seek legal advice
The Agent may from time to time seek and rely upon advice from professional advisers and will not be liable for any action taken or not taken in reliance upon that advice.

This may strike you as cavalier. But, should you protest, expect to hear the agent’s legal advisers sagely intoning that, yes, this is absolutely standard in the market and non-negotiable, being a simple and effective allocation of risk by a service provider who gets paid a pittance and otherwise does not share in the fruits of the transaction.

Have no truck with this nonsense. Especially not from external legal advisors, who have a raging conflict of interest in dispensing this sort of “market colour”.

Bad advice is not the client’s problem

No-one is stopping an agent getting whatever advice it wants, on its own dime and at its own risk. It’s a free country. (Now, we say, “its own dime”: note, though, how common it is for an agent to ask its customer to foot the bill: it gets paid a pittance, does not share in the fruits of the transaction, etc. etc.)

And nor is anyone stopping the agent relying on the advice it gets. Again, free country: that’s an agent’s prerogative. That it did get advice may even be (weak) evidence that it diligently discharged its contractual duty and wasn’t, factually, at fault. Weak evidence.

But, still, if the advice turns out to be wrong, that should be the agent’s problem, not the customer’s.

The answer is not for the agent disclaim its liability to the customer: it is for the agent to sue its lawyers. That’s what it paid the blighters for: so they, and that juicy professional indemnity insurance policy they never seem to claim on, can cover the agent’s blushes if their advice turns out to be wrong and their client’s customer goes on the warpath.

If fails the commercial imperative

In any case, agents: think about it from your customer’s point of view.

You buggered up and lost your customer money: if you now let your own (Q.E.D. negligent) lawyers off the hook, you throw your customer under a bus.

Your customer will not see the funny side of this. It will not matter that the contract is clear: your customer will rightly say it had little choice: your lawyers — yes, they who shall not be sued —hotly insisted it was a market standard. It may withdraw its business. It may well grumble about you to other customers in the watering holes across the square mile.

None of this will be good for your business. It undermines the commercial imperative: the main thing keeping you in business. Over the long run — unless your customer happens to be Archegos — the very worst thing a customer can do to you is withdraw its business.

It defeats the purpose of engaging lawyers

Nor, this way, are you getting value for your legal fees. Your customer, who is likely to be paying them, certainly isn’t. There is a view that legal advice is really just legal compliance insurance: to engage lawyers is to buy access to their professional indemnity insurance.

But here you would let off the actually delinquent party — your lawyers; your servants, who would have no complaint if you threw the book at them; who said they were the grand-an-hour experts on this stuff, but turned out not to be — scot-free. They get their premium, but you don’t make them write the insurance. Why on earth would you do that?

And if you won’t sue your lawyer, bear in mind your customer can’t: it has no privity. So the poor customer — who, don’t forget, is the only innocent party here — winds up paying for advice that gets you off the hook while being left high and dry and without any legal recourse against anyone.

Is this prudent business? Is this commercially reasonable behaviour?

Incentives

This is to say nothing of the perverse incentives it creates. If an agent can dissolve all liability, for free, by simply running to matron every time a cloud appears on the horizon then what should we expect its staff to do? Since every legally-penned email, file note or memo functions like a cloak of mithril however misconceived or dunderheaded it may be, wouldn’t you do that? Wouldn’t anyone? We should therefore expect an agent’s staff, on these terms, to decline to take a view on anything.

But the agent holds itself out as the purveyor of excellence in its chosen field of expertise. Experts are confident enough to take a view: that is what being an expert means. Shouldn’t it be prepared to exercise that skill?

Cui bono?

Lastly, ask this: who, principally benefits from such a liability dissolution clause?

Certainly not the customer: it winds up with an ostensibly actionable loss for which it has no recourse.

Nor really the agent, since holding the putative free option incentivises poor behaviour from its staff, while exercising it will damage its client relationships.

But the lawy — ahhhh, that’s it! That’s who benefits from this nutty clause. The lawyers! And whose idea was this nutty clause, in the first place?

Let the record reflect a certain Mr L. Eagle, Esq. stepped forward at this point.

See also

• Allocation of legal fees
• Agency problem
• The commercial imperative. Never forget the commercial imperative.
• All our other counterparties have agreed this
• Legal eagle