Claiming the advantage: Effectively managing the client/lawyer relationship to reduce the risk of client claims

Many of life’s problems boil down to misunderstandings, so it is little surprise to learn that poor communication lies at the root of many claims made against law firms. And, where successful claims against firms can prove disastrous for both finances and reputation, it is well worth learning how to better manage client relationships to reduce the risks. Sarah Clover, a partner at Barlow Lyde & Gilbert, examines the common causes of claims and how firms can go about reducing their likelihood.

This article supports a very straightforward proposition: good communication with clients and management of their expectations can dramatically reduce the risk of client dissatisfaction and complaints, as well as the incidence of professional-negligence claims.

In the box below, I have listed ten of what I believe to be the most common causes of claims against law firms.

Failure to identify the client;
Inadvertently advising third parties;
Failure to define scope of the retainer or mission creep;
Failure to distinguish role from those of other professionals;
Failure to record instructions and advice in attendance notes or correspondence;
Advising outside the solicitor’s area of expertise;
Missing time limits/failure of diary system;
Lack of supervision;
Time pressure;
Failure to identify and properly deal with conflicts of interest.#

Of these common causes, the first five derive from lack of good and full communication. All of these common causes of claim can be eliminated by an understanding of the need for good communication, particularly at the outset of the retainer.

The engagement letter

This is perhaps the first formal communication of the retainer and is so important in setting the parameters of the piece of work. Firms are slowly waking up to the value of the engagement letter although, even now, it is surprising how often these are absent.

A very considerable amount of detail for engagement letters is prescribed by the Solicitors Practice Rules and other regulatory requirements, which I do not intend to set out here. I would only make brief mention of the requirements of Solicitors’ Practice Rule 15. The object of the Code is to make sure that clients are given the information they need to understand what is happening generally and in particular:

Costs;
Responsibility for clients’ matters;
Complaints-handling procedures.

To avoid complaints and claims, the most important of these three pieces of information relates to costs. The client is frequently shocked by the size of the bill at the end of a transaction and casts around for a way not to have to pay it. An easy way out is to allege that the service and quality of advice have not been satisfactory.

Claims often begin with proceedings brought by solicitors for payment of fees, and progress to a large counterclaim alleging negligence and breach of contract. The likelihood of this happening can be greatly reduced if the client has a full understanding of the basis on which he will be charged and a good idea of what the work is going to cost him. Estimates given at the outset will usually have to be revised as the work goes on.

The Code’s requirements are detailed and merit study. For example, the code requires clarity, transparency, consideration as to the client’s ability to pay and a cost-benefit analysis. If followed, there should rarely be any costs dispute with clients who will be fully informed of their likely costs exposure at all times throughout the retainer.

The first five common causes of claims can be eliminated or potentially eliminated by providing the correct information in the engagement letter. Taking these in turn, it is essential to set out in the engagement letter for whom the solicitor is acting and limiting, if necessary, the parties to whom duties are owed. For example, is the solicitor acting for an individual, his company, or shareholders of the company? Is he acting for husband and wife, lender and borrower or only one of them?

There is a well established line of case law beginning with Hedley Byrne & Co v Heller & Partners Ltd [1964] AC 465 supporting the proposition that a solicitor may take on a duty to a third party who is not his client by assuming a duty to that party. A negligent misstatement or advice may give rise to a liability to the third party who has suffered loss as a result. If there is a possible third party who might seek to run such an argument in the future, the engagement letter should make it clear that the solicitor has no intention of advising that third party.

Often there are accountants, actuaries or other professionals involved in a transaction and it is essential for all participants to understand what each is doing so that issues do not fall between two stools. For instance, the accountant may think the lawyer is advising on the tax implications of the transaction while the lawyer thinks the same of the accountant. If all professionals were to write good letters of engagement, witnessed by all participants in the transaction, such misunderstandings would not arise.

One of the most important issues to define with the client at the outset is the scope of the retainer and I deal with this in some detail below.

Scope of the retainer

Apart from detailing costs and providing information as to whom the solicitor is taking on a duty, it is my view that the definition of the scope of the retainer is the part of the engagement letter that can be the most effective in reducing the risk of claims against a firm.

The Law Society’s Guide to the Professional Conduct of Solicitors, eighth edition, states the obvious at paragraph 12.08(1): “It is essential at the outset for a solicitor to agree clearly with the client the scope of the retainer and subsequently to refer any matter of doubt to the client. If a solicitor limits the scope of the retainer it is good practice for the limits of the retainer to be precisely defined in writing to the client.”

The importance of defining the scope of a solicitor’s duty in writing in the engagement letter is threefold:

A clear letter of engagement is the best evidence of what the solicitor has agreed to do;
The central role played by solicitors in many transactions may lead a client to assume, and a judge to rule, that the solicitor is responsible for matters on which he did not believe he was required to give advice;
The law may imply duties beyond the scope of the solicitor’s understanding of his obligations. By anticipating the way in which the courts may perceive his duties, a solicitor may avoid taking on unintended obligations.

Taking these points in order, I deal first with evidence. Where a solicitor’s duties have not been put beyond doubt – for example, through an engagement letter stipulating that the solicitor is not advising on tax – there is scope for conflicting evidence from client and solicitor as to what was actually agreed. Sadly, the court does not always believe the solicitor. For instance, in Hurlingham Estates v Wilde & Partners [1997] I Lloyd’s Rep 525 the judge viewed the absence of an engagement letter as a black mark against the solicitor. The judge held that if the solicitor was not proposing to advise on some aspect of the transaction, it was important that he record this in writing if the client was to be able to give fully informed consent. In Hurlingham the solicitor neither had the intention nor the expertise to advise on tax. There was no engagement letter and the court held that he had a duty to advise on tax, notwithstanding his ignorance of the subject.

It is often not so much a case of the solicitor’s evidence as to the scope of the retainer being disbelieved, as the client having a much clearer memory of what was said. In the recent case of Normans Bay Ltd v Coudert Brothers [2003] EWHC 191 (QB), the client was investing in a Russian-state joint-stock company, which was to be privatised. It was proving very difficult for the solicitors to get hold of the privatisation documentation, which had been produced by the Russian government. A key issue at first instance was whether the client or the solicitor had agreed to be responsible for obtaining that documentation and carrying out due diligence on it. It was key because the client’s investment in a Russian company was subsequently held invalid by the Moscow Arbitration Court because it was to be made over a period of five rather than three years, as stipulated by the government in their documentation.

In negligence proceedings in the UK, the court held that it would ordinarily have been the solicitor’s duty to carry out this due diligence unless the contrary had been expressly agreed – as to which there was no written record.

The events had occurred nearly ten years previously and memories were rather hazy. After hearing evidence from numerous witnesses, which is analysed in several pages of the judgement, Mr Justice Buckley preferred the client’s evidence in circumstances where the client firmly denied that the solicitor and he had agreed that the client would take over the task of trying to get hold of the documentation. The solicitor, meanwhile, was sure that such an agreement had been reached but could not remember the gist of the discussion. The judge held that the solicitor’s evidence was not based on recollection but “logic and deduction” and concluded: “These issues concerning … instructions, their scope and whether they were varied, have only arisen because of the lack of contemporary documentary records that I would expect a conscientious solicitor to have made. Any uncertainty as to a solicitor’s instructions, in particular their scope, ought to be resolved and the prime responsibility for that must rest with the solicitor.”

Had the solicitor in that case recorded in the engagement or a subsequent letter that it was the client’s responsibility to obtain the official documentation and consider its contents, there could have been no claim.

Second, the role played by the solicitor. To a judge, the solicitor often appears to be playing the lead role in a commercial transaction by virtue of being responsible for communication with the other party’s solicitor and, in particular, for revising the draft agreement to reflect changes required on his side of the transaction.

Where the solicitor is just one of the professionals involved on behalf of the clients – others being potentially accountants, merchant bankers or actuaries, for example – the central role he plays is conducive to a judicial finding that the solicitor is responsible for certain advice (for example, tax) if otherwise there is a danger of it falling between two stools.

Hurlingham v Wilde is, again, a good example of this. Mr Justice Lightman said in his judgement, having rejected the argument that the client had agreed to rely on a separate tax adviser: “Mr X, the solicitor, assumed the full role in the transaction and responsibilities to be expected of a solicitor having the conduct of it. I have no doubt that, if he had at the meeting of 29 May exposed his ignorance and unfitness to have the conduct of the matter as he should, the clients … would have immediately instructed someone competent instead. Mr X must have known and feared this. He entered the tax minefield armed only with a precedent book (as he frankly admitted) not knowing what to look for or the significance of anything he found …”

Third, there is the law governing the scope of duty. To see how a well written letter of engagement can help reduce the risk of claims, one needs to look at how the law will decide what is the scope of the solicitor’s duty. The law in this area is constantly being tested. The basic principle is that a solicitor is only required to do what the client asks him to do. In Clarke Boyce v Mouat [1994] 1 AC 428 it was said that the solicitor had “no duty to go beyond instructions by offering unsought advice on the wisdom of a transaction”. In Midland Bank Trust Co Ltd v Hett Stubbs & Kemp [1979] Ch. 384, it was said that: “The court must beware of imposing upon solicitors…duties, which go beyond the scope of what they are requested and undertake to do.”

This principle was very recently confirmed in the Privy Council’s 2004 decision in Pickersgill v Riley (Times Law Reports, 2 March 2004), which approved the following statement at paragraphs 10-160 in Jackson & Powell, fifth edition: “In the ordinary way a solicitor is not obliged to travel outside his instructions and make investigations, which are not expressly or impliedly requested by the client.”

But notice the words ‘in the ordinary way’ and ‘impliedly’. There are circumstances in which the duty can be broadened and there are implied duties as well. If the client is inexperienced, the solicitor’s duty broadens. As the Court of Appeal said in Carradine Properties Ltd v D J Freeman [1999]Lloyd’s Rep PN 43: “An inexperienced client will need and will be entitled to expect the solicitor to take a much broader view of the scope of his retainer and other duties than would be the case with an experienced client.”

It is worth noting that the question as to how experienced the client actually was can often become a disputed issue of evidence at trial where it has not been flushed out by appropriate wording in the engagement letter. In Carradine, the solicitor successfully demonstrated at trial that his client did not need him to advise upon the importance of checking the scope of his insurance coverage. It is much better if there is no scope for argument because, unsurprisingly, the courts have sympathy in practice for the typical claimant argument that, having bought a dog, he was not intending to bark himself.

A further broadening of the solicitor’s duty arises from the fact that often the solicitor comes across information when carrying out the assignment, which needs to be brought to the client’s attention. The case of Credit Lyonnais SA v Russell Jones & Walker [2003]PNLR 2 provides a good illustration. Here, the client wished to vacate premises of which it was tenant and instructed the solicitor to exercise a break option in the lease. Properly interpreted, the lease required the client to make a certain payment by a certain deadline as a condition precedent to the execution of the break option. The solicitor handling the instruction, who was not a property lawyer and did not appreciate this, argued that his only instructions were to serve notice of termination in time, which he did, and that the limited scope of these instructions was consistent with the very modest fees that were charged. Rejecting this argument, Mr Justice Laddie held: “A solicitor is not a general insurer against his client’s legal problems. His duties are defined by the terms of the agreed retainer… He is under no obligation to expend time and effort on issues outside the retainer. However, if, in the course of doing that for which he is retained, he becomes aware of a risk or a potential risk to a client, it is his duty to inform the client. In doing that, he is neither going beyond the scope of the instructions nor is he doing ‘extra work’, which is not to be paid. He is simply reporting back to the client on issues of concern that he learns of as a result of, and in the course of, carrying out his first instructions. In relation to this, I was struck by the analogy drawn by Mr Seitler. If a dentist is asked to treat a patient’s tooth and, on looking into the latter’s mouth, he notices that an adjacent tooth is in need of treatment, it is his duty to warn the patient accordingly. If, in the course of carrying out instructions within his area of competence, a lawyer notices or ought to notice a problem or risk to the client of which it is reasonable to assume the client may not be aware, the lawyer must warn him.”

These factors have led the courts to a further principle, which in practice often undermines the principle that the solicitor need only do what his client asks him to do. A solicitor is expected to advise his client of risks that should be obvious to the solicitor but which the client may not appreciate; and to pass on information he learns during the course of the instructions that may be relevant to the client.

In the recent Pickersgill case, the court referred to Mr Pickersgill’s duty to point out to Mr Riley “any legal obscurities of which Mr Riley might have been unaware” and of “drawing the attention of Mr Riley to any ‘hidden pitfalls’”. The solicitor in that case was held not to have had an obligation to tell his experienced businessman client that he ought to investigate the financial standing of a company from whom he was taking an indemnity that was to run for many years. It was significant in that case that the court accepted that the solicitor had in fact warned of the dangers involved in taking a contractual indemnity from a limited company. One may be permitted to wonder why, as an experienced businessman, Mr Riley needed such advice.

I hope that the above demonstrates that the scope of a solicitor’s duty under the general law often goes beyond what has been said between client and solicitor and that the engagement letter, or a subsequent revision of it, offers an opportunity to the solicitor to limit the scope of his duty if he so wishes and the client so agrees.

Back to basics

In conclusion, I come back to my very basic proposition. Good written communication between solicitor and client can dramatically reduce the risk of misunderstanding or of the client subsequently reconstructing a retainer of much wider scope than intended. Hence, the risk of complaints and claims can be greatly reduced.

Sarah Clover is a partner at Barlow Lyde & Gilbert. She can be contacted at sclover@blg.co.uk