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High value – high exposure?

1 October 03

Why the number of professional indemnity intimations arising from commercial property work is on the increase, and the risk controls necessary

by Alistair Sim

In his letters of 17 February and 11 April 2003 issued to all practices, the Convener of the Society’s Insurance Committee reported to the profession on features of the latest concluded year’s Master Policy claims experience and drew attention in particular to the number and cost of higher value intimations.

Higher value commercial property intimations

Although a wide range of practice activities feature in the experience of higher value intimations, it is noticeable that there is an increased incidence of intimations arising out of commercial property / conveyancing. What accounts for this discernible increase? What are the underlying causes of the errors and omissions giving rise to these intimations?

The types of error or omission certainly include many of the features which are common to the Master Policy claims experience as a whole, for example:

  • Delay and missed time limits/deadlines
  • Poor communication – both internally and with clients
  • Lack of clarity about instructions/terms of engagement
  • Failure to follow instructions.

Examples:

  • Delay in obtaining licences for new licensed premises postponing the opening
  • Failure to have an offer for commercial premises lodged before the closing date
  • Failure to ensure that a guarantor appreciated the extent of his exposure
  • Overlooking prior security when instructed to obtain a first ranking security leaving a lender substantially unsecured.

One could argue that most of these intimations arise out of breakdowns in (or lack of) systems and procedures and have little to do with the technical aspects of the legal work involved.

Technical errors and omissions

However, there are examples of errors and omissions in relation to technical matters giving rise to higher value commercial property claims, for example:

  • Drafting errors and omissions
  • Errors and omissions in legal advice
  • Failure to anticipate risks for clients.

Examples

In the recent claims experience, examples include:

  • Error in drafting of missive provision regulating price on the sale of development land
  • Error in invoking obligations of guarantor under a lease following default by tenant
  • Failure to protect client by documenting option in lease, rather than in back letter.

Understand why errors creep in

If risk management measures are to be effective in preventing recurrence of these types of errors and omissions, as always, it is essential to understand how the error or omission actually happened, what caused it and what factors contributed.

When devising a strategy to prevent recurrence of, for instance, an error in documentation, it is critical to the effectiveness of the strategy to know whether the alleged error arose as a result of:

  • a glitch in word processing
  • a proofreading oversight
  • using an out-of-date style or proforma
  • misunderstanding the client’s instructions
  • not following the client’s instructions
  • lack of technical knowledge.

When the underlying causes and contributory factors have been identified, an action plan ought then to be prepared, implemented and regularly reviewed to minimise any risk of recurrence. Quite apart from the practice’s own interest in preventing a repetition of a costly error, insurers are becoming increasingly interested in seeing evidence that effective preventive action is being implemented.

The action plan to prevent recurrence will reflect the identified causes and contributory factors. This is illustrated by the following case studies.

Case study 1: option

The firm acted for Andco Ltd in taking a lease of premises belonging to Landco Ltd. It was agreed between the parties that Andco would have an option to purchase the property during a defined period at a fixed price. This option agreement was fully documented in a back letter.

Soon after the commencement of Andco’s tenancy, Landco sold the property to Zedco. Shortly after that, Andco intimated that they wished to exercise the option to purchase the property. Unfortunately for Andco, (a) Zedco wasn’t bound by the terms of the option agreement and (b) Landco had gone into liquidation by the time Andco decided to pursue Landco for breach of the agreement. Andco’s only available remedy was against their solicitors.

How could this problem have been avoided? The first question to be addressed is what was the underlying cause of the alleged error? How did the alleged error occur? What were the contributory factors? The bare facts won’t provide the answers to these questions – it will usually be necessary to review the file and the facts in some detail in order to establish the causes and contributory factors.

Case study 2: title

An assistant was part of a team assigned to the acquisition of a development site for a client. The work had been won on a tender. Conscious of the slim margins, the partner delegated all of the work to his associate. The associate was completely snowed under with work and he in turn delegated the bulk of this project to the assistant. The assistant failed to note title properly, overlooking the fact that the client had no right of access to the site. This was never picked up by the associate or by the partner.

What was the cause of the omission? Failure to check all relevant deeds? Failure to appreciate the meaning of title provisions? Failure to clarify instructions?

What were the contributory factors? The assistant’s lack of experience or poor technical knowledge? Poor delegation? Inadequate supervision and checking? Poor management of workloads? Failure to properly cost the rates for the job in an effort to win the business?

Case study 3: acquisition

A firm was instructed by one of their property developer clients in a development site acquisition and subsequent plot sales. It subsequently came to light that there were discrepancies between the site boundaries and those of the plots, resulting in the developer making a claim for the remedial costs.

What was the cause of this problem? Detailed consideration of the file and discussion with those handling the transactions revealed a number of points that were critical to an effective preventive strategy. It emerged that negotiations between seller and developer had been protracted. The title was complex and problematic and the partner concerned had spent hours in negotiations trying to resolve various problems. The development had thereafter hit a number of planning problems. Relations between partner and developer client had become fraught, with the client maintaining that his solicitor was not being proactive. The partner got to the stage where he avoided calling the client unless it was absolutely unavoidable.

How could the situation have been avoided? More effective management of the client? Having a system of referring problem matters between colleagues?

Case study 4: completion

A partner was instructed to prepare leases for a number of shop units. After lengthy negotiations and various amendments to the drafts, terms were agreed. Final completion took place hurriedly to meet the client’s deadlines. The partner had finished a late-night completion meeting the night before and did not properly check the final documents against the approved drafts. There was a problem with the pricing mechanism in the leases, which was not in accordance with the agreed final draft.

What caused the problem here?

Complexity may well have been a factor. Workload and timescale pressures could have contributed. Pressure from the clients and other parties may also have played a part.

How could the situation have been avoided? Perhaps by having a colleague help check that the complex pricing provisions in the final documentation were in accordance with the clients’ instructions? Managing workloads to avoid individuals having to handle multiple completions in a short space of time without assistance?

Essential risk controls

The potential size of claims in the context of commercial property-related work is such that care needs to be taken in all aspects of the work – in particular:

Engagement criteria. Consider carefully whether the practice has the expertise and capacity to undertake the work and establish that there is no conflict of interest; consider whether the practice has adequate professional indemnity insurance for the level of exposure to potential claims.

Terms of engagement. Ensure complete clarity as regards the scope of the work to be undertaken and matters which will not be the practice’s responsibility. In one-off commercial property matters it is vital that sufficient time is taken at the outset of matters to define exactly what work will be carried out by the practice and what the client requires to do to assist in the achievement of their own objectives.

Delegation and supervision. Where inexperienced colleagues are involved in complex or high value transactions, it is clearly particularly important to ensure that they are adequately supervised. Delegation should be of work, not responsibility.

Workloads. In order to avoid fee earners becoming overloaded it is necessary properly to schedule new and transferred cases into the workload of suitably qualified fee earners.

Control of documentation. Avoid the use of out-of-date or otherwise inappropriate style/proforma documentation. Rigorous document control is even more important for practices where word processing applications allow the creation of multiple versions of large, similar looking documents.

Communication. In transactions involving negotiation/drafting of complex documentation, there is increased risk of misunderstandings between solicitor and client and particular care therefore needs to be taken to ensure that both are clear as regards advice imparted and instructions received. Regardless of the speed at which commercial property transactions can progress (particularly in the run-up to completion) and the frequency with which deals adapt and develop as a result of external factors, it remains vitally important for solicitors to record all advice given in a coherent, accurate manner. It is more important that this discipline is adhered to in fast moving commercial situations.

Critical dates. Effective diarying arrangements include setting up a series of reminders in advance of final deadlines. Carried forward reminders are an integral part of good time (and therefore, risk) management.