Charles Attwell and Paul Smith are solicitors and risk consultants who support Travelers’ claim and underwriting teams. They help 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 1 June 2020)
Commercial litigation work 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 fifth in terms of the value of the claims — behind residential property, commercial property, company and commercial, and trusts and probate.
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.
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.
- 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.
- Document the retainer. This helps identify your client’s intentions and manage expectations. It also flags up any assumptions that need to be discussed.
- Be clear on the matter’s prospects. Avoid unwelcome surprises about the duration, cost and chances of success.
- Schedule any deadlines. Schedule key actions and highlight them in your planning for each matter.
- 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.
- Document any late instructions. Problems often arise when instructions change, so make attendance notes and immediately amend any plans that need to change.
- Track and review progress. How is the retainer progressing against what you were originally instructed to do? Have the prospects of success changed?
- Regularly review Precedent H costs budgets. Apply for an amendment when appropriate.
- 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.
- 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
- 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.
- 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
- 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.
- 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.
- Promote an ‘open door’ culture. Encourage discussion of challenging cases and issues.
- Create ‘knowledge exchanges’. Provide regular opportunities to raise and discuss issues, and to tap into colleagues’ knowledge.
- Offer mentoring schemes. This can be a structured way for knowledge to be passed on.
- 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.
- Track individual workloads. Avoid overloading people. Stress and fatigue affect performance and risk perception.
Improving risk management
When taking steps to reduce the risk of having to make a professional negligence claim against your PI insurance, it may be useful to think in terms of these four headings:
- People – whether clients or those within the firm providing the service.
- Process – the steps in delivering the retainer, dealing with the matter to completion.
- Systems – that underlie all the work that the firm does – file opening, client due diligence, IT, HR, communications within the business, diaries and file closure.
- Risk management – the extent to which good practice in risk management is followed in the firm.
Start with a thorough ‘onboarding’ process, to identify the client’s legal needs. Take a statement from the client, setting out the facts of the matter. Use headings such as the ones below to provide clarity and structure to these facts. Adopting this project management approach will help you to plan and control the matter (and its profitability) through to completion.
- Initial business case – the purpose of the matter.
- Scope – the activities to be performed, the resources needed, and the outcome (eg a contract, or a sale).
- Deliverables – specific tangible outcomes that satisfy specific named objectives.
- Assumptions – assumptions that the client can confirm are correct (eg a particular property is owned by X; or a particular document has not been superseded by another document).
- Dependencies – a series of steps to be taken in sequence, including the question of what happens if a step does not take place (what is critical, what is not?).
- Limitations – on the scope of the legal advice, based on the information available and the areas of law to be covered (eg is tax advice covered, or IP law?).
- Unknowns – factors where there is no information, which could affect the outcome.
When progressing a matter, use systems like these to keep control of the various issues:
- Issues log – a straightforward log of things that arise which may have an impact on the project (eg a survey may have been requested on a building).
- Risk control log – any checks or solutions that need to take place (eg if a survey reveals a problem with the building, there will usually be a follow-on action that must be completed).
- Revision history – changes to the matter and why they were made (eg where new information means that the original plan needs tweaking).
- Change control – a way of preventing mission creep, so that if a matter materially changes the firm can then reset the budget, resources, timings and expectations of the outcome (eg if a seemingly straightforward transaction is revealed to be a complex one).
- Earned value – a cost-benefit analysis carried out during the course of the matter to check that the original commercial logic still stacks up in light of any changes (eg in any M&A deal a number of factors can erode the value to one party or another).
The government has an interactive tracker tool showing which courts are open, staffed and suspended during the coronavirus pandemic.
Travelers has provided a separate note to address the Covid-19 and operational risk challenges facing law firms.
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.
- 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 (50 FAQs), and PI insurance for law firms FAQs: Part two (48 FAQs)
- A series of podcasts on risk, including: Dishonesty risk in legal service delivery - Podcast 3
- Covid-19 and operational risk