Set off on the right foot

Client and transaction vetting are activities which have always been a required and necessary part of a solicitor’s job when taking on a new client, but never more so than in the current environment.

The COVID-19 crisis has already caused unprecedented upheaval to “business as usual”, with fundamental changes almost certainly on the horizon.

As lockdown restrictions are gradually eased and we all start thinking about how to restart business and recover from the financial hit, it is important that the profession thinks about what can be done to minimise risk when seeking to take on new work in what is now a radically altered landscape.

The Law Society of Scotland provides helpful COVID-19 guidance, including advice on how solicitors should approach the process of verifying and vetting new clients. That advice is regularly updated on the website, and the Society’s Professional Practice team is working remotely and able to deal with any specific questions. In this article, we focus on key areas to think about when considering taking on a new transaction.

Just don’t dabble

Previously reliable streams of work have dried up or seen significant reductions in volume as a result of the lockdown. Clients now face unprecedented challenges, and they will be more reliant than ever on help and advice from the profession. The natural temptation is to seize every opportunity and accept all client instructions that come your way.

However much new business seems attractive, a realistic assessment should always be made before accepting it – are you equipped to accept the instructions in question? Do you have sufficient knowledge of the practice area, and does your firm have sufficient resources to carry out the required work adequately? The last point is particularly relevant, given that fee earners and support staff may not currently be working and may return to work in a reduced capacity.

If things, unfortunately, go wrong, a solicitor’s lack of experience will likely not prove to be an effective answer to a complaint or a claim. The standard for negligence makes no allowance for the fact that a solicitor was working outside their comfort zone. The claims landscape following the 2007 financial crash made clear that an increase in dabbling leads to an upsurge in claims against solicitors.

Instructions in the age of virtual meetings

The fundamentals of dealing with new business have not changed – take careful initial instructions from the client. What has changed, of course, is the ability to carry out this process face-to-face. Current restrictions essentially rule out physical meetings, and even as restrictions are eased it seems likely that there will be a shift away from face-to-face interaction.

Instructions have always been taken over the phone and by email, of course, and remote meetings can now approximate a physical meeting. Sometimes, however, none of these can get to the nub of the issue quite like a physical meeting can.

The best way to head off any risk that instructions are misinterpreted is to communicate. As soon as reasonably practicable, express clearly in writing what you understand to be the client’s instructions and have them confirm that you have correctly understood them. Take file notes of your own, detailing what were the instructions provided – you will doubtless be sick of having this particular point repeated to you in these articles, but it really is more important now than ever before to keep notes. And keep file notes safe – they are of no use if they have been lost or destroyed.

Another point to bear in mind is that remote meetings can pose headaches from a data protection standpoint. Virtual platforms, while user friendly, may come with security issues. Ensure that the client is informed of any risks to the security of their data arising from the choice of platform. You might personally prefer to hold a remote meeting to approximate a face-to-face discussion, but security concerns may need to override your preference. Consider this point particularly if the client’s instructions may relate to commercially or personally sensitive matters.

Don’t forget the humble letter of engagement

Letters of engagement can be powerful tools, especially so for new clients, and yet too often solicitors seem to resist properly scoping their engagement letters to mitigate the risks arising from transactions. If you decide to venture into a new area of practice or are working with a new client, it is doubly important that you are precise about exactly how far you will go and what you will do or not do in relation to the matter.

Many practitioners will issue to a client a letter of engagement covering a particular type of work (lease preparation, debt recovery work), and when future instructions to carry out the same type of work are received no further engagement letters are issued. That is allowed – practice rule B4 says that you don’t need to repeatedly provide the information required under that rule to a regular client who instructs the same type of work, provided they got that information at the time of their first instruction. However, always carefully weigh up the nature of each new instruction: is a proposed transaction really of such similar character to previous ones, or are there any distinguishing factors which should be specifically covered off in a transaction-specific engagement letter?

Consider on exactly what terms you should engage to carry out transactional work where you have identified any transaction-specific risk factors. We have seen claims which might have been avoided if a tailored letter of engagement which properly defined what the solicitor was going to do, and what they would not be doing, had been issued rather than a generic engagement letter. The solicitors failed at the outset to identify that there were specific factors associated with the proposed transaction which increased risk, such as jurisdictional or choice of law issues which might arise, and they failed to take sufficient care to reduce that risk through tailored engagement terms. The result is that there is exposure to potential liability which could potentially have been limited or excluded.

In particular, if you are advising on contractual matters, it is desirable to set out clearly what is the scope of the advice being provided, so that there is a limit to the scope of what is your duty to advise the client. This will help the client properly to understand what your advice will (and will not) cover, which will manage expectations and in turn reduce the likelihood of complaints.

A final point regarding engagement letters is an administrative one. In pre-COVID times, many practitioners might simply have dictated instructions along the lines of “please prepare and issue to the client the standard letter of engagement”, and thought no further about it. That could lead to issues where no copy of the principal letter was retained on the file and there was therefore no documentary proof that it was sent.

Engagement letters will now likely be sent out by email. That will generate an email trail showing that every engagement letter was sent, which may actually be an improvement on previous record keeping. But make sure that each email sent is actually properly stored and not left languishing in someone’s sent email folder, at risk of being deleted, lost when IT systems are updated, or simply forgotten about if that person leaves the firm or perhaps is furloughed. This point is true regarding all emails sent and received; store them safely!

COVID, contracts and conflict

Firms are now seeing an increased demand for advice on how contracts respond to COVID restrictions and the current business environment. Your firm may well have originally drafted the contracts in question for the client.

The effects of a global pandemic may have been entirely beyond the contemplation of the original drafter, and the operation of provisions such as force majeure clauses may now be viewed in an entirely new light. Be aware of the potential for a conflict of interest to arise – such risks need to be identified at the outset to avoid problems further down the road.

Once a fraud, always a fraud

Fraud is still a major issue in the current climate, and the methods by which fraudsters operate often are unchanged.

However, what may have changed are perceptions. Whereas previously an instruction from a new client located hundreds of miles away might have elicited suspicion, it may be less likely to raise an eyebrow where all instructions can now only be received over the phone, remotely or by email.

Many solicitors will see the shift away from physical meetings as a good opportunity to seek out new clients who otherwise have been excluded by geography. Don’t forget that if something would have aroused suspicion before the lockdown, it almost certainly is suspicious now.

To illustrate the point, a geographically distant party with no prior connections to your firm, or your existing clients, being nevertheless desperate to instruct you should always ring alarm bells.

The same principle applies regarding the details of proposed transactions, even where the client is already known. Factors which were suspicious before COVID remain suspicious now, and certain questions should always be considered before acting: why is the transaction structured in the way that it is; is your firm being asked to receive and transfer funds which appear tangential to the purposes of the transaction; is there any unexplained or undue sense of urgency in the background?