The life of PI

The judgments of Lord Denning, whether one agreed with the outcome or not, were welcomed by generations of law students for their simple language and clarity in explaining some of the most complex concepts of law.

Yet those same lawyers, whose business derives from the use of language, seem averse to using such clarity themselves, as Charles Dickens identified in Bleak House: "The one great principle of English law is to make business for itself… viewed by this light it becomes a coherent scheme, and not the monstrous maze the laity are apt to think."

Engagement letters at the start of a matter, for example, might be expected to set out the scope of what the solicitor will do for the fee. Yet our experience and that of other defendant firms shows otherwise.

If there is a letter at all, it rarely describes what is to be done. Where it does, the solicitor has then embarked on further work - ‘engagement creep' - beyond that which was originally agreed, probably unpaid and bringing untold liabilities.

Solicitors' scope
The most prominent case of the year on the scope of the solicitor's duty was Football League v Edge Ellison [2006]. It arose from the solicitors' alleged failure to advise on bidder solvency, or the desirability of seeking parent company guarantees for the league's contract with ONdigital for television rights, with claimed losses of £142m following ONdigital's spectacular collapse.

The case confirmed that unless expressly agreed, solicitors owe no (implied) duty to advise commercially aware clients on commercial aspects of transactions.

Yet why do solicitors not say in their engagement letters that they are not advising on the commercial aspects of transactions? On the contrary, marketing literature and websites are littered with claims to providing "sensible and commercial advice" or "responsive, pragmatic and commercial advice". A quick search on Google for "solicitor commercial advice" scores 13,700 UK hits.

The scope of duty on claims where there are multiple causes of losses - external factors such as falls in the property market, perhaps other advisers, or even the client's own in house legal team acting in conjunction with an external law firm, will be more complex to analyse.

Loss causes
Not infrequently, defence lawyers' attempts to analyse the scope of duty and the extent to which losses fall within it (applying the decision in SAAMCo) are lost in complex legal argument.

Pictures bring clarity: try a pie chart showing the separate aspects of loss and identifying where the claimant contends the cause lies. Annex it to the defence, or mediation submissions - the more clarity, the better chance of the points being understood and accepted.

What the future holds for the more interesting arguments on solicitors' duties, with wholesale reform of the regulation of the profession proposed in the Legal Services Bill, remains to be seen. In smaller cases at least, they may not enjoy the same success. Perhaps a clue to the lie of the land is to be found in the financial services sector.

Schemes like the Financial Ombudsman Service (FOS) provide relatively quick resolution of consumer complaints with the minimum of formality. The fear is how the proposed Office for Legal Complaints may deal with consumer complaints - "It's law, Jim, but not as we know it…"

In IFG Financial Services Ltd v Financial Ombudsman Services Ltd (2005), an award was upheld even though it differed from one a court would make: it just had to be fair and reasonable, and take account of the factors set out in the statute, in that case the Financial Services and Markets Act (2000). The case involved individuals seeking a medium risk investment. They lost money due to fraud for which the adviser would not have been liable as a matter of law, but the ombudsman awarded their full loss.

The wording of Part 6 of the Legal Services Bill does not appear to be significantly different from those provisions. The point was apparently not raised in the committee chaired by Lord Hunt of Wirral, but the consequences appear inequitable, that lawyers should pay for losses which they have not caused. They may be insured, but that overlooks the fact that this year's claims will add to next year's premiums, hefty excesses and reputational issues.

The Accident Group litigation, with nearly 700 defendant firms, has preoccupied many, but apart from preliminary skirmishes, the only key issue decided so far has been the claimant insurers' entitlement to disclosure of files in Winterthur Swiss Insurance Company & Anor v AG (Manchester) Ltd & Ors (2006).

The quality of defence work is variable, with some insurers and their insureds apparently far better served than others judging by the files this writer has reviewed.

Future trends
In a year when few solicitors have failed to save substantial amounts on premiums, what other developments can be expected? In the absence of a downturn in the property market, the conveyancing claims should not increase, though there have been some substantial claims arising from mortgage fraud this year.

Claims trends already indicate more from pensions and financial services. Corporate work is an issue; a number of the writer's overseas clients have expressed concern, too, about the extent of their potential exposure to claims from non-clients for reliance on due diligence.

Claims by non-clients have also been noted as an area of increasing concern in the US where a high proportion of large claims involve dishonest clients, perhaps a symptom of the campaign to clean up corporate America. Reliance by third parties on due diligence has been raised by a number of overseas firms as an area of concern; a recent claim in New York, Mega Group, Inc. v Pechenik & Curro, (2006), was successfully defended, but only because the claimant failed to prove negligence.

Smaller law firms are under attack from all sides at the moment. The Carter review of publicly-funded work which may threaten the existence of smaller firms, and the Law Society's imminent investigations into compliance with the rules on referral fees, may also cause significant pain, given the widespread breaches found on the recent pilot investigation.

One firm, which was fined £9,000 plus £25,000 costs, claimed that the effect of the proceedings hanging over it reduced it from a £1.2m profit to a £398,000 loss over four years.

Clearly, therefore, there is potential for many small firms to go out of business, and being covered either under the run-off provisions or under the ‘successor practice' provisions. Neither scenario is likely to be greatly appealing to insurers whose premium income may have dropped by anything up to 25% this time if industry estimates are to be believed.

Successor practice planning is developing into an art form like tax planning, with ways being explored to avoid the potentially devastating consequences.

Whether or not firms pay the run-off premium is another matter - an issue where contract certainty may help insurers: one case this writer is involved in involves insurers trying to recover £1m under a policy for which the terms relied on are in documents which were only issued after inception. IT

Frank Maher is a partner in Legal Risk Solicitors, specialising in professional indemnity, risk management and anti-money laundering