Corporate and commercial risks: drafting and dabbling

Drafting errors

It is easy to classify drafting errors as “mistakes” which are part and parcel of legal practice. It would be wrong to think that all drafting errors are unavoidable. A great number of safeguards can be put in place to reduce the likelihood of such errors occurring. Because these tend to be seen as administrative tasks, their value can often be overlooked. All areas of practice rely on style documents, and corporate/commercial work is no different. Given the reliance which is placed on style documentation, it is important that sufficient time and resources are devoted to creating, managing and maintaining those styles. This can be seen as a fairly mundane task, and one which can consume resources, because styles require peer review and approval from fee earners.

There are many ways in which risk can manifest itself in relation to styles, for example:

Using the style as a definitive document. Without fully understanding the specifics of the transaction and the potential risks which the document should try to address on behalf of the client, blindly using a style may not actually give the client all the protection required. This, of course, somewhat depends on how comprehensive the style might be.

Using the wrong style. This can happen where the explanatory notes to the style are inadequate and the user simply creates a document based on a style which is inappropriate to the transaction at hand.

Using a style which is out of date. While the style might be appropriate for the transaction, care still has to be taken that the style is maintained and that developments in law and practice have been incorporated.

Using a style from a previous transaction. This runs the risk of inappropriate terms being incorporated into the first draft document, which are then never corrected.

Case study

When dealing with an asset purchase on behalf of a buyer, a solicitor utilised a style from a previous transaction without appreciating that this document had been heavily negotiated. The resulting first draft was lacking a number of buyer protections and this was not picked up by the solicitor in subsequent drafts. The client had a post-transaction issue which was not covered by warranty protection. This could have been avoided by having at least one “buyer friendly” style asset purchase agreement available for use. Utilising a past agreement without understanding the version history of that document can lead to gaps and risk exposure.

Competencies

As with any other practice area, there is a risk of dabbling. The vast majority of solicitors are, without doubt, alive to that issue. However, it still manifests itself in the claims history. There is the potential for an increase in dabbling where macroeconomic circumstances may push solicitors to increase turnover or explore different opportunities for generating income.

The economic impact of the coronavirus pandemic will likely evolve over months and years to come. It may well be tempting to take on some pieces of work which would otherwise have been referred elsewhere. Always remember that the additional fees generated may be eclipsed by payments of the self-insured amount and subsequent premium increases in the event of a claim. For a more detailed explanation of competency risks, see the risk management column at Journal, December 2018, 44: “Into uncharted waters”.

The lack of core competencies/dabbling risk itself could be said to encompass three related but different risk bearing activities.

The first is undertaking a piece of work which is simply outside the core competencies of the firm.

The second is undertaking a piece of work which is within the core competencies of the firm, but reserving that work to an individual lacking the competency.

The third is commencing a piece of work which is (initially) within the firm’s competencies but which then expands to encompass matters on which the firm does not have sufficient expertise to advise.

1. Work outside of core competencies

This is the easiest type of dabbling risk to understand, define and manage. All firms should be fully aware of what their key service lines and competencies are. Engagements should be sufficiently well researched and clear that fee earners are never in a position to take on work which is outside scope.

Risk management practices which can prevent this issue arising include:

• keeping the firm’s core competencies under review;
• making fee earners aware of what services the firm will not undertake, and perhaps what types of work require partner signoff before acceptance; and
• emphasising the need for properly scoping the engagement in relation to all matters.

Case study

A firm of solicitors with a general practice background was asked to advise on the acquisition of a business by way of a business transfer agreement. One of the assets of the business was the premises from which it traded. The firm had been involved in asset purchases before but had limited experience of corporate matters. Although not comfortable with business transfer agreements, the firm did understand commercial property missives. The approach taken was to develop the agreement based on commercial property missives with some additional warranties. For various reasons, that drafting failed to account for a number of matters, not least of which was an absence of any warranties as to the accounts or financial position of the business.

2. Silos

The second area which can result in risk exposure is where, notwithstanding that the firm has an acknowledged competency in a particular area, the work in that area is not properly delegated. In other words, there is a silo mentality in the firm. This can be for any number of reasons, including a desire not to share fees internally or a belief that there is a client expectation that the work will be handled by a particular solicitor. Regardless of the underlying cause, this is a cultural issue and if this arrangement exists in a practice, it is likely to take more than the writing of policies and procedures to effectively eliminate the risk.

Case study

A commercial property lawyer who had undertaken a number of corporate transactions years ago when an assistant decided not to refer a small corporate transaction from one of his clients to his corporate colleagues. This was as a result of a perception that the transaction would be more straightforward without involving corporate colleagues. In the event, the transaction – though small in value – had a number of complexities, some of which were not adequately addressed, causing an adverse outcome. This would undoubtedly have been avoided had the matter been dealt with by the appropriate individual within the firm. The commercial property lawyer in question had simply ignored the firm’s procedures, based on both personal prejudice and a desire to bolster their monthly fee target.

3. Scope creep

Scope creep can result in inadvertent dabbling. This can often be far harder to recognise and address than the position where the firm simply does not have the competency to undertake the work at all. When a firm is already committed to a transaction, related matters may have to be addressed that were not within the scope of the initial engagement. If that happens, the prudent approach would be to identify which additional elements might be outside the firm’s competency and address how this is to be managed. Sometimes, through pressure of time or client pressure, that approach is not followed.

Case study

A firm was engaged initially to review articles of association and a shareholders’ agreement. The solicitor in question was then asked to review the client’s contracts of employment and director service arrangements as part of the same review. The client then made a request for an incentivisation scheme, which included a share option plan. At that point, the firm ought to have reviewed its position as the creation of share option schemes was not something with which it had much experience. However, drafting was duly undertaken and the scheme was prepared. Unfortunately, due to an oversight on the part of the solicitor involved, there was an adverse tax consequence resulting from the implementation of the scheme. That outcome could have been avoided had the firm either referred that part of the work to another specialist firm or taken advice from a specialist on a subcontracting basis.

Risk management begins at home

In the commercial law sphere, no two commercial transactions or deals are the same. Commercial solicitors need to have superb analytical skills, attention to detail and expert knowledge of business and corporate law. For many commercial solicitors, risk management will be nothing new. Solicitors may, for example, have had experience in advising client companies on good corporate governance and how those companies manage their regulatory requirements and their legal and financial risks. However, while delivering for their clients, solicitors and law firms should always bear in mind their own risk management requirements too.