Avoiding negligence claims in commercial litigation

Paul Smith is a solicitors and risk consultant who supports Travelers’ claim and underwriting teams. He helps law firms to identify and avoid professional indemnity insurance risks.

Here they explain some common errors in commercial litigation and how to avoid them. (Updated 18 January 2024)

Commercial litigation work currently ranks fourth in our data showing which areas of work in law firms generate the most negligence claims. Top of the ranking is residential conveyancing, then commercial property, then trusts and probate.

Commercial litigation ranks third in terms of the value of the claims — behind residential property and commercial property.

By far the largest number of claims arise from errors by law firms during the day-to-day conduct of the matter. In addition we see some claims from settlements and pleadings, with fewer claims generated by problems over enforcement, investigations or undertakings.

This article highlights some of the more common issues, and how your firm can reduce the risk of a claim. These issues have featured consistently in claims over the last three years and in the longer term before that.

1. Agreeing the retainer

Over 50% of claims can be categorised as failure to agree and then manage the retainer, including missing time limits.

Often, the problem starts with a lack of clarity around the facts and the risk prospects of success.

Problems can then be compounded by late instructions, complex instructions, a lack of retainer documentation and attendance notes, and poor tracking of the key dates.

1. Get the facts. Collect the information systematically. Understanding exactly what the matter involves reduces the chance of a mismatch between what the client wants and what results.
2. Document the retainer. This helps identify your client’s intentions and manage expectations. It also flags up any assumptions that need to be discussed.
3. Be clear on the matter’s prospects. Avoid unwelcome surprises about the duration, cost and chances of success.
4. Schedule any deadlines. Schedule key actions and highlight them in your planning for each matter.
5. Have systems to support legal service delivery. For example: client acceptance; file opening and closure processes; multiple diary systems; checklists for mapping workflow and guiding activity on a matter; work handover processes.

2. Progressing the matter

Once a matter is in progress, it can be easy to overlook issues and to communicate in adequately with the client.

1. Document any late instructions. Problems often arise when instructions change, so make attendance notes and immediately amend any plans that need to change.
2. Track and review progress. How is the retainer progressing against what you were originally instructed to do? Have the prospects of success changed?
3. Regularly review Precedent H costs budgets. Apply for an amendment when appropriate.
4. Supervision: monitor workloads and identify issues.

3. Not following clear instructions

Some claims reflect a serious mismatch between what the client believes has been agreed and what results.

For example:

• a law firm was instructed to obtain funding by way of ATE insurance to include enforcement, but there was a failure to follow this up promptly with the insurers. There was a potential loss if the insurers declined to cover enforcement costs

1. Check the client’s agreement with the terms of the retainer in the first place. This helps to reveal any errors or omissions.

4. Missing time limits

Missing time limits is a major source of claims.

For example:

• issuing proceedings out of time, six months after the limitation had expired. The firm’s client had to concede without a challenge of any kind, to avoid incurring hearing costs too
• delaying starting a professional negligence claim against a second firm of solicitors, resulting in the claim becoming statute-barred

1. Consider using a multiple diary system and task planners for each fee-earner and each case.

5. Legal advice

40% of claims stem from defective advice – which can be the result of getting the law wrong, getting the costs wrong, or misjudging the prospects of success.

For example:

• failing to advise the client to take out ATE insurance, which this left the client exposed to a costs award that wiped out virtually all the damages won
• having succeeded in unfair prejudice proceedings for a client, the firm wrongly believed the cost order entitled the client to immediate assessment. There was delay in clarifying the terms and enforcement, during which the opposing party went bankrupt
• a firm acted for client A in claims over the sale of A’s business to B and their associated companies – that B structured his various companies to avoid repaying loan notes in favour of A issued on sale. No recovery was made against B. The client then claimed that firm had negligently failed to make a claim within time against A’s former solicitors, alleging that the solicitors were negligent when drafting the Share Purchase Agreement

Advice failure can be caused by the sort of process and systems issues discussed earlier. But they are also caused by situations where there is a communication breakdown, people lack support or are unsupervised, and the firm’s culture does not encourage discussion and information-sharing.

1. Promote an ‘open door’ culture. Encourage discussion of challenging cases and issues.
2. Create ‘knowledge exchanges’. Provide regular opportunities to raise and discuss issues, and to tap into colleagues’ knowledge.
3. Offer mentoring schemes. This can be a structured way for knowledge to be passed on.
4. Set up feedback schemes. These provide opportunities to discuss risk issues, including both claims against the firm and ‘near misses’ – where things have gone wrong without ultimately resulting in a loss or claim.
5. Track individual workloads. Avoid overloading people. Stress and fatigue affect performance and risk perception.

6. Drafting

In more recent claims, we are seeing an increase in drafting errors – in particular around pleadings.

For example:

• naming the wrong party, or mis-spelling a party's name
• removing a definitions clause in error
• not including a costs schedule

Drafting error has various causes. Frequent and complex changes to instructions shortly before deadlines, demanding clients, poor record-keeping, and overstretched fee-earners with insufficient time to review documentation all make errors more likely.

To manage these risks:

1. Review draft documents systematically. Use drafting software, or operate the ‘four eyes’ system where one person reads out the document as another follows the text to spot errors. Work through any formulae.
2. Track individual workloads. Avoid overloading people.
3. Recognise that reviewing documents is hard work. Concentration levels fall quickly, especially when no problems are apparent at an early stage. It’s easy to become ‘routine-blind’ to error.

There are countless different situations that can lead to a PI insurance claim from a law firm, but hopefully this note has given you helpful ideas about where to focus your risk management efforts and the sort of controls you can use.

Why do law firms choose Travelers?

It’s because Travelers has unmatched expertise and longevity in the legal sector, with a dedicated team of experts in underwriting, claims and risk management.
 

See also:

• How to avoid professional negligence claims in residential conveyancing, wills and probate, commercial property and company and commercial
• PI insurance for law firms FAQs: Part one (51 FAQs), and PI insurance for law firms FAQs: Part two (48 FAQs)
• A quarterly series of 'Legal sector risk soundbites', plus longer videos such as Dishonesty risk in legal service delivery