A commercial approach
Risk management lessons to be learned from recent claims in the corporate and commercial law claims experience
It might be thought that, since corporate and commercial work is perceived to involve complex drafting and high value transactions, it would be regarded as high risk work. In fact, while it is true that claims arising from corporate and commercial work are more likely to be expensive, there have been over the past few years relatively few claims under the Master Policy.
It might also be thought that the more complex the work, the more complex the causes of claims are likely to be, and that the risk management systems and procedures which might require to be devised to minimise the risk of claims in this practice area might also be of some complexity. Nonetheless, the claims that have been intimated recently tend to illustrate the same causes of claim and risk management issues as can arise in any other practice area.
It is important to identify at the outset of the client/transaction vetting process, not only who the client is but who has authority to give instructions. If this is not done, you could leave yourself open to the allegation made in the following case study:
The practice acted for a company which was granting securities to its lender, including a cross guarantee by its parent company. When the guarantee was called up by the lender, the parent company alleged that it had not agreed to grant the guarantee and that the person instructing the practice was not authorised to do so.
As in any other practice area, terms of engagement are an important risk management tool for managing clients’ expectations and minimising the risk of claims and complaints.
The Solicitors (Scotland) (Client Communication) Practice Rules 2005 provide that solicitors must provide to clients in writing details of the work to be carried out on their behalf; but from a risk management point of view it can be equally important to specify what work/advice is excluded from the engagement:
The practice acted for an individual in acquiring the whole issued share capital of X Ltd. The client alleged that the practice had not advised him of the adverse tax consequences of the way the deal was structured.
In this case, the practice was able to establish in defending the claim that the client had negotiated the structure of the deal direct with the vendors and that they were not involved in the negotiations. However, they could have put the matter beyond doubt, and beyond argument, if they had included in their terms of engagement, clauses excluding commercial and tax advice from the scope of the engagement.
In many corporate transactions, the client will engage a team of professional advisers and it is important to clarify the role(s) of each member of the team and to set out in terms of engagement precisely what work is to be done and not done by the solicitor and by other advisers. Beware of making the assumption that just because the client has engaged accountants to advise on a transaction, they must necessarily be giving the client any tax advice required. The client may not share that assumption:
The practice acted for the purchasers in the acquisition of the whole share capital of a company whose only asset was a hotel. The client alleged that the practice had failed to give advice on the corporation tax implications of this method of acquiring the property. The practice assumed that any necessary advice was being given by the clients’ accountants.
However, in corporate transactions, the solicitors may well be involved in drafting/revising tax warranties and indemnities and can easily be drawn into discussions with the client about tax matters, even if the terms of engagement exclude tax advice from the scope of work. In that situation it may be advisable to state in terms of engagement that the tax warranties/ indemnities will be drafted/revised in accordance with advice given by the client’s tax advisers.
An allegation by a client of a failure by the practice to follow instructions is a surprisingly common cause of claims in all practice areas:
The practice acted for majority shareholders in a company in a transaction involving the creation of new shares in the company. It was alleged that the practice failed to follow instructions, with the result that the clients’ voting rights were diluted.
Clearly it is desirable that the instructions given by a client should be recorded in file notes (if given by telephone or at a meeting) and/or in correspondence.
Sometimes the problem may be a failure to clarify the client’s intentions, or an incorrect assumption about those intentions. In either event, there is an absence of a shared understanding with the client:
The practice acted in the acquisition of the whole share capital of a company. The terms of the acquisition resulted in the purchasers taking on the liability for a claim against the target company. In their letter intimating a claim against the practice, the purchasers said that they had never intended to take on that liability.
It may not always be possible for instructions to be carried out, but if the client is not told (in writing) that the result he wishes to achieve cannot be guaranteed or cannot be achieved, then the client may well allege that the practice has not carried out his instructions:
The practice acted for a client in relation to the termination of his employment with, and his directorship of, a company. The client had signed a personal guarantee in respect of the company’s borrowings from a bank and was keen to be released from his liability to the bank. The compromise agreement that was eventually negotiated and signed made no reference to the removal of the client’s liability under the guarantee. The bank had refused to grant a release.
An allegation by the client could have been more readily addressed if only there had been a record of information and advice given by the practice.
Failure to advise
Sometimes the instructions given are clear and have been followed by the practice, but the client alleges that no/inadequate advice or information was given by the practice:
The practice acted in the sale of a business. Payment of part of the price was to be deferred. The client alleged that the practice gave inadequate advice in relation to security for the deferred part of the price, which was never paid owing to the subsequent liquidation of the purchasers.
Often the practice will counter an allegation of this kind by saying that advice was given and was adequate in the circumstances but was not recorded in writing. As with taking instructions, all significant advice should be recorded in file notes and, ideally, correspondence to minimise the risk that the clients’ claim may be successful because their evidence is believed rather than that of the practice.
Errors in documentation
Allegations of drafting errors in documentation sometimes disguise the true cause of the error, which can often be a failure by the solicitor to appreciate a risk and therefore protect the client by inserting an appropriate clause in the documentation.
However, one type of issue which tends to arise more often in corporate and commercial claims than in other practice areas is that the documentation does not accurately record/reflect the intentions of the parties, or the agreement reached between them:
The practice acted for the purchasers in the acquisition of the whole share capital of a company. The parties entered into heads of agreement which included a mechanism for adjusting the price depending on the performance of the target company. The relevant clause was inadvertently omitted from the share purchase agreement.
Omissions are the largest cause of Master Policy claims, and in all walks of life one of the best ways to avoid forgetting to do something is to write it down. A checklist/aide memoire of the key points/issues to be included in the final agreement could have prevented the above claim. Peer review of the documentation may also minimise the risk of oversight.
Share purchase agreements normally contain time limits for notification and bringing court proceedings in respect of claims arising from alleged breaches of warranties. Claims have arisen because of failure to raise court proceedings timeously. While the client needs to be made aware of any applicable time limits, is the practice going to assume responsibility for issuing reminders to the client? It is advisable for the practice to set out its position in terms of engagement or in a final “sign off” letter at the conclusion of the transaction, or ideally in both.
If the practice is to take responsibility for post-completion critical dates, a “belt and braces” approach to diarising the relevant date(s) (with countdown warnings and reminders) is necessary. Since it will often be necessary for preparatory work to be carried out before court proceedings can be raised, it would be desirable to inform the client that instructions must be given in good time to enable a court action to be raised before the expiry of the relevant deadline.
Russell Lang and Marsh
Russell Lang is a former solicitor in private practice who works in the FinPro (Financial and Professional Risks) National Practice at Marsh, the world’s leading risk and insurance services firm. To contact Russell, email: email@example.com .
The information contained in this article provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insureds should consult their insurance and legal advisers regarding specific coverage issues.
Marsh Ltd is authorised and regulated by the Financial Services Authority.