Law firm asks PI insurers for better M&A liability guidance

Law firm SGI legal has asked the Solicitors Regulation Authority (SRA) and professional indemnity (PI) insurers for better guidance about liability when buying work in progress from other law firms.

SGI argued that it is currently unclear when lawyers buying work in progress from another firm will be considered a successor practice, which makes them liable for any problems in the selling firm’s past.

In cases where the seller continues to trade, a successor practice issue will not arise. However, if the seller ceases to trade, which is common where the sale has been forced by financial stress, the buyer may be considered a successor practice and thus be liable for the seller’s problems.

SGI Legal managing partner Simon Gibson said: “The current guidance is extremely vague.

“The SRA and main indemnity insurers urgently need to provide much clearer guidance on this issue. It is in everyone’s best interests that acquiring firms understand the circumstances in which liability will arise for historic risk.

“It also allows insurers with exposure to acquisitive law firms to properly assess their risk and reserves with a degree of certainty. This is a time bomb sitting under too many firms and it needs to be resolved.”

He added that case law on the matter is fact-sensitive and so of limited value.

SGI Legal said the dangers have increased because of the increase in work in progress sales since the implementation of the Jackson legal reforms and the new RTA Portal fees.

Gibson said: “I have come across firms that buy the files and, with regards to mitigating the risk of becoming a successor practice, just hope for the best.”