Combating claims in interesting times

Coinciding with a UK general election, ongoing volcanic ash cloud disruption, the threat of economic contagion from other parts of Europe and, closer to (a solicitor’s) home, the lively ABS debates and the administration of major professional indemnity insurer Quinn Insurance – this year’s Risk Management Roadshow undoubtedly took place during “interesting times”.

The economic uncertainties also continue to make for “interesting times” in terms of risks faced by law firms, and many of the case studies presented for discussion in this year’s Roadshow focused on current and emerging risk issues, alongside some of the perennial problems.

The messages to take away from this year’s Roadshow include the following:

Be alert to mortgage fraud

Lender claims remain an area of concern for insurers and the Society’s Insurance Committee. Several factors are at play: higher numbers of borrower defaults as a result of the credit crunch; increasing evidence of mortgage fraud; and allegations of failure to comply with lenders’ reporting requirements.

The messages emerging from discussion of three case studies in the Roadshow materials were: be alert to unusual aspects of a transaction; be fully aware of lenders’ reporting requirements; report any unusual or suspicious circumstances to lenders.

A number of the possible warning signs flagged in the case studies are highlighted in a “Financial Compliance update” issued by the Society on 23 June. The full text of this update is reproduced in the Roadshow reference materials. These can be downloaded from Marsh’s website (www.marsh.co.uk/lawsociety).

Assess effectiveness of notice procedures

One of the consequences of the recession is that many businesses are keen to get out of leases that were entered into in more favourable economic conditions. Unfortunately, landlords are equally keen to hold on to their tenants wherever possible, and therefore, where a break option is exercised, it is likely that the notice will be scrutinised thoroughly, and any deficiency in the notice or its service seized upon. There is, consequently, a heightened risk for solicitors acting for tenants in relation to break options.

Effective systems and procedures which can help to manage this type of risk do not have to be high-tech or complex. Delegates were invited to consider a fictional firm’s practice note (see below, left), setting out procedures to follow when drafting and serving break notices for tenant clients, and comment on how effective the procedures were likely to be and whether/how they could be improved.

While this may be a good starting point, it could be made more effective if developed as a checklist, with clear and specific action points. For example, it might include a “check point” (see above).

Learn from claims

Where a claim is made against a firm, something positive can be gleaned from the experience. Rather than simply moving on and trying to ignore the fact that it happened, an analysis of the circumstances of the claim can identify possible gaps in the firm’s systems and procedures, and has the potential to address problems which could otherwise have led to similar mistakes arising in the future.

To emphasise the point, delegates were presented with a scenario taken from the latest module of the Marsh e-learning for solicitors (www.marsh.co.uk/lawsociety):

Philippa is a partner in the firm of McVitie Simmers & Bronte. Following a spate of critical date claims, the firm has undertaken an audit of a number of files to review how critical date issues are being handled across the firm. Extracts from Philippa’s audit notes on a randomly selected trust & executry file are reproduced opposite.

Which of the possible action points (listed on the right and at the foot of the screen image illustration) would be most effective in reducing the risk of further claims in relation to serving notice of agricultural tenancy bequests?

Log on to the Critical Dates e-learning module to complete this exercise online, or access a suggested answer to this, and the other questions in this year’s Roadshow by downloading the materials – in each case available on www.marsh.co.uk/lawsociety (username and password available on request).

Maintain a comprehensive file

A number of the panel solicitors, in their introductory address, emphasised the critical importance of maintaining a comprehensive file in the prevention and successful defence of claims. Although a perennial theme in discussions at successive roadshows, delegates recognised that this may be particularly important at a time when some clients, having signed up to deals in very different economic circumstances, may now be seeking to revisit the terms of the contract and looking for someone to blame.

Delegates were asked to consider what they would look for on the file in the following case, which might assist in defending the potential claim, and what they might do in similar circumstances to reduce the risk of a claim arising in the first place.

Mr Tweedy, proprietor of Chelsy Tractors Ltd, is a longstanding client. Over a business lunch he informs you that his rival, Mr Serge, who owns Luxury Limos Ltd, has agreed to sell up. Mr Tweedy wants you to handle the deal. “Just the legal side – we’ve already agreed terms”, he explains.

Mr Tweedy subsequently emails details of the deal from which you draft heads of terms which are subject to a series of minor amendments in negotiation with Mr Serge’s solicitor before being signed by the parties.

The deal drags on longer than Mr Tweedy had anticipated, and, when it eventually completes, the signed share purchase agreement includes a number of last minute amendments.

Some months later, the post brings a letter from Harridges Solicitors, whom Mr Tweedy has now instructed, in relation to a dispute with Mr Serge over the final balancing payment under the terms of the agreement. It appears that the drafting of the payment mechanism is somewhat ambiguous and Mr Serge and Mr Tweedy cannot agree on its interpretation.

At this stage Harridges are looking for your comments, but the clear inference is that, in the event that Mr Tweedy has to pay anything more than he thinks is due, he will be looking to you to reimburse him.

One of the options considered in response to this case study was to decline to take on the work on an “execution only” basis, given the potential complexities of the deal. Alternatively, if taking the work on, the emphasis was on clearly setting out the limited scope of work in the letter of engagement, which should be kept on file. Was it made clear to Mr Tweedy, for instance, whether or not he was being advised on the terms of the payment mechanism? If not, was he advised to get specialist advice on its terms?

Consider whether (written) confirmation should have been obtained from Mr Tweedy that he had checked and was happy with the terms of the final form share purchase agreement and acknowledging that it no longer reflected the heads of terms previously agreed?

Evaluate risks/rewards

Attracting new business is particularly important in a tough business environment. There can be a temptation, however, to take on work which, in different times, you might have declined.

Cyril Grubb is approached by established client Widgets2u Ltd, seeking advice on a refinancing for their English subsidiary. The loan and guarantee documents are all to be subject to English law. Cyril hasn’t advised clients on an English law matter before, but as he has undertaken several similar transactions in Scotland, he is happy to take on the instruction from Widgets2u.

What transaction vetting issues should Cyril Grubb have considered? Would your answer be any different if the only unfamiliar aspect of the transaction had been an EU competition law issue?

In both situations it would appear that Cyril may risk straying into unfamiliar areas of law/practice if he takes the work on. In the first example, there is also a risk that he would not have cover under the Master Policy unless he could satisfy insurers that he was “demonstrably competent” in the English law matter in question. Advising on EU law, on the other hand, would be covered under the Master Policy.

If Cyril did not want to decline the new instruction, he could have considered subcontracting the specialist aspects of the work to a solicitor with the relevant experience.

• A full set of materials from the Roadshow can be accessed by logging on to the Marsh solicitors’ website www.marsh.co.uk/lawsociety

Calum MacLean and Marsh

Calum MacLean is a former solicitor in private practice who works in the FINPRO (Financial and Professional) National Practice at Marsh, the world’s leading insurance broker and risk adviser. For a user name and password to access the Marsh solicitors’ website, contact calum.maclean@marsh.com .

The information contained in this article provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insureds should consult their insurance and legal advisers regarding specific coverage issues.

Marsh Ltd is authorised and regulated by the Financial Services Authority.