Opinion: Liabilities of acquiring failed firms’ cases should be clarified

As the calendar flops with trepidation from 2010 to 2011, little seems certain other than that a year of unprecedented change lies ahead for the legal services sector: ­significantly increased competition from new entrants; a new code of conduct; and the gradual unveiling of what the Legal Services Ombudsman and the Legal ­Services Board will mean in practice for the ­profession.

Craig Jones
Craig Jones

News of store closures by HMV proved a timely reminder that the post-Christmas period can be particularly tough for many businesses. Law firms are no exception.

It seems almost certain that a growing number will bow to financial pressure, especially when we thunder towards the annual professional indemnity ­renewal period.

Of course, one person’s misfortune is another’s opportunity. ­Distressed firms present openings for healthy practices to expand by acquiring good staff, clients and work-in-progress. But there is a sting in the tail in the shape of the successor ­practice rules. Essentially, the acquisition of work from one practice by another can lead to a finding that the acquiring practice is a successor practice to the ­ceasing one, accumulating not only staff, clients and potentially work-in-progress, but also more ­undesirable aspects such as claims history and ­un-notified claims.

Should the ceasing practice be in distress because of a vastly increased PI premium caused by poor claims history, the ­acquiring practice could quickly find itself saddled with a crippling premium.

It is the innate uncertainty and absence of precedents or useful guidance on when the acquiring practice will be treated as a successor practice which is deterring healthy firms from receiving the baton.

The acquiring practice is at the mercy of a range of authorities with differing motives and stakeholders. The insurer of the ceasing practice will, of course, be looking to shift liability for any future notifications. It is my ­understanding that in the event of a ­dispute, insurers will resolve it through arbitration into which the ­acquiring practice will have ­little input.

The courts and the Ombudsman could be asked to take a view on whether the acquiring practice is in fact a successor practice. Although it is too early to ­determine the impact of the Ombudsman in terms of dealing with complaints, it presents yet another opinion-holder and decision-maker with regard to these rules.

And, of course, we must not forget the SRA, which could also be required to rule on the successor practice dilemma as we move from the current code of conduct towards outcomes-focused regulation, in turn ­heightening the sense of ­uncertainty for the acquiring practice.

But isn’t this just business, and if you can’t stand the heat you should get out of the kitchen? Perhaps. But ultimately, we’re not just talking about CDs that can be stored or biscuits that will slowly rot.

Real people will be left in limbo, with live cases that are much less able to weather inactivity. If left, they not only become worthless but attract negative value in terms of potential claims against the insurer or the assigned risks pool – and, of course, by tarnishing the image of the profession as a whole.

This known unknown and its ­potentially ruinous implications make it a risky business to engage with a distressed firm and its ongoing matters. While the objectives of the successor practice rules might be admirable, surely it would be ­sensible to ensure the rules are policed in such a way as to give greater certainty to healthy practices looking to absorb work from failing ones. The ­alternative is a legal services industry on its knees, a kitchen on fire and hundreds of clients left to burn.