Roll again

by Alistair Sim

Consideration of a sample of matters intimated to the Master Policy insurers, to identify common themes and common solutions

The Journal, August 2004, page 36

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A sample of intimations to the Master Policy insurers over a random period confirms that few claims are down to lack of technical legal knowledge – the vast majority arise through oversights and omissions, most of which could be avoided by simple systems, procedures and disciplines. Some recurring themes are considered with a view to how problems could have been avoided.

Delay means disappointment

The circumstances in which the substance of the allegation is delay on the part of the solicitor are many and varied. They include:

• failed sale/purchase transactions resulting from alleged delay in concluding missives;
• claims from disappointed beneficiaries on account of wills remaining unsigned;
• reduced proceeds on the sale of investments.

Many of these allegations are without foundation and the claims have been successfully defended. However, delay and failure to communicate with clients are causes of client dissatisfaction and give rise to the highest incidences of complaints to the Society of inadequate professional service.

Workloads, complexity of work and, of course, ever higher clients' expectations all present challenges. Part of the answer must be managing clients' expectations by agreeing realistic timescales, response times and the arrangements for reporting to the client. These are all matters which should be addressed in terms of engagement agreed with the client at the outset.  

VAT errors and omissions

Over the course of recent years, allegations of VAT-related errors/omissions have featured in a number of property, commercial and other claims. Some examples include:

• Solicitors failed to advise that VAT may be chargeable on the assignation of a lease.
• In drafting/advising on missives for the purchase of commercial property, solicitors omitted to state that the price was inclusive of VAT.
• In connection with the purchase of a business as a going concern, solicitors incorrectly advised their clients to make a payment to the sellers on account of VAT on the price.
• Solicitors failed to advise on the clients’ VAT options in relation to a series of property sales.
• An error in drafting missives means that the purchaser is not liable for the VAT that arises in relation to the sale of commercial property.
• The solicitors acting in the administration of the estate disposed of an asset of the deceased’s business without charging VAT as they ought to have.
• It was not explained that there would be a substantial VAT liability in connection with the purchase of commercial property.
• The solicitors failed to ensure that incoming tenants were taken bound to meet the VAT on rental payments.

It is beyond the scope of this article to discuss the technical aspects of VAT and it should be borne in mind that not all of these allegations resulted in any payment being made to the claimants concerned. However, the examples do illustrate the fact that VAT-related problems can arise as a result of a variety of different errors or omissions.

Quite apart from the possibility of giving incorrect advice from a technical perspective, there are risks of:

• failing to address the issue at all;
• misunderstandings arising between solicitor and client;
• drafting errors or omissions in missives or other documentation.

In addition to ensuring the appropriate level of technical knowledge and supervision, practical risk management measures that need to be considered include:

• Terms of engagement – to make it clear whether advising on VAT implications of the transaction is/is not part of the scope of the work to be undertaken for the clients.
• Checklists/aides-memoire – to prompt consideration of VAT at all the relevant stages of the transaction so that the subject is timeously raised with the client when taking instructions and preparing terms of engagement, and addressed when drafting documentation and when completing the transaction.
• Controls over documentation to ensure that the relevant styles and proformas in use throughout the practice properly address VAT issues.

When the title falls short

Claims continue to arise out of alleged failure to acquire title to the entirety of the property clients believed they had purchased. For example, there have been cases where purchasers of residential property did not obtain title to part of their garden and where purchasers of licensed premises acquired no title to part of the car park “belonging to” the premises. Very often, these problems emerge only on the subsequent resale of the property. Where the claim proves to be well founded, how has the problem arisen?

• A misunderstanding between solicitor and client as regards the extent or boundaries of the property?
• Failure to examine the title properly or to reconcile the title description with the client’s expectations?
• Drafting errors or omissions?

It is vital that the underlying cause is established so that the appropriate preventive measures can be put in place, measures which will minimise the risk of recurrences. Is it a matter of training and supervision or controls over documentation?

Watch the market

A claim was made by the principal beneficiary of an executry estate, the bulk of which comprised quoted investments. The beneficiary alleged that there had been undue delay in selling the investments resulting in a material reduction in the amount he received from the estate. After investigation, it was established that the beneficiary’s claim was justified and, following negotiation with the agents for the beneficiary, a payment was made in settlement.

How had the delay arisen? A misunderstanding? An oversight? Again, identification of the underlying cause and any contributing factors is critical to preventive measures being effective.

Follow up on undertakings

The incidence of claims arising out of granting letters of obligation is very low indeed considering the volume of property transactions undertaken every year. Solicitors are careful in undertaking the “due diligence” required before granting undertakings and are reluctant to grant any non-standard undertaking. As a result, the majority of claims that do arise out of the granting of letters of obligation are “classic” letters of obligation and benefit from the special Master Policy treatment, with the result that there is no Master Policy premium loading and no self-insured amount payable.

However, there have been occasional claims against purchasers’ solicitors resulting from failure to follow up undertakings.

A firm acted for a client in the purchase of a flat. Property enquiry certificates produced by the sellers’ solicitors disclosed the existence of an outstanding notice. After discussions, the sellers’ solicitor agreed that the letter of obligation would incorporate an undertaking on behalf of their clients to deliver a receipt and discharge.

Following settlement, the file was fee’d up and archived. The sellers’ solicitors were never chased for delivery of the outstanding receipt and discharge. When the client came to sell the flat some years later, the notice was still outstanding, the previous owners who had not paid the local authority were untraceable and the client was required to attend to this in order for the sale to proceed.

On the facts stated, it appears there may have been an omission to diary the outstanding undertaking and, if necessary, to make the client aware of the situation and of their options in the event of the sellers’ failure to implement their undertaking. Effective follow-up is clearly a critical element of avoiding this type of situation.

Arrangements need to address the risk that outstanding undertakings received are overlooked and are problematic or perhaps impossible to implement/enforce, for example because of the operation of prescription or because the outstanding issue is identified only when a property is being resold.

Have a standard, documented procedure to be followed for following up outstanding undertakings. Perhaps maintain a separate file of (copy) letters of obligation (issued and received) for ease of administration. Consider at the outset the date when each undertaking ought to be implemented. In the case of undertakings received from other firms, consider the various courses of enforcement action and timescales, culminating in action for implement.

When to double check

A particular provision in documentation drafted by the practice is alleged not to reflect the terms of the agreement reached between the parties to the detriment of the firm's clients. There is the possibility of curing the error by rectification, but this will involve significant cost and delay.

The error could be due to any one of a number of reasons. The documentation in many transactions is highly complex and concluded in a short period of time in the face of intense pressure from clients. Pressure and extended working hours must increase the risk of errors.

What can be done to avoid this? There is no easy answer to this. Rigorously controlling styles and proformas by correct labelling and updating may be part of the answer. Beyond that, there needs to be recognition of the risks so that, for instance, interruptions are avoided when involved in complex drafting and certain categories of document (or particular clauses, e.g. rent review clauses in commercial leases) are identified as requiring sign-off by an experienced colleague.

In an ideal world all documentation would be thoroughly doublechecked by a colleague. That ideal is not necessarily realistic, practical or economic; although a risk assessment could be undertaken to identify the categories of document, specific clauses or circumstances where a second opinion or sign-off is a must.

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