Lawyers' Risk and Regulatory Briefing
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Professional liability Lawyers’ risk and regulatory briefing Summer 2017 Contents Living in uncertain times – what now Living in uncertain times – what now for law firm claims and regulation? for law firm claims and regulation? Page 1 Richard Harrison, Partner, London Claims against lawyers – recent key John F Kennedy said “The Chinese use two brush issues in case law Page 6 strokes to write the word crisis. One brush stroke Diversity and Inclusion in Law Firms – stands for danger, the other for opportunity. In a the Why? and the How? Page 11 crisis be aware of the danger, but recognise the Lawyers’ liability: a global perspective opportunity.” The current economic and political Page 13 uncertainties, and other threats and “disruptors” such as cyber issues and AI, are likely to create risks and opportunities with which law firms will need to get to grips. We consider below what trends and developments might in due course shape negligence claims and regulatory action. Levels of claim The volume of claims against law firms is currently generally down from its height in 2009 post the financial crisis, but ever-increasing claims severity remains a considerable concern. The impact of changes to funding and in the Court system upon the economic viability of pursuing lower value claims may explain the dip in volumes in part. This in turn has led to an increased appetite for alternatives to litigation such as making a complaint to the SRA or Legal Ombudsman, or perhaps attempting to bolster a complaint via a subject access request under the Data Protection Act. To date, the PNLA adjudication scheme for professional negligence disputes has not taken off. The anticipated introduction of a fixed recoverable costs regime for claims worth up to GBP 250,000 (and potentially upwards of that figure in the future), might lead to an increase in claims at the lower end of the scale, as well as changing the dynamics in relation to claims under the regime, as the parties will recover less if successful. This may be in force from as early as next year. Heightened claims severity is undoubtedly in part driven by the complexity and scale of the transactions being done and work carried out by clients and firms operating with an ever-expanding global footprint. Litigation funders are taking an increasing interest in backing high value claims which is driving claims at this level which might not otherwise be brought. For example, we are seeing an increasing incidence of “vulture funds” (who buy up the debt in distressed companies and then take a driving seat in any litigation brought by the company) starting to take root in the professional indemnity arena. We have long predicted a group action in the professional negligence field. It has novel areas in an uncertain environment. It will be important recently been reported that a group negligence claim for to ensure the usual risk management frameworks are more than GBP 500 million is being considered against in place by, for example, caveating advice appropriately, lawyers who acted for buyers in “help to buy” leasehold making clear potential uncertainties such as to the correct housing schemes for allegedly failing to advise on onerous interpretation of legislation, and delineating in the retainer ground rent and other lease terms. the areas that the firm is and is not advising on. Anecdotally, we understand that large law firms are Counterparties to transactions may well be looking to find purchasing ever higher limits of PI cover, and this is excuses to get out of deals they find unfavourable in light of undoubtedly a sensible move. As firms expand their Brexit, perhaps due to the unforeseen drop in value of the operations and are more innovative in their practice there pound. Consequently, we are likely to see claims that lawyers is a need to ensure that cover remains fit for purpose have acted negligently, for example by failing to consider the and that the boundaries of professional indemnity cover impact of Brexit in relation to specific retainers. This might are properly understood. (See for example the Supreme be due to a failure to include (or exclude) a “Brexit clause”, or Court case of Impact Funding (2016), in which it was held failing adequately to provide for or advise on the impact of that a funding agreement, pursuant to which the funder currency fluctuations. provided monies to solicitors to pay disbursements, fell Other risk areas include failing to review whether boiler plate within the exclusion in the policy for the supply of goods clauses in precedent documents remain appropriate, for and services to the solicitor, so that a six figure claim for example, whether an exclusive English jurisdiction clause negligently investigating the merits of claims brought by in a standard commercial agreement will continue to be the funder was not covered.) enforceable after Brexit. Politics and economics In many of these cases it is likely that the distinction between Brexit commercial and legal advice will be highly relevant. The Brexit, the inauguration of President Trump and the recent recent decision in BPE v Hughes Holland (2017) (discussed in and forthcoming elections in the UK, France and Germany more detail in our other article “Claims against lawyers – have brought new uncertainties into the political and recent key issues in case law”) is also likely to be of assistance economic climate. However, at the present time it remains here. Depending on the exact fact pattern and how far in difficult to predict what the exact effect may be for law firms advance of the referendum the negligence is alleged to have and, in particular, negligence claims. That said economic and occurred, we might also see arguments as to whether the political uncertainty breeds risk which leads to more claims. outcome of the referendum was foreseeable. (Case law which considered whether the financial crisis was foreseeable by Predictions as to the economic effect of Brexit in the short professionals went both ways (see, for example, Rubenstein v and long-term vary, and currently there is a higher degree HSBC (2012) and Camarata v Credit Suisse (2011)). of uncertainty than normal around all forecasts, largely because geopolitical risks are so much greater than normal. Going forward, there is of course the possibility of a However, past experience has shown that any turmoil or downturn in work with all the familiar attendant pressures deterioration in the financial and property markets clearly on firms to stray outside their areas of expertise. In a major creates circumstances where clients are more likely to suffer recession there is also the increased likelihood of law firm loss and, in turn, claim against law firms. failure. Failure of a large law firm was considered a risk priority for the SRA a few years ago following the demise In the shorter term Brexit is likely to lead to an increase of Halliwells and Dewey. This may well be something moving in work for law firms. Clients will need advice on the up the agenda again, particularly following recent events legal implications of the changes in law and the EU/UK at KWM. relationship for their particular business, and this is likely to cross a number of practice areas. The application and interpretation of the law is likely to be uncertain and lawyers may see themselves advising on complex and sometimes 2 Political scrutiny in-house. These include systems that carry out routine Professionals, including lawyers, are increasingly coming work usually undertaken by junior lawyers, and doing so under the spotlight in relation to the actions of their in a fraction of the time, such as analysing or classifying clients. The involvement of professional firms in giving complex legal documentation in the due diligence process evidence to Parliamentary Select Committees in the or reviewing potentially disclosable documents in litigation. wake of a high profile corporate collapse is just one Some platforms are able to apply legal logic to analysing example. Worryingly, on occasion, we have also seen documents such as leases. that individuals in Parliament have failed to note that AI clearly has the potential to operate as a risk reducer. lawyers should not be associated with their client’s cases However, a number of risk concerns also arise, and or have criticised a professional firm for protecting the these are certain to come increasingly into focus as AI client’s confidentiality and/or legal privilege. The UN encroaches on the work of more senior professionals, Basic Principles on the Role of Lawyers provide that such as in the advisory arena. Law firms must now start lawyers shall not be identified with their clients or their to grapple with these issues. The scoping, in the retainer clients’ causes as a result of discharging their functions. letter, of what the firm will and will not do, and avoiding There appears to be no sign of government lessening its mission creep thereafter, will be as important as ever, if not focus on professionals as gatekeepers of their corporate more so. Likewise, issues will arise about how professionals clients’ behaviour. For example, the proposed “tax should satisfy themselves as to the quality of a robot’s avoidance enablers” legislation (in the event dropped work product, and who will bear responsibility for errors from the Finance Act due to the election), had provided which arise from failings in the software or failures in for a penalty for professionals marketing and enabling understanding how best to use the software. Law firms tax arrangements which were found to be abusive. April obviously need to be careful with regards to their contracts saw the Pensions Regulator bringing its first criminal with software providers in relation to issues such as client prosecution against a law firm for failure to provide client confidentiality, and liability.