The corporate challenge

Although the position varies from year to year, in 2001-02 claims arising from corporate and commercial transactions accounted for 3.41% of the total number, and 20.15% of the total value, of claims intimated under the Master Policy. This is not particularly surprising given the high value and potentially high risk involved in many corporate and commercial transactions. It is important, therefore, that firms should address the potential risks by adopting good risk management practices. Many firms may already have procedures in place in a quality control or transaction procedures manual. It should be recognised that quality control and risk management are often the two sides of the same coin.

Engagement. Managing the client’s expectations is a key component in avoiding claims or complaints and should begin, prior to the outset of the transaction, with the engagement process. Aside from the usual issues of compliance with the money laundering legislation, the following should always be borne in mind:

Do we take on the transaction at all? This question needs to be answered honestly and objectively. It is all too easy to be seduced by the possibility of a huge fee and/or the kudos which may be involved in the transaction, into agreeing to act when it would be more prudent to decline the instruction. Resist the temptation – you may only end up buying yourself a liability. Perhaps the value of the transaction is greatly in excess of that which your firm normally undertakes. You may, therefore, need to consider (additional) top up cover. Remember that such increased cover cannot be bought only for single transactions, may have to be maintained in force for several years and may therefore make it uneconomic to have undertaken the work. The increased cost could well surpass the amount of the projected fee. Perhaps the size of the transaction is simply too large for the firm to resource properly. There is little point taking on a large transaction which stretches the firm to the limit, if the result is that the firm loses half a dozen existing clients in the process because their work is not being serviced properly.

What work is to be included/excluded? Failure to advise is a far more common cause of claims under the Master Policy than giving bad advice. Many disputes with clients can be avoided if the scope of the work is precisely set out in the letter of engagement so that it is clear what work is to be carried out and, just as important, what work is not to be carried out. For example, in corporate transactions, is the firm to advise on taxation or not? In many cases the client will have engaged the services of an accountant to advise on taxation issues, but the extent of his responsibilities and yours vis-à-vis the taxation warranties and indemnities you may be drafting or revising should be clearly stated in the letter of engagement. It is worthwhile using a checklist. While never a substitute for individual thought about the transaction in which you have been instructed, a checklist is a useful aide-memoire to make sure nothing is overlooked. The letter of engagement may need to be altered as the transaction progresses. The client may, for example, decide to curtail the amount of due diligence work you were originally instructed to undertake and that will need to be reflected in an amendment to the letter of engagement along with any effect that may have on the previously agreed fee or fee structure.

Know the client. It is necessary not only to understand the client but also to understand his commercial objectives for entering into the transaction. You also need to be aware of any timescale to which he is working. If the timescale cannot be achieved, this should be explained to the client as soon as possible. Often clients have unrealistic expectations based on sometimes hazy assumptions of the amount of work solicitors have to carry out and how quickly they can do it. Do not promise the earth if you cannot deliver it. Do not allow your client to believe, erroneously, that you will.

Fees. Disputes with clients about fees are often caused by a failure of the engagement process. The letter of engagement should clearly set out the agreement on fees. If there is a possibility that the transaction may not proceed, you should also state whether and, if so, what, or on what basis, fees for abortive work can be charged.

Managing the transaction. Corporate transactions, especially the larger ones, often involve a multi-disciplinary team of lawyers on both sides. It is important that someone should be in overall charge of the team, and that such project leader should have good planning, communication and management skills. At a minimum, each member of the team needs to have a clear understanding of what is required of him or her and any applicable timescales.

Documentation. The drafting, and review, of documents is of supreme importance and, therefore, from a risk management point of view, adequate systems for supervision and co-ordination should be put in place. If several members of the team have input into the drafting or revisal of, for example, a share sale and purchase agreement, there could be a “drafting” or “reviewing” partner whose responsibility is to co-ordinate drafting and ensure consistency among the various clauses in the document. A cause of claims resulting from “drafting errors”, and not just in relation to corporate/commercial transactions, relates to ambiguities in clauses introduced during the revisal process. It is a good idea to have the work of all members of the team reviewed, not simply the work of junior members of staff. Four eyes are better than two – but not always. Even with the most sophisticated word processing systems, the old fashioned system of document comparison still has its place, but claims have arisen apparently as a result of failure to compare documents properly. The underlying cause of such claims is often the failure to train properly the junior staff delegated to carry out the work and the failure to convey to them its importance.

Communication. Effective communication – whether “intra-team”, with the client or with the other side – is essential. Without proper systems and lines of communication being put in place, things can quickly become disorganised and out of control and there is always the danger that information, correspondence, emails and, of course, instructions from the client may not be shared among the members of the team.

Completion meetings. Completion meetings often last well into the early hours of the morning. Pressure and tiredness substantially add to the risk of mistakes being made. Often there are revisals and rewrites of documentation, or new matters are raised and there may be little time to consider and explain these fully to the client and take instructions. Nonetheless from a risk management point of view, it is essential to take the necessary time – postponing the meeting, if necessary. Proper file records of the key issues and the client’s instructions ought be kept.

Post-completion. A number of matters may arise after completion and it may be useful to prepare a list of critical dates, such as dates for preparation of completion accounts, dates for payment of deferred consideration and dates for expiry of claims under warranties. The list should be circulated to the client and other professionals involved in the transaction. The critical dates should be put in the diary with sufficient advance warning that any necessary action, for example raising court proceedings in respect of claims for breach of warranty, can be taken in good time before the expiry of any applicable time limit.