Commercial negligence claims are rising rapidly and, says John Verry, law firms need to adopt clear and rigorous procedures in vetting their clients if they are to avoid being wiped out by a hefty catastrophe claim
There are signs that the risks involved in commercial practice are increasing.
Historically, company and commercial work has not given rise to a substantial number
of negligence claims against solicitors. In 1998-99, the proportion was just 3.42%. However, when one calculates the proportion by value, the figure rises to 8.41%. While such claims were relatively infrequent, when they did occur they were expensive.
The 2000 Annual Report from the Solicitors Indemnity Fund contains statistics which should cause concern to firms that undertake commercial work. There has been a marked increase in the average value of commercial claims, from less than £100,000 in 1998-99 to around £150,000 in 1999-2000.
One would also expect the number of commercial claims to rise as the economy moves into recession. When businesses collapse, directors are minded to look to their advisers and to question the professional advice they have received. These trends underline the need for commercial lawyers to develop a risk management strategy. To do this effectively, the risks must be identified and analysed. Then steps must be taken to reduce the risk exposure.
So what are the risks associated with commercial work – what goes wrong? From major corporations through to small and medium-sized or owner-managed enterprises, commercial clients have high expectations of their professional advisers. They expect to receive the same standards of service that they provide to their customers. Sadly, in some cases solicitors do not meet their expectations.
The underlying cause of many commercial claims is failure on the part of the solicitor to communicate effectively with the client. This can be seen from the more common types of claim. Assets transferred to the wrong company name, Tupe problems not dealt with, debts falling to be discharged by the wrong party to an agreement, tax matters incorrectly dealt with or not addressed at all. Often the final agreement fails to reflect the client’s original or subsequent instructions.
Some commercial lawyers take the view that these problems are bound to happen in the modern climate of fast, high-pressure deals. Clients impose unreasonable demands, but nevertheless we have to do our best, they say.
But if firms had an effective client acquisition and vetting procedure, these demands and expectations could be ascertained at the outset, allowing the firm to make an informed decision about whether or not they wish to act.
A decision based solely on the prospect of fee income is not a wise one. The lure of a substantial fee and the prestige of acting on behalf of a high profile company may become a distant memory when the claim arrives.
Consider the losses the firm will incur in increased premiums, payment of the excess, ancillary costs, the likely loss of the client and, potentially most important of all, damage to reputation.
A client vetting process will enable the firm to ascertain both if it wishes to act and if it is able to act. As a minimum, the process should address the following points, which do not constitute an exhaustive list, but will help firms to develop a client vetting procedure to meet their particular requirements.
