Why take the risk?

Terms of engagement, checklists, file reviews and scope letters are hardly the things to make you sit up with excitement. Yet there is more here than meets the eye – the Master Policy excess means that the basic cost of a successful professional negligence claim is £4,500 per partner per claim, never mind the issue of double and even triple deductibles or the consequential rise in future premiums.

The phenomenon, however, is that data and experience both confirm that the overwhelming majority of claims for professional negligence (including the most expensive) do not arise by dint of giving wrong legal advice, but are invariably the result of poor practice and file management or system failure.

The profession predominantly comprises capable and competent lawyers, but many of those, even with years of experience, demonstrate carelessness, naivety or even a lack of awareness when it comes to applying the same level of care, attention to detail and professionalism in relation to managing risks as they apply when advising their clients.

This paradox is difficult to explain when the tools available both to identify the risk of claims and to reduce them are well known, tried, tested and straightforward to apply.

Perhaps the explanation is that busy solicitors feel overwhelmed by a combination of the exponential increase of invasive and time-consuming regulatory compliance, higher demands and expectations of a more mobile and selective clientele, pressures on fees and a widespread impression that the regulatory bodies and even the courts have shown a disproportionate tolerance and acceptance of the claimant against the position of the solicitor. So, what does your toolbag contain?

1. Terms of engagement

I used to call these letters “terms of endearment” because they set out (or should!) in clear language the terms and conditions which form the basis of your relationship with your client. More importantly, from a risk perspective, they often prove to be the first line of defence. Many lawyers consider both the need for and the drafting of terms of engagement to be burdensome. This is a cardinal misjudgment. Your terms of engagement letter can be a shield offering complete protection against a dissatisfied client steadfast in their pursuit to find someone to blame for an unfortunate outcome. The letter is vital and the benefits of a carefully and properly constructed letter cannot be overstated. 

Your letter should contain fundamentals:

• Identify the work which has to be undertaken.
• Provide details of any area of work which will not be undertaken.
• Explain the basis upon which the fee will be charged, and any variations.
• Set out realistic timescales for completion, again explaining variables.
• Limitation of liability.

How instructions will be taken from spouses, partnerships and limited companies etc.

A typical engagement letter will cover many more details such as complaints procedure, etc, and for a fuller analysis and consideration see the Letter of Engagement Guide on the Lockton website at www.locktonlaw.scot, as well as the following articles in the Journal:

• “Swimming, not sinking” (Journal, August 2018, 44)
• “Engagement letters: a practical approach” (Journal, September 2018, 44).

Importantly, of course, your file should contain clear evidence that the terms of engagement letter has been issued, and ideally a signed copy.

2. Scope letters

Your scope letter should not be a carbon copy of the terms of engagement letter. Scope letters should be complementary to the more general terms of engagement letter, drafted in a bespoke fashion to the client and reflect the particular instruction. Your letter should communicate to the client the precise nature of the work to be undertaken, including extraordinary or unusual issues or items requiring special expertise and identifying particular elements of work not to be undertaken by you. 

A good scope letter would identify where other skills, such as an accountant or planning consultant, would require to be engaged.

A classic illustration arises in private client work where aspects of taxation can often cause untold difficulties, and it is good practice within the scope letter to be accurate and comprehensive in what is going to be done, what will not be included and where specialist advice may require to be sought.

Both the initial terms of engagement letter and tailor-made scope letter are enormously helpful to insurers in defending claims and put a much higher onus on the pursuer in establishing liability. A bonus of both letters is that they are also extremely useful in resolving complaints, as distinct from claims, in favour of the solicitor.

3. New matter form

The forms I have seen in most firms score maximum points for recording anti-money laundering enquiries and requirements. Many of those forms, however, contain a paucity or no disclosure about client or transaction risk.

Client risk

Your form should explicitly cover the following key points:

• What is the precise identity of these clients (individual, partnership, limited company, etc)?
• What do we know about these clients?
• What checks have been made to confirm what we have been told?
• Why are these clients (particularly new ones) instructing you?
• Who has authority to provide instructions?

We are all keen to secure new business, but enthusiasm should be tempered with caution, particularly when the client is new, or instructions are being received remotely or give vague information as to why you have been instructed, the purposes and the timing of the transaction or about the financing (in particular). Your forms should address each of those points.

Transaction risk

Often forms are bland and state that a transaction is a conveyance, divorce, etc. This first but often missed opportunity to identify transaction risk should be presented at the very outset of the transaction and, at that stage, a little time should be taken to record some fundamentals, because it is those omissions which often give rise to the claim:

• Does the firm retain the competencies to complete the transaction?
• Does the firm have the resources (e.g., is this extremely urgent)?
• What are the aspects of the transaction that are likely to be harbinger of risk,
  e.g. options agreements?
• Is there an unusual nature or type of work?
• Are different disciplines required?
• Is rural property involved?
• Are time limits identified and recorded?
• Are there access to land issues?
• Jurisdiction checks.
• Title checks.

Many large claims have arisen because of inadequate and sometimes careless recording of basic instructions. The classic example arises in the taking of title. Your form should confirm precisely:

• Who is your client?
• In whose name(s) is/are the title to be taken?
• Is there a survivorship destination?

These are illustrations of oversights at the outset of a transaction which have frequently been seen and which often lead to trouble and a claim arising even many years later.

4. File review

These are anathema to many practitioners, but a claim buster to even more! File review need no longer be cumbersome. Many readers will remember coming into offices at weekends and painstakingly physically going through cabinets and reviewing either their own or their colleagues’ files. Today, with the advent of technology and advanced case management systems, file review is far less labour intensive and ought to be both more efficient and more frequent. One caveat to the electronic file, however, is to ensure that everything (I mean everything) is fully recorded on the file in the same way as the file note was written.

5. Peer review

While accepting that in smaller firms peer review may be impractical on a resource basis, the overarching principle nonetheless ought to be sacrosanct across the profession that, wherever possible, reviews should be done on a peer basis to avoid the obvious risks of subjectivity and a reluctance to address issues in the hope that the problem will simply dissolve. Experience shows that problems grow arms and legs if not resolved as quickly as possible. Often peer review will reveal more than simply the problem within the file itself, such as a personal or professional problem facing a colleague which may itself be a risk factor.

During, and beyond, the pandemic, the inexorable rise in a variety of working practices whether at home or remotely has the potential to spawn new claims. Changes in working practices bring new issues of both identifying and managing risk. Insufficient time has yet passed to know whether claims will arise as a result of new working methods; however, careful thought should be given by all practices to create satisfactory systems which identify and manage risks, especially where work has been delegated and there may be inadequate systems of supervising and reviewing work done at other locations. File review (ideally by peer) is even more important with the advent of remote working.

6. Checklist

To maximise the effectiveness of the file review, whether carried out by physical examination or remotely, a checklist is essential to guide the reviewer to the points (some of which may not be obvious) to be checked. This article does not extend to detailing the content of checklists, and to an extent these may be matters of preference; however, the key is to confirm the following:

• The identity of the client.
• Has a terms of engagement letter been sent?
• What are the terms of the scope letter?
• What transaction risks have been identified?
• What client risks have been identified?
• What key dates have been identified and communicated?
• Has the file been progressed?
• Has there been recent communication with the client?

7. File validation

The final element in dealing with files and completing the circle from opening through review to closure is validation. This is the last and critical opportunity for you to check that risks which you have identified at the outset of the transaction have been managed throughout, and confirm that there are no loose ends at conclusion. This is vitally important especially in cases where some of the work has been delegated to a colleague perhaps working remotely. Again, the extent and scope of the validation is not for this article; the purpose is to encourage its application. Typically, as with the file review, a file validation exercise relies heavily on a checklist or other aid to ensure that the key points referenced are identified.

Hopefully (at least some) readers will find this article helpful and stimulating, and encourage colleagues to revisit client and transaction risk.

For more assistance and wider analysis of risk topics, please visit the Lockton website: www.lockton.com