Claims forecast: Some clouds on the horizon

Gaby Kaiser considers trends in professional negligence claims and what an exit from the EU and a move towards US-style group litigation could mean in the future

Following the post-financial crisis peak in negligence claims in 2009, our experience is that the number of claims has fallen considerably. However, we have seen an increase in the sums being claimed across the board, from straightforward matters to cross-border multi-party litigation. Further, there has been an increase in relatively complex claims which often require, for example, complicated expert evidence in relation to more specialised areas of law, including competition law and tax. This trend inevitably leads to increased litigation costs for both parties.

Cross-border litigation is also becoming much more common; that trend is perhaps unsurprising given that a number of the larger firms have moved into new markets in response to client demand. Claims can commonly arise when firms open offices in jurisdictions with unfamiliar litigation and regulatory systems, particularly if the lawyers in those offices seek to give advice (perhaps in response to client pressure) in unfamiliar areas in an attempt to be a full service office.

Another trend relates to the upswing in the number of parallel civil claims and regulatory proceedings. There have been significant changes in the approach of the Solicitors Regulation Authority (SRA) over the past few years, with the SRA increasingly wishing to be seen taking action against non-compliant firms.

We also find that law firms are more conscious than ever of the need to report material regulatory breaches to the SRA, following changes in the Code of Conduct and the compliance officers for legal practice (COLP) regime. Dealing with both civil and regulatory proceedings at the same time can put considerable strain on the lawyers who are at the centre of the claim, and have to be managed carefully in terms of issues such as disclosure and witness evidence.

As to the range of claims, although we are no longer seeing the same very high levels of lender/mortgage fraud claims, there are issues arising in relation to other types of fraud. Solicitors firms of all sizes are increasingly being targeted by fraudsters who use confidence-building methods to obtain bank details and extract money from client accounts, convince firms to make transfers themselves, or intercept emails between firms and clients, leading to funds being paid into fraudsters’ accounts. It is clear that methods for carrying out these types of fraud are becoming more sophisticated and the SRA has issued a number of warnings about the risks law firms face arising from cybercrime, most recently last month.

Pensions and tax law also remain key areas where claims arise, no doubt due to the fact that the law in these areas changes relatively often; difficulties arise when changes are not properly followed or understood by the lawyer, or adequately explained to the client or implemented in drafting. Although the era of large-scale tax avoidance schemes appears to have come to an end, issues in relation to some of these schemes are still working their way through HMRC’s system, and a client may (subject to limitation constraints) postpone a claim against their adviser until they have reached the end of the line in terms of HMRC’s appeal process.

Further, claims will always arise from bespoke tax planning arrangements, which tend to be cyclical, so that when tax rates rise and tax planning becomes more worthwhile, negligence claims are likely to rise again. We also continue to see pension-related claims where lawyers have failed to properly make amendments to schemes, meaning they are administered on the wrong basis for many years.

Litigation issues

The reforms brought in by Lord Justice Jackson have now been in place for over two years. However, we continue to deal with cases under the old regime (where the conditional fee agreement (CFA) uplift and after the event (ATE) insurance premium are recoverable from the defendant if the claimant wins), which are now heading to trial.

Our experience continues to be that, despite the reforms, the costs and time of dealing with electronic disclosure still presents a challenge in
a number of solicitors’ claims. This can easily produce satellite litigation as issues arise over exactly what should be searched for, where,
and how.

Although the reforms introduced a menu of potential disclosure options the courts can order,
it still very much remains the case that standard disclosure is the default. It may be that, in the future, predictive coding techniques could be adopted to reduce the time and costs spent. Witness the recent Irish High Court case of IBRC v Sean Quinn in which the court sanctioned the use of predictive coding in discovery. We may see something similar in the English courts.

Following the huge rise in court fees earlier this year, it is likely that we will see more litigants using the Legal Ombudsman service or, assuming the pilot scheme is successful and fully adopted, the adjudication scheme for professional negligence claims. The adjudication scheme, which was lobbied for by the Professional Negligence Lawyers Association, launched on
1 February 2015. Mr Justice Ramsay is seeking feedback from three pilot cases this month.
The pilot is aimed at solicitors’ negligence claims valued at less than £100,000, excluding costs.

The future?

Peering into our crystal ball, we anticipate
claims against solicitors are likely to arise in
the following areas.

We are still in a period of economic uncertainty. The European Union (Refendum) Bill is currently on its way through parliament, and a vote on exiting the EU should be held before the end of 2017. There is also speculation as to a potential further vote on Scottish independence. Even the prospect of a ‘Brexit’ is likely to be enough to
make the markets and investors wobble, and we anticipate that an actual exit will only increase
the ‘wobble’ factor.

In such times it is inevitable that the spotlight will again be on the professional advisers and, arguably, bad legal advice is more likely to be uncovered as mistakes are not masked by rising markets. Commercial parties are likely to look to break deals and disappointed investors may seek recoveries from their professional advisers.

While we do not suffer from the same excesses as the US litigation system in England and Wales, and do not have class action suits or anything like the US plaintiff bar, there are indications that greater use is being made of group litigation orders (GLOs). Initially GLOs tended to be obtained in relation to product liability claims, often concerning the pharmaceutical industry. Recently, however, we have seen a trend of GLO actions in the financial services arena, such as a claim by investors in Lloyds Bank that the directors breached tortious and fiduciary duties.

We consider that the possibility of a GLO in relation to a professional negligence claim (for example, a number of claimants seeking redress from their former solicitors for failing to provide them with composite litigation funding advice)
is becoming more likely, particularly given the recent rise of litigation funders, who may be willing to back a GLO claim.

As to the Jackson reforms, it is likely we will
see negligence claims arising out of the costs budgeting rules (where solicitors are required
to submit costs budgets at an early stage of the claim to which they will be held unless permission is granted for revision). Recent reports have suggested that, in a high proportion of cases, solicitors are exceeding their costs budgets;
indeed it can often be very difficult to accurately predict and estimate all potential costs near
the start of a claim.

We have also seen some claimant lawyers flagging up the possibility of bringing claims against solicitors who have failed to advise on
all of the funding options for bringing a claim.
In the pre-Jackson era there seemed to be little
to lose for many claimants in taking out a CFA
and ATE insurance, but it may be that not all litigation lawyers were providing composite advice in this area.

It is clearly good news for firms that negligence claims seem to have recovered somewhat from their post-economic downturn peak. However, challenges remain, and there are some potential clouds on the horizon in terms of the bigger economic picture. As ever, good risk management practice is essential for all firms in seeking to
avoid claims. SJ

Gaby Kaiser is a partner at Clyde and Co