Roadshow ahead

The 2004 Risk Management Roadshow series gets underway in Edinburgh on 21 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 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. The appropriate response will always involve an element of judgment on the facts and circumstances as they present themselves to the individual solicitor.

Client vetting/client engagement

You have been asked if your firm will act for an overseas client who will apparently guarantee your firm a regular flow of big-ticket work, principally property transactions in Scotland and England. There is a major property purchase in the pipeline and, on the information you have been given, this would easily be the biggest transaction ever handled by the firm and, potentially, the most lucrative. It has already been indicated that there will be no problem with the level of the firm’s fees, indeed there would be a payment up front on account. You have mentioned all of this at a partners’ lunch and, conservative by nature, one or two of them have raised concerns. Before agreeing to take the client on, you are sending a memo to all the partners to check for any conflict of interest and seek approval to acting.

Two of your partners have already emailed you following the discussion at lunchtime, to the effect “Who are these people anyway? What do we know about them?” One also raises concerns about the size of any potential claim should anything go wrong.

What are the issues you need to address and how are you going to address them? What enquiries do you need to make in order to be fully prepared for questions and concerns that may be raised by your partners?  

Due diligence on prospective client: Who is the introducer? What is known about the introducer? Is there an established connection? Why has your firm been selected/approached? Who has acted for them previously?

Who precisely would be the client: An individual? A company? Other? Where is that individual/entity based? How would you obtain instructions? Can you meet the client?

Money laundering: Carry out money laundering check. How will you be paid? Can you get credit references? Searches? Any other checks you could make?

Capability and capacity: Are you capable of doing this work? Do you have the necessary expertise/experience? Do you have the capacity to do the work within time limits/deadlines?

English transactions: Consider whether you are competent to undertake English transactions. Critically, consider whether your professional indemnity insurance covers such transactions. If you cannot undertake the work yourselves, are you to be responsible for appointing English solicitors and subcontracting to them? What would be the terms of engagement? Who would be responsible/liable if English solicitors make a mistake? It may be appropriate to check (or advise the client to check) adequacy of English solicitors’ or other professionals’ professional indemnity insurance. Consider legal status of other professionals if no cover, e.g. firms with limited liability.

Exposure to high value claims: Is contractual limitation of liability a possibility? Establish the cost of a substantial increase in professional indemnity. Be aware that cover is not available on per transaction basis; and of the implications of cover being on a “claims-made” basis, meaning that cover probably needs to be maintained for a number of years. Assess how economic it would be to commit to maintaining a high level of cover long term when there is no guarantee of continuing instructions. Will the clients require an undertaking to maintain cover at a high level?

Client engagement/managing the client

All clients, whether private or commercial/corporate, like to get value for money and keep legal costs to a minimum. How do you deal with the following situations from the perspective of risk management?

You bought a house for Mr Buick last year and now he has faxed you asking you to prepare a partnership agreement. In his fax, Mr Buick indicates that he has been operating his catering business in partnership since the start of the year when he assumed a friend of his who is a professional chef. They do not want to incur much expense as they are looking for something very simple to produce to the bank and they have apparently agreed everything between them already. The fax sets out the terms of their agreement in a couple of pages of bullet points.

The firm has acted for many years for a local entrepreneur, Mr Ford and handled a wide range of property, employment and commercial contract matters. He provides regular work and regularly introduces new clients to the firm. Mr Ford drives a hard bargain where fees are concerned and has asked you to handle a personal matter for him as a “freebie”. He is buying a £250,000 yacht and wants you to handle this on his behalf. You have no experience of this kind of transaction.

You are handling Mr Lincoln’s divorce. As part of the arrangements his wife is transferring to Mr Lincoln her half share in a Highland estate. You are dealing with the conveyance in favour of your client. Mrs Lincoln is represented by English solicitors who are taking a very passive role in relation to the conveyance. Now they are demanding that you certify to them and their client that she will be relieved of any liability associated with the property and the loan secured over it. They explain that their client is not inclined to incur the cost of instructing a Scottish solicitor to deal with these matters.

Mr Morgan is not the easiest client to deal with. Things get particularly awkward in the course of his purchase of a new property on what you suspect was at one time the site of the local gasworks. You have tried to explain the issues to him and suggested that a contaminated land report might be obtained. He rants about lawyers creating unnecessary work, complications and expense and is adamant that good money shouldn’t be wasted on worthless reports.

Does it make any difference if the property is commercial rather than domestic? What if there is to be a loan over the property?

Mr Buick: Query whether you should be prepared to act for more than one party to the partnership agreement? If so, what should be in the terms of engagement with Mr Buick and the business partner? If not, how do you proceed? How do you ensure that the business partner understands the position? Letter of non-engagement?

Mr Ford: Consider the risks of dabbling in complex/specialist transactions. Should you subcontract? Decline to act?

Mr Lincoln: It is suggested you should decline to provide any such certification. Arguably you should be asking for a letter of obligation in respect of the conveyance of the wife’s half share.

Mr Morgan: If, based on local knowledge, you consider there to be environmental risks associated with this property, the client needs to be made aware of the risks – is a specialist report appropriate? If the client declines, is it a similar situation to a client declining to incur the cost of a valuation/survey? How do you protect your own position?

Managing critical dates

Following the departure of a partner and distribution of his files between fee-earners,  an assistant advises you that she has come across several personal injury files that appear to be time barred. You have asked for a full report.

What are the questions you want answers to? What action do you want taken immediately?

Are these matters really time barred? Is there a reason why there appears to be more than one problem file (e.g. unusual limitation period)?

Corrective action: Review all the ex-partner’s files. Establish action plans on cases identified which could become time barred but are not as yet.

Preventive action: A belt and braces approach to avoiding time bar could involve: diary/case management systems; central diary or equivalent; case review meetings; physical file reviews; and file audits.

Consider a system to monitor workload to check adequate resources/management/handling; and training sessions on understanding of the law on time bar periods particularly for unusual types of claim/circumstances.

Establish the underlying cause(s) of cases becoming time barred – draw up action plans/revise systems of work to prevent recurrence.

Proper handover of files between departing colleague and fee earner assuming responsibility prior to departure allows opportunity for discussion while the departing colleague is still available.

Drafting error

Missives for purchase of a housing development were subject to a suspensive condition relating to planning. In order to keep the missives alive, the developers instructed their solicitors to waive the condition. The responsible partner had been about to depart for a fortnight’s holiday at the point when the developers were making up their minds about the planning condition and the file was left with an assistant who had recently joined the firm. The missives ran to six or seven formal letters and the complex price-setting arrangements were dealt with in the same set of provisions as the planning condition. Waiving the planning condition had the unintended effect of crystallising the price payable at the fixed price specified as the default position in the missives. The developers made a claim for the difference between the fixed price they ended up being committed to and the lower price they would have paid in accordance with the price-setting formula.

What was/were the underlying cause(s)? The format/complexity of missives? Inappropriate delegation of work/responsibility? Inadequate supervision of assistant? What experience did he/she have?

How could the risk of recurrence be minimised? Having a colleague test the effect/effectiveness of waiver/modification of the contract condition? Adopting a simplified approach to drafting missives – a single contract document adjusted as a draft?

Conclusion

How would you have responded in the above scenarios? If your area of practice is not represented above, could similar risk issues arise in the matters in which you act? How would your colleagues have responded to these situations?