Risk management: Scope is the key

1. Risk management: ever more important

All solicitors in Scotland must complete a minimum of one hour compulsory risk management CPD. Particularly in the post-COVID-19 landscape and beyond, the risks which must be identified, understood and mitigated against are increasing in number and severity.

For many of us, monitoring and managing client risk is part of our day-to-day activities. We consider each course of action from every potential angle to ensure our client’s position is protected at all times. But the importance of also doing your part to mitigate the risks to yourself and to your employer/firm cannot be overstated. Most professional indemnity claims and complaints arise not from legal mistakes, but from poor risk management and administration.

In recent years, a number of landmark cases on the scope of a professional’s duty to their client have had (and will continue to have) repercussions across the profession. This has made it more important than ever to consider how risks can be avoided or mitigated by more careful consideration before issuing letters of engagement.

2. The developing law on scope of duty

Those practising in the field of professional negligence claims will be familiar with South Australia Asset Management Corp v York Montague Ltd (popularly known as “SAAMCo”). For almost 24 years, SAAMCo has been the leading authority on the “scope of duty principle”, i.e. the principle that, for damages to be recoverable for negligence, there must be a link between the loss suffered by a client and the scope of the duties owed to them by the (allegedly) negligent party.

Many have struggled to condense the SAAMCo principle into a universal statement of law, and its application has, at times, been difficult to predict. After two and a half challenging decades of SAAMCo, the true importance of the scope of a professional’s duties was reconsidered by the Supreme Court in Manchester Building Society v Grant Thornton LLP (“MBS”). The court cast aside the “information” versus “advice” distinction, which had previously been used to distinguish between cases where a professional was responsible for an entire course of action and ones where they were responsible only for losses related to the particular information provided. Instead, the Supreme Court reiterated that the focus had to be on precisely identifying the matters for which the professional had assumed responsibility.

This landmark case from 2021 revamped the SAAMCo principle by placing it into a newly expressed six-part test for determining liability for negligence:

1. Is the loss or damage actionable in negligence?
2. What are the risks to the client against which the defender has a duty of care? (the “scope of duty” question)
3. Did the defender breach their duty of care?
4. Is the loss for which damages are sought the consequence of the defender’s negligence?
5. Is there a sufficient nexus between the particular element of the loss for which damages are sought and the scope of the defender’s duty of care? (the “duty nexus” question)
6. Is any element of the loss too remote from the defender’s negligence, or does it have another legal cause?

The scope of duty principle is embodied in parts 2 and 5 of the above test. This test applies to all forms of negligence, but in the context of professional negligence, part 2 requires the court to consider the relationship between the professional and their client and to consider exactly what risks the professional’s advice was intended to protect against. Part 5 then requires consideration of whether a particular loss falls within the scope of that duty.

The impact of this decision is potentially significant.

The ripples have already been felt as far away as Trinidad & Tobago, where earlier this year, in Charles B Lawrence & Associates v Intercommercial Bank Ltd, the Privy Council applied MBS to restrict the losses recoverable by a lending institution to those which fell within the restricted scope of the professional adviser’s duty of care – $625,000 of a potential transaction value of $15 million. It must be noted, however, that this case would likely have been decided in the same way under the original principles set out in SAAMCo.

These recent developments highlight the importance to the profession of carefully considering the purpose of your instruction and ensuring that is clearly documented for posterity.

3. How do letters of engagement help manage the risk?

Professional obligations

In practical terms, all solicitors in Scotland must consider whether they are obliged to comply with practice rule B4.2 by issuing terms of business providing their client with various items of required information, including an outline of the work to be carried out. At a minimum this will ensure compliance with regulatory requirements, but a carefully drafted letter of engagement can have other significant benefits.

Terms and conditions (disputes, payment of fees)

Ensuring a robust letter of engagement is issued can protect you and your firm from future claims and disputes. Clearly defined fee arrangements and payment policies can also serve as a useful point of reference in the unfortunate event that relations sour.

All standard terms and conditions should be reviewed to ensure they remain appropriate and fit for purpose, particularly as regards recent legislative changes (think GDPR) and in light
of the changing world of work (think two years of pandemic-imposed remote working!).

Lockton has produced a guide to letters of engagement, available at www.locktonlaw.scot/news/letters-of-engagement-guide.html,
so consider also reviewing the terms of your letter of engagement against that.

Importantly, give consideration to whether your letter of engagement can limit financial exposure in the event of a claim. Practice managers ought to ensure any limit of liability is assessed with reference to the terms of insurance cover available and that advice is taken on agreeing any non-standard caps on liability.

Limit scope

There are lessons to be learned from MBS and similar cases in terms of explicitly stating exactly what work will and will not be carried out, and under what circumstances, in the course of providing legal services to your client.

The key starting point is to establish in clear terms what you are undertaking to do for your client. Thereafter, work out what is not intended to be included within your instructions. These elements are the foundation of assessing the scope of your duty of care to your client.

Consider, in particular, whether there is a risk that it might be argued you were obliged to warn your client about certain risks or issues which are beyond the nature of the work actually being undertaken. If so, think about expressly excluding advice on such areas from the scope of the services being provided. A common example of this might be an express exclusion of advice about the tax consequences of a transaction.

Any limitations on and exclusions of liability should be expressly set out in the letter of engagement in clear and explicit terms. Ambiguous terms are likely to be construed by the courts in favour of the weaker negotiating party (likely the client rather than the professional), so consistency with the limitation clauses and wider contract must be ensured. Terms and conditions must also be reasonable in all the circumstances (including the identity of your client and nature and extent of your relationship with them), to avoid falling foul of regulations on unfair contract terms.

Firms should also ensure that limits are reasonable and have discussions with the client in advance of any cap being imposed. The Law Society of Scotland considers that liability should not be capped below the minimum level of Master Policy cover (currently set at £2 million), and also that doing so would almost certainly be considered unsatisfactory professional conduct (see para 4.05 of Law, Practice & Conduct for Solicitors).

Importantly, revisit your letter of engagement on a regular basis during the course of your instruction in order to avoid “mission creep”. Ensure the terms of business you originally issued remain fit for purpose as the transaction or instruction develops. Keep meticulous and consistent records of all discussions around the scope of your work and ensure evidence of those discussions is put to your clients in writing wherever possible.