Risk management focus review

The 2003 Risk Management Roadshow series gets underway in Edinburgh on 24 April. As before, these events will concentrate on group discussion of case studies aimed at identifying risk issues and practical risk management points.

Some of the case studies from last year’s Risk Management Roadshow appear here with a note of some of the risk management points to be considered.  It is clear from the group discussions which took place last year, and in previous years, that there is no definitive ‘correct answer’ to the questions posed and no authoritatively correct response to the issues raised by the case studies.  The appropriate response will always involve an element of judgment on the facts and circumstances as they present themselves to the individual solicitor.

Breakdown in communications

Mrs Rich rang her solicitor, Mr Rush to tell him that she wished to withdraw from a house purchase because she had just received notification that an old family friend had died and quite unexpectedly left her a substantial legacy; she would now be in a position to consider a rather more expensive property.

Following a discussion the previous afternoon, Mr Rush was about to issue a final acceptance concluding the bargain.

Mr Rush was busy, so a message was left with the receptionist which Mrs Rich said was urgent.  The message was to the effect that Mr Rush should not conclude the deal and should phone Mrs Rich urgently.

Somehow or other, Mr Rush did not receive, certainly did not act upon Mrs Rich’s message.  He concluded the bargain and Mrs Rich was obliged to proceed.

Risk management issues to be considered:

• All members of staff, including support staff, to appreciate importance of their role in Risk Management
• Training in basic Risk Management awareness for all personnel including support staff
• Standard
  
• Consider the relative risks/reliability of e-mail, voicemail etc.

Family funded purchase

Following her husband’s death, Ailsa Craig was contemplating the prospect of selling the family home and moving to something much smaller and more manageable.  Out of the blue, Ailsa’s son-in-law, Ken More, came up with an alternative plan.  Ken and his wife, Yvonne, would buy a house big enough to accommodate Ken and Yvonne and their teenage family with enough space to create a separate granny flat for Mrs Craig.  Ken and Yvonne would contribute the equity from the sale of their own house plus whatever they could borrow. The balance of the purchase price plus the cost of creating the granny flat would come from Mrs Craig.  

A letter from Ken provides this brief description of what is planned, encloses sale particulars for a substantial townhouse in which he has noted an interest and asks you for a meeting with him and his mother-in-law in a couple of days’ time.

What are the risks that you reckon need to be addressed?

Risk management issues to be considered:

• what are the principal risks for the various interested parties?  what happens if -
• Ken and Yvonne divorce?
• Ailsa has to go into a nursing home?  
• Ken and Yvonne do not keep up repayments on the loan?
• where are the potential conflicts?
• who could you act for?  Ailsa?  Ken?  Yvonne?  Lender?
• who would you be content to act for?
• is Ailsa’s contribution a loan or a gift?
• how is Ailsa’s position secured?
• what happens to Ailsa’s loan in the event of her death, the sale of the property, default on the loan? 
• how should title be taken?

See article ‘Family Funded Purchases’, JLSS July 2002.

Uncommunicative client

Zoltan was the perfect client as far as Scott was concerned.  Zoltan never pestered Scott, as most other clients did, with constant phone calls and questions about progress or lack of it. 

Scott had presevered with the negotiation and drafting of the Agreement documenting Zoltan’s withdrawal from the public relations consultancy partnership he had resigned from nine months ago when he got his big break and took up a plum job with an international PR agency.   The terms were all agreed when a new but relatively insignificant issue was raised on which Scott needed Zoltan’s instructions.

Scott’s letter and a reminder went unanswered.   For some reason, the file was not re-diaried and over the next three months, either Scott did not conduct a file review or else Zoltan’s file got overlooked.  Either way, the months went by with no action being taken.

This period of inactivity was interrupted when one of the other partners contacted Scott for advice in connection with the insolvency of the partnership and Zoltan was in touch at the same time to ask for Scott’s urgent confirmation that a mistake had been made by the partnership’s lenders and landlords who had written to him intimating that they were holding Zoltan liable for the partnership’s debts/lease commitments.

Scott felt aggrieved that Zoltan’s failure to respond to his requests for information had brought about this situation.  Zoltan’s explanation was that he had been on secondment abroad for an extended period and had not received Scott’s letters.

What would you have done differently in order to protect your position better than Scott appears to have done?

Risk management issues to be considered:

• To minimise this sort of risk, it is important that regular client contact is maintained throughout.  How regular? 
• Importance of diarying files, conducting regular file reviews
• Clients should be clearly warned of the possible consequences of failing to deal with correspondence. 
• Client should be warned that if they are to be absent from the country for an extended period they must let their solicitor know; wherever possible, a contact name and number should be provided to enable the solicitor to obtain urgent instructions.
• Use of letters of disengagement / non-engagement
• Were there factors which perhaps ought to have prompted Scott to anticipate that the client might be uncontactable for periods of time and to plan accordingly? The client’s name, for instance; the nature of his job? 
• Did Zoltan appreciate that his resignation alone did not release him from his liability to the bank and landlords?
• Note – Scott was approached by one of the other partners when the partnership went bust. Was Scott also acting for the partnership/other partners? Could there be the potential for an allegation of conflict of interest? 

See article ‘When clients ask and expect too much’ JLSS August 2000

Distribution of clients funds

How do you avoid finding yourself in the following situations?

• A solicitor acting in the administration of an estate sent a cheque to one of the beneficiaries for £15,100 instead of £11,500.  The mistake was only uncovered when the final executry account was being prepared and the final distribution was being made some months later. 
• A client instructed his solicitors to invest the proceeds of a property sale for his four grandchildren and paid to them, in equal shares, when they reached the age of 21.  When the eldest grandchild reached age 21, she contacted the solicitors and asked for the money.  The solicitors closed the account in which the funds were invested and issued a cheque for the entire proceeds to the eldest grandchild.  The error only came to light when the next eldest grandchild approached the solicitors after her twenty first birthday.
• A holiday cottage had been purchased by a group of four friends to be used on an informal ‘time share’ basis.  There had been a bit of a fall-out over the arrangements and the ‘friends’ had agreed to re-sell the cottage.  One of the group had volunteered to make all the arrangements for the cottage to be put on the market etc. Following settlement, the solicitor instructed in the sale sent the entire fee proceeds to the individual who had instructed him on behalf of the co-proprietors. There was then a dispute amongst the ‘friends’ about allocation of maintenance costs etc. and that resulted in the solicitor receiving demands from the three other ‘friends’ for their respective quarter shares.

Risk management issues to be considered:

• It may sometimes be possible, as a matter of law, to effect a recovery, however that may be academic if the party overpaid has spent the money and is impecunious.  There is also the risk of fraud in some of these situations.
• Make a point of double checking that cheques are made out correctly in favour the intended payee and that the amount of the cheque is correct/corresponds with the covering letter/documentation
• Grandchildren’s respective trust funds should have been invested separately
• Whatever the type of transaction etc, ensure that money is only paid to the party or parties entitled to it unless you have signed written authority to remit the money to a third party or to only one of the parties entitled to it
• Depending on the circumstances, prepare statements of intromissions for each of the parties entitled to part of the funds and procure the agreement of all the parties to the statement and to the arrangements for remittance
• Anticipate the possibility of someone else dealing with the distribution of funds on one of your files in your absence or without reference to you – instructions on the file need to be clear

Dealing with pressure from distressed client

<>Quayle & Co are consulted by Mrs Partridge to act on her behalf in a matrimonial matter.

Mrs Partridge is married to Alan, a Company Director. He is clearly of not insubstantial means but Mrs Partridge does not have detailed knowledge of her husband’s assets.

The marriage is very unhappy. There are allegations of both verbal abuse and excessive alcohol consumption, which leads to threatened physical abuse.

Mrs Partridge is desperate to remove from the matrimonial home. She has seen another property which would be very suitable for her purposes and which she wants to buy.

The husband realised the marriage had irretrievably broken down and offers a financial settlement that is not ungenerous. The husband’s proposals would enable her to buy the other property.

Mrs Partridge is desperate to proceed with an offer for the purchase of the property she has seen and therefore decides that she wants to accept the financial offer that has been put to her by her husband.

What are the various issues that require to be considered from a Risk Management point of view?

Risk management issues to be considered:

• Client possibly making an ‘uninformed’ judgment
• Client rushing into a course of action that may not necessarily be in her best interests
• What can you do to buy time to enable client to make an informed judgment?

Exclusion Order?

Matrimonial Interdict?

Encourage her to rent property meantime

• Can you allow client to offer for the purchase of a property without first having crossed all ‘T’s’ and doted all ‘i’s’ re financial situation?
• If client insists on going ahead

Meet with client in person (preferably with  colleague present) and make sure he/she understands that he/she acting contrary to your advice

Extend notes of meeting

Confirm views of client in writing within 24 hours

Get written instructions from client

See article ‘When clients ask and expect too much’ JLSS August 2000

The information in this page is (a) intended to provide guidance on matters of practical risk management and not on issues of law, (b) necessarily of a generalised nature and (c) not intended to endorse or recommend any particular product or service. It is not specific to any practice or to any individual and should not be relied on as stating the correct legal position. Alistair Sim is Associate Director in the Professional and Financial Risks Division at Marsh UK Limited