Line of Defence

Written by Alex Ktorides

This year, there have been several reports in the press of large law firms fighting major negligence claims. International law firm Weil, Gotshal & Manges is facing proceedings in the UK high court for damages of £10m for allegedly failing to explain voting control powers to its client, Bancroft, over its acquisition of a Slovakian ice cream company. In addition, the firm allegedly failed to arrange for the translation of documents into English. The case has reportedly been listed for a three-week trial in June.

In May, a Dallas jury ruled that global law firm Baker Botts had acted negligently in representing two competing technology companies and failing to disclose the potential conflict to clients. But, because the claim dates back more than a decade and was filed at least one year too late, the US$40.5m damages award was set aside. Both sides reportedly intend to appeal the verdict.

Magic circle firm Clifford Chance has also faced a negligence claim this year after being joined into action brought by JP Morgan against German public transport provider BVG. The claim is based on the allegation that the law firm gave negligent advice in 2007 on complex risk management arrangements for a collaterised debt obligation transaction. Clifford Chance has denied all liability. The claim was reportedly settled in March for US$210m (£130m).

In February 2014, international law firm Watson, Farley & Williams defeated a £10m negligence claim in relation to a client’s investment in solar energy in 2007. The firm eventually triumphed in court and won an award of costs on an indemnity basis. But, the time, cost and stress would have been considerable for the lawyers involved.

Clearly, there are a number of benefits to avoiding and minimising the risks of professional negligence claims, not least of which is avoiding time-consuming litigation and PR crises. A good, solid claims history (six years minimum) will lead to lower insurance premiums. Morale will also be higher among staff; studies show that professionals facing negligence claims typically experience higher levels of stress and suffer a resulting loss in productivity.

What follows are some tips to avoid future claims and improve your firm’s long-term insurance premiums.

1. Client objectives

Most claims in litigation come from either a straightforward error, such as failing to issue a claim within the limitation period for bringing claims, or from clients who are disappointed with the outcomes achieved. Clients, especially lay clients who may be using a law firm for the first time, can have unclear motives.

This is why it is important to agree on the scope of the retainer. Objectives should be discussed, defined and confirmed in writing, as well as the cost of each goal. In this way, nasty surprises can be avoided. Once the objectives are agreed, they should be included in a letter of engagement which is in line with the firm’s terms of business.

These two documents are key and should be regularly reviewed as the retainer continues. If there are any changes to these objectives, they should be discussed with the client, reviewed together with the engagement letter and amended where possible.

2. Solid communication

Limiting the scope of liability is essential; this is also best done in the letter of engagement. Lawyers should list the work that they have agreed to be responsible for and the work they aren’t going to do. For example, in wills and probate work, who is responsible for tax planning? This needs to be stated and the client needs to agree.

It is also crucial to avoid working in a vacuum and to ensure the client is kept informed. Important communications should be copied across and all major decisions should be recorded in writing, to be confirmed by the client.

3. Robust policies

Deadlines should be diarised, preferably in a central diary, as well as in a personal one. A head of department (or another senior person) should be appointed to review all deadlines. Weekly emails or team meetings are a good way of implementing a diary policy.

Capping and limiting liability are also important tools for mitigating the risks of doing work. Liability caps should be discussed with the client where possible and should be no less than the minimum insurance requirements, which currently stand at £3m for an LLP. They need to be clear, upfront and reasonable, taking into account the bargaining powers of the parties and the availability of insurance. If third parties such as surveyors or experts are on the team, it may well be appropriate to agree a proportion of liability is the basis for apportioning the cap.

Regular file audits should be carried out to ensure that these policies are implemented. Quarterly audits are a practical way of checking that documents such as engagement letters are signed and on file and that clients are informed at the outset about costs.

4. No misunderstandings

At the beginning of any retainer, litigation clients should be told about costs, including all of the finding options. Is insurance avoidable? Directors and officers may be covered by insurance covering the entities they have agreements with; household policies may also apply, as may memberships of trade unions.

It is essential to know your clients and to understand their objectives and financial positions. Clients, especially lay clients, may come to law firms with objectives that are emotionally driven. This is often seen in contested probate matters, where families in dispute do not wish to be seen as ‘backing down’ or having perhaps acted in an immoral way, for fear of being judged. Others simply feel that they want to punish another sibling for a perceived slight.

Such circumstances can spell danger for the lawyer acting unless the client is fully apprised of all the options, pitfalls and costs of litigation at the outset and receives dispassionate and clear unbiased advice. The lawyer may otherwise find that, months down the line after paying fees with no end to litigation in sight, that the quality of advice given is being questioned.

For this reason alone, it is good practice to discuss the real reasons for seeking to act in a certain way and then to explain the ramifications in both time and cost terms, as well as a full and frank assessment of the merits where possible. This is particularly true in litigation, but also applies to all types of advisory and transactional work. Lawyers should take care to avoid ‘scope creep’ during these discussions by inadvertently assuming responsibility for the decisions their clients make.

5. Know your limits

Lawyers should always keep within their own expertise. If in doubt, do not act. Reliance on counsel may not help either. Using counsel is something that most lawyers and clients rely on, as they are advocates and possess expertise in defined areas of specialism. However, it is inappropriate to act effectively as a post box between the client and counsel. Lawyers are expected to bring their own knowledge and expertise to bear on a matter and will be judged on how well they exercise reasonable care and skills.

Although it may be a good defence to a negligence claim to say that the lawyer relied on advice given by counsel, each case will turn on its own facts and it is inadvisable to abrogate the lawyer’s role by relying entirely on counsel’s advice.

Risk Management

As noted above, much can be done to mitigate the risk of claims and the ensuing stress and loss of productivity. Following up on key discussions and the client’s decision-making processes in writing, in addition to clarifying the lawyer’s remit at the outset, are just some of the simple steps that can be taken. Ultimately, these could be a crucial line of defence should things go wrong.

Contact the Author

Alex Ktorides

Gordon Dadds