16 June 2003
We reap what we sow. The types and amount of professional negligence claims against solicitors tend to reflect the economic state of the country, not to mention social attitudes. Everyone knows that when recession bites, litigation mushrooms - the harder money is to come by, the more people will sue for it. These, therefore, could be dangerous times.
To make matters worse, the compensation culture is still on the rise. Here, again, we reap what we sow. The number of personal injuries claims is still rising, and many solicitors are benefiting from it. The replacement of legal aid by conditional fee agreements (CFAs) and after-the-event insurance may have weeded out a few of the more outrageously undeserving claims, but the numbers have been more than restored by the enthusiasm with which individuals are urged to make a claim to right the wrongs they have suffered. However, a steady and significant proportion of claims against solicitors themselves are arising from failed personal injuries actions - if they have been outside limitation periods or struck out for delay, for example. Those same CFAs will be brought to bear upon the errant solicitors. And this applies not just in personal injury cases, but in all cases where a client claims to have lost an opportunity or to have made a loss by reason of his solicitor's negligence.
The increase in claimants' costs caused by CFAs will add to our insurers' outlay, not to mention our premiums. The temptation is then to be rushed into a quick settlement to avoid costs. But here we reach the tension between short-term and long-term advantage. As our insurers will be the first to recognise, although meritorious claims should, of course, be settled early, this is no time for the short-term saving of costs by settling whatever comes along just to be shot of it. Such a process feeds the compensation frenzy and delivers more claims and higher premiums in the future.
So, what about the types of claims? Obvious economic trends include a buoyant property market, low interest rates, and poor investment returns.
It is no surprise that property-related claims have risen significantly over the last two years. They now account for nearly half of all claims notified to insurers. The more transactions there are, the greater the 'opportunity' for negligent conveyancing is. These are claims that come out of prosperity and we are through the era of claims by lenders against their lawyers and valuers that arose from the collapse of the property market in 1990. However, interest rates are very low at the moment and the current propensity to borrow up to and beyond the hilt is easily matched by lenders' rush to lend. Nothing changes. We all know the property market will never decline. But when it does, the types of claims will have come full circle. The crackdown on
solicitors acting for borrower and lender in the same transaction will reduce the level of claims of previous years, but they will be there.
One of the growth areas of solicitors' practice of late is the provision of investment advice. This falls within the scope of the business of a solicitor, but what a time to diversify into this field. With the stock market having lost so much value and pensions losing their worth, we are already seeing a large number of negligence claims and will see more. Our insurers will not be keen to cover lawyers who provide specialist investment advice and will certainly only provide cover at a price.
The dramatic fall in the value of many companies has swelled the number of claims against accountants and solicitors involved in mergers and acquisitions, be it for due diligence or commercial advice. The potential size of some of these claims raises the question as to whether solicitors should seek, in establishing the terms of their retainer, to limit their liability to a sum that will satisfy their clients, their insurers and the Unfair Contract Terms Act 1977.
There is never an easy place to talk about fraud involving solicitors, but trends should be noted for what they are. Money laundering is ever-present. It goes back to the days of Al Capone and owes its name to his habit of sinking his ill-gotten gains into launderettes. Solicitors are a perfect vehicle for money laundering, as the perceived respectability of the profession and the confidential nature of its relationship with clients make a solicitor's client account an even better staging post for money laundering than a washing machine. In such cases, the solicitors are sometimes knowingly involved, but more often are not.
Mortgage frauds have passed through the system, but the 'prime bank instrument frauds' are rife and benefit from current low interest rates. This fraud involves duping people into producing large amounts of money to be invested, once enough has been collected, into schemes that will, it is said, produce vast amounts of interest, up to 100 per cent a year - who could resist? The 'security' offered is that the money will be placed in a solicitor's client account until it is ready to be invested. The money goes in and out, and the solicitor gets sued because no one else can be found and, frankly, because he deserves it. In such cases, the solicitors are sometimes involved unknowingly, but more often are fully aware of what's happening.
A popular and profitable use of solicitors involves their ability to give undertakings, which are supposed to be as good as cash. The usually small firm is approached by the seemingly prosperous businessman and is dazzled by the promise of bulk work in the future. In the meantime, the businessman is taking a large loan to tide him over until his mighty fortune lands on these shores in a few days time. As 'security' for the loan, the solicitor gladly gives an unconditional undertaking to the lender to pay the amount of the loan plus interest by a certain date. He knows, of course, that his client will be in funds by then, but he is in for a shock. It is worth bearing in mind that should such an undertaking be requested of a solicitor, it will usually be regarded as a mere guarantee of a client's debt, and therefore not in the ordinary business of a solicitor, and so not covered by his insurers. This can prove to be a very expensive, if not fatal, mistake.
Barney Micklem is a partner at Reynolds Porter Chamberlain
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