Professional negligence: Claims vs reality

Clients are more willing to bring claims against professional service providers but the risk to defendants is not as dramatic as it might seem 

Professional negligence claims have soared in value in recent years, with damages being sought for tens, if not hundreds of millions of pounds, but the settlements are often far lower.

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Robin Simon partner Michael Robin says this is to be expected in a post-recession economy and that despite the staggeringly high value of claims it is unlikely that a claimant will be able to pin the full loss on a professional service provider.

“Claims only come about because of losses, so with each economic dip greater claims arise,” he says. “It’s the size of the transaction that determines the loss, but settlement amounts are often far less than the claims brought. I think the largest ever payment would be less than £100m. The ones we see settle at a fraction of that.”

Dodging a silver bullet

Freshfields Bruckhaus Deringer and Herbert Smith Freehills (HSF) recently dodged a £140m court showdown with London Underground (LUL) after settling a professional negligence case just weeks before it was due to go to court.

The suit, which first came to light in July 2011, was originally for £178.5m, but this was reduced after LUL managed to recoup £36.54m from other sources.

It is precisely this kind of shift in claim size that Robin says is evident when many claims come to settle. 

“The professionals wouldn’t be liable for the full loss in a property transaction when it was partially attributable to market conditions, for example,” Robin explains.

Likewise, in a tax transaction where the client is obliged to pay a tax bill anyway and may only be claiming for incorrect advice on how to handle the matter, it would not follow that the whole tax bill was claimable, although a client may claim for the full loss nonetheless.

Robin says most cases settle at about 10 per cent of the overall value of the claim, adding: “I know of a few cases that have been in the tens of millions and settled for under a million”.

Sue the lawyers!

Nabarro will be hoping for a swift settlement for its scheduled six-week court battle in November over a £130m negligence claim brought against it last year by a disgruntled former client over the way it conducted a High Court case back in 2006. The case is one of the highest value professional negligence claims ever, worth just £10m less than the mammoth Freshfields/HSF case – thought to be the largest ever filed against a City firm.

Clyde & Co professional negligence head Sarah Clover says claims of this type against law firms have been the overwhelming trend in the past five years.

She agrees that this is in part down to the state of the economy and a greater willingness on the part of claimants to seek reparation of losses by suing advisers – and also simply that the claims are arising for far bigger transactions than used to be the case.

“We’ve got some big speculative claims whereby clients have divested themselves of risk as much as possible via litigation funders and conditional fee arrangements,”
Clover says. “It’s easier to bring these claims, although there are still claims going through that have recoverability.”

However, as she points out, most claims in progress today are under the old regime – it is unclear how the introduction of damages-based agreements might change the way risk is approached in these cases.

Robin agrees that the changes to recoverability are bound to have an effect on future claims.

“Being unable to recover success fees and premiums has had a big effect already,” he says. “In the past it was worthwhile for a claimant firm to take a punt because the reward was much higher and there was more incentive for the insurers to settle.”

It looks like there will be no shortage of claims as alongside all this is the emergence of a far more draconian approach to court procedure, which Robin believes not only makes the course of initial claims more arduous, but may also lead to satellite litigation if lawyers fall short of the new rules.