Controlling the risks
Some of the most common themes arising in corporate/commercial claims experience, and possible controls to minimise the risk of claims and complaints
The risk of claims arising from corporate/commercial work is not so much a frequency issue as a severity issue. Corporate/commercial transactions tend to be of high value and, consequently, when claims do arise, they tend to be expensive.
Over the past five years, the number of corporate/commercial intimations has been relatively insignificant when compared with intimations arising from other practice areas, despite insurers’ concerns, discussed in “Claims, trends and targets” (Journal, May 2014, 38), that as a result of the economic downturn the number of such intimations would increase. Nonetheless, there are some recurring themes in claims experience which are worth reviewing from a risk management perspective.
Engagement issues – the client(s)
AB & Co was asked by the directors of BV Ltd to organise the sale and exit strategy when they sold out to GMBH Ltd. AB & Co had acted for BV for 12 years since the company was formed. AB & Co set about preparing the relevant documentation and gave advice to the directors over the course of the three-month sale process.
One of the directors, DH, subsequently wrote to AB & Co expressing concern that his exit terms were less favourable than those of his fellow directors. AB & Co advised that that was true to the extent that the directors had prearranged bonus and incentivisation structures, but the resolution of how these operated was nothing to do with AB & Co. AB & Co then received a letter from DH’s new solicitors alleging that AB & Co’s advice was inadequate.
It is, of course, essential to be clear from the outset of a transaction about who is your client, particularly where, as is common in corporate/commercial transactions, it is a multi-party transaction. Allegations can arise:
- that some parties involved in the transaction thought/were given to understand/assumed you were acting for them when you were not so acting;
- that, where you were acting for more than one party, you had failed to take instructions from/on behalf of all your clients;
- that, where you were acting for more than one party, you had failed to protect the interests or failed to give appropriate advice to one or more of your clients.
Risk management points
- Clearly set out in your terms of engagement who is your client.
- Where you are acting for more than one party, agree with your clients, and set out in your terms of engagement, from whom you will take instructions and to whom you will report.
- Consider whether there are any other parties who might assume (wrongly) that you are acting for them, and whether it might be desirable to send them a letter of non-engagement.
- Where you are acting for several parties, keep under consideration the issue of possible conflict of interest.
Engagement issues – scoping the engagement
Many disputes with clients can be avoided if the scope of the work is precisely set out in the letter of engagement so that it is clear what work is to be carried out and, just as important, what work is not to be carried out.
For example, is the firm to advise on taxation or not? Where the client receives an unwelcome and unexpected tax demand, it is inevitable that they will seek to blame one or more of their professional advisers. In many cases, the client will have engaged the services of an accountant to advise on taxation issues. Do not assume that they have done so. In one recent claim, the solicitors, assuming that the client’s accountants were advising on taxation issues, failed to state in their terms of engagement that they were not giving taxation advice, whereas the accountants had excluded taxation advice from the scope of their engagement.
Therefore, you need to be clear with the client (and with any other relevant professional advisers) who is to advise on taxation issues. If it is not you, you also need to clarify the extent of the taxation adviser’s responsibilities and yours vis-à-vis the taxation warranties and indemnities you may be drafting or revising. The position should be clearly documented in your terms of engagement.
You should also be alert to the possibility that the scope of your engagement might change during the transaction. For example, the client might decide to reduce the scale of due diligence he has instructed you to carry out. Sometimes the structure of the transaction might change. In these situations, the terms of engagement letter should be amended to reflect the changed position. If the change has an effect on the fee you have agreed with the client, that should also be stated in the amended terms of engagement.
You should also beware of “engagement creep”, where you say in your terms of engagement that certain work is outwith the scope of the engagement but you end up taking on responsibility for carrying out that work.
Some claims have arisen from allegations of “drafting errors”. In most cases, parties are in dispute about the correct interpretation of a clause (inevitably about the payment of money), caused by an ambiguity which may have been introduced during the revisal process.
From a risk management point of view, consider what controls might need to be put in place. If several members of the team have input into the drafting or revisal of, for example, a share sale and purchase agreement, there could be a “drafting” or “reviewing” partner whose responsibility is to co-ordinate drafting and ensure consistency among the various clauses in the document.
The controls should also address the issue of keeping the file up to date and in good order. This can be difficult at times, given that completion meetings often last well into the early hours of the morning. Often there are revisals and rewrites of documentation, or new matters are raised and there may be little time to consider and explain these matters fully to the client and take instructions, let alone record them in writing. Nonetheless, from a risk management point of view, it is essential to take the necessary time to make comprehensive file notes of the key issues and all instructions given by the client.
Post-completion critical dates
In corporate transactions, there may be critical dates of which the client should be aware, such as preparation of completion accounts, payment of deferred consideration, and expiry of claims under warranties. However, you need to be clear with the client (both in your terms of engagement and in a letter sent to the client as soon as possible after completion) who has responsibility for diarising relevant dates and making sure all necessary matters are attended to timeously.
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, global leader in insurance broking and risk management. To contact Russell, please email firstname.lastname@example.org
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 Conduct Authority.