Trials on error

Last year saw a number of large claims against solicitors brought to trial and fail. This is good news for the firms concerned, their insurers and the legal profession as a whole, particularly since the courts appear to be coming down on the side of the professionals on key issues such as scope of duty. Inevitably, however, these claims would have incurred significant costs, management time and reputational risks. Could these claims have been avoided and what are the risk management lessons to be learned?

Common causes

The cases that went to trial in 2006 involved some familiar themes that can often give rise to claims against solicitors. These include:

• lack of clarity about the scope of the solicitor's duty;
• failure to distinguish the role of the solicitor from that of other professionals; and
• failure to record instructions and advice in attendance notes or correspondence.

Scope of duty

The scope of a solicitor's duty is first and foremost determined by his express instructions. The courts can also, however, imply duties in some circumstances and the law in this area was tested in three cases in 2006.

In Football League v Edge Ellison [2006] EWHC 1462 (Ch), the court found that the solicitor advising the Football League on the sale of its broadcast rights to ITV Digital in 2000 did not owe an implied duty to advise the League to consider seeking guarantees from ITV Digital's ultimate parents, Carlton and Granada, over the £315m payable under the contract in circumstances where consideration of this issue was well within the competence of the individuals at the League. In doing so, the court upheld the principles that: (i) there is no such thing as a general retainer; and that (ii) only in limited circumstances will a solicitor's duties go beyond the express terms of his or her retainer. Following the Football League case, there have been two further decisions supporting its conclusions:

• In Regent Leisuretime Ltd v Skerrett & Pearson [2006] EWCA Civ 1184, a Court of Appeal case concerning litigation advice, the court confirmed that there is no general duty on a solicitor to consider all aspects of a client's needs.
• Likewise, in Marplace (Number 512) Ltd v Chaffe Street [2006] EWHC 1919 (Ch), a case concerning a corporate deal which later unravelled, the court followed the Football League decision, concluding that the solicitors did not have a duty to offer unsought advice to their commercially astute clients.

There are valuable lessons to be drawn from each of these decisions.

First, they emphasise the importance of solicitors ensuring that their instructions are clear, understood by all parties and recorded in writing, preferably by means of a clearly worded engagement letter. They also emphasise the importance of solicitors being alive to the fact that the scope of the duty owed to their client can, in some circumstances, go beyond their express instructions, such as where the solicitor notices a potential risk of which the client might not be aware.

Secondly, in each case the sophistication and experience of the clients was a key factor in the court's decision that the solicitors had not been negligent. This upholds the well-established principle that 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': see Carradine Properties Ltd v DJ Freeman [1999] Lloyd's Rep PN 43. The client's experience may therefore be crucial in determining whether advice should be given to any particular client, and if so what advice. It is very much the case that one size does not fit all.

Thirdly, in Marplace, the court went one step further and also took into account the experience of the solicitors and the nature of their relationship with the client. In determining that the solicitors were not negligent, the judge compared the defendants' role as 'competent (if somewhat pedestrian)' solicitors with that of 'dynamic corporate lawyers who take on themselves a role very close to the client, and identify strongly with the client's interests'. There may clearly be a tension between effective marketing of a firm's business and risk management. However, had the solicitors in Marplace held themselves out as 'dynamic corporate lawyers' in the sense described above, it is possible that the court would not have reached the same conclusion in relation to the scope of duty owed to their client. Firms should take care not to overstate their experience in either their engagement letters or marketing materials.

The solicitor's role and that of other professionals

Solicitors are often retained as part of a team, acting in conjunction with other professionals such as accountants or counsel. It is crucial for the solicitors to define clearly from the outset what their role does and does not include.

The decision in Marplace provides a helpful illustration of the risks for solicitors acting as part of a professional team. The defendant solicitors were a small boutique corporate firm in a fast-paced corporate deal in which the corporate finance advisers and experienced businessmen clients were the main players. The transaction involved the sale of a company, which subsequently failed due to the way in which the deal had been structured (allowing the vendors to receive payments intended to be paid to the claimants). The clients sought damages from the solicitors for failing to protect against this possibility. The judge rejected the claim and held that it was designed to 'shift blame' onto the solicitors for a commercial failure by the clients and the corporate finance advisers.

In Regent Leisuretime, the Court of Appeal confirmed that the defendant solicitors were entitled to rely on the advice of experienced counsel when advising the claimant directors on the best way of pursuing proceedings against a bank. The experience of the clients (the court found that they were well aware of the claim's practical problems), counsel's expertise, the difficult area of law involved and the absence of anything to suggest that counsel's advice was wrong, all pointed to there being no duty on the solicitors to question counsel's advice.

Although the claims in Marplace and Regent Leisuretime were successfully defended, they highlight the importance of solicitors ensuring that their responsibilities are clearly set out in writing and understood by the client and, if appropriate, that they understand the role being played by other professionals and that their engagement letter dovetails with those of the other professionals. In Marplace, although the solicitors had an engagement letter, it did not adequately set out the limits of what they had and had not agreed to do. Their role was, in effect, to document the terms of an agreement which had already been made in principle.

Solicitors should also not assume that other professionals will be in the firing line. In Marplace, the claim was brought against the solicitors, even though TMG, the corporate finance advisers, were the project managers. Unfortunately, the perception of 'deep pockets', backed up by insurance cover, is likely to make solicitors an attractive target.

A possible risk management tool to guard against this risk is the use of proportionate liability clauses in the engagement letter. Such clauses cut through the general rule of joint and several liability and limit the amount of recoverable loss to that caused by that professional's negligence, thereby taking into account the proportion of responsibility that should be borne by any other party.

Limitations of liability for negligence are of course subject to the test of reasonableness imposed under s 11(1) of the Unfair Contract Terms Act 1977. In Marplace, the court considered the reasonableness of a liability cap in the solicitors' engagement letter. It is a rare instance of such clauses coming under the judicial spotlight and is therefore very useful guidance as to how the courts will judge reasonableness in the context of a professional services contract. In that case, the court upheld the clause as being reasonable for the following reasons:

• the clients were familiar with limitation of liability clauses in professional contracts;
• the clients had discussed the limitation provision with the solicitors and it had not been imposed as a non-negotiable term;
• the engagement letter included a provision on discussing variation of the cap; and
• the cap was determined on reasonable commercial principles, taking into account insurance cover and its expense as well as the circumstances of the transaction.

The decision illustrates the importance for solicitors of properly documenting any discussions with the client regarding limitation of liability. Although the engagement letter was signed, there was a dispute over the advice given to the clients in relation to the maximum potential claim against the solicitors, which the clients said had influenced them in accepting the cap, and of which no proper record had been kept.

Failure to record instructions and advice

In fast-paced deals and litigation, recording instructions and advice can sometimes take a back seat. However, if a claim against the solicitor arises some time (often years) later, a written record can be crucial in determining the true course of events.

The recent decision in Fulham Leisure Holdings Ltd v Nicholson Graham & Jones [2006] EWHC 2017 (Ch) provides a good illustration of how deals can unravel over what was thought to be minor detail and the difficulties that can arise in the absence of proper records. This case concerned Mohamed Al Fayed's share acquisition of Fulham Football Club in 1997. A key issue in dispute was whether Al Fayed's solicitors had been instructed to ensure that, as part of the deal, certain protections for minority shareholders would cease to apply once Al Fayed's investment in the club exceeded £60m (a possibility that seemed very unlikely at the time). The solicitors argued that Al Fayed had known that such a provision was not included in the final deal, but they had no documentary evidence to support this and the judge ultimately found against them on this point. If a proper record had been kept, a claim may still not have been avoided entirely, but the costs incurred in attempting to reconstruct the actual events could perhaps have been avoided.

Another recent case in which a similar issue arose was Walker v Chruszcz [2006] EWHC 64 (QB). In this case, a personal injury claimant alleged that he had been pressured by his solicitors and counsel into settling his claim at an undervalue at the door of the court. The claim was rejected by the judge, who concluded that the decision to advise settlement at the door of the court was made on the basis of concerns that the claimant would not be a credible witness, and so was not negligent. The availability of detailed attendance notes prepared
by the solicitors which set out the advice given and in large part refuted the claimant's allegations was a key factor in the judge's decision.

Last year was a successful year for defending claims against solicitors, but the real lesson of these claims is that, while many claims cannot be avoided, prevention is better than cure.