While negligence claims against law firms are a fact of life, recessions cause a spike to occur both in terms of number and size of claim

The current economic cycle has been no different, and the first half of 2011 has seen significant activity in this arena. In particular, a number of new claims have made the press recently, the most prolific of which being reports in February that Linklaters is facing a £115 million claim from Credit Suisse relating to advice given on a transaction which allegedly resulted in a better outcome being lost. This has lead to Linklaters pursuing an Italian firm who it is understood was an alliance partner at the time. Another recent example of a large loss claim is the £50 million loss sought from Mace & Jones which was successfully defended at trial.

Predicting claim trends is a critical part of the insurance equation, and some are easier than others to spot, for example lender and fraud based claims. However, what is both telling, and concerning, for insurers about a number of the decisions we have seen, or indeed the claims that have recently made the press, is that they appear to be both "one off" and yet significant in terms of loss. The worst of both worlds.

As for recent court decisions, it is useful to look briefly at four, and what lessons (if any) can be gained. Mills & Reeve features in one of them, and so it is probably best to deal with that first.

Swain-Mason v Mills & Reeve

The core allegation faced was that the firm ought to have advised Mr Swain and his daughters as to the tax consequences of the transaction should Mr Swain die during a routine heart procedure. After the recusal of the first trial judge (via the Court of Appeal), the claim was dismissed. In short, no duty arose to advise on the tax consequences, and the claimants were found to have "no coherent case" on causation.

Importantly, the firm's retainer letter limited the role played. That said, an obiter finding was made that a clearer statement as to the full extent of the limits of the retainer should have been given (and in particular what was not to be covered). This aspect of the decision is considered to be wrong, and the better view is that a solicitor who has defined his retainer should not be required to state all those matters on which advice is not being given.

However, the decision provides a strong example of how critical it is to ensure that an appropriate retainer letter is in place, and even if it is, how courts may still be quick to criticise law firms bearing in mind the hindsight they are by then able to apply to a situation.

Amalgamated Metal Corporation plc v Wragge & Co

This claim arose from advice given on settlement of the claimant’s tax claim with HMRC, and also from the fact that it was alleged the firm acted without authority. The court found that there was no evidence to support the contention that the firm had been authorised to settle, and in fact found that it was “almost overwhelming that (the firm) was instructed not to settle …”.

Further, while academic, the court found that negligent advice arose as to issues concerning quantum assessment, and that the retainer was not limited in this regard. Judgment was awarded for £7.65 million. The firm relied on the witness evidence of a solicitor who had left in 2005. The court commented that whilst it was not seeking to suggest that the solicitor was seeking to mislead, the events had taken place a long time ago and her account of relevant telephone conversations “is based more on reconstruction rather than recollection”.

Yousefi v SJ Solicitors

While not a particularly notable case, it does demonstrate the importance of witness evidence, and arguments around the extent of the retainer. The allegation faced was that the firm had failed to exchange on an acquisition by a given date and the court found that it was incontrovertible that the firm knew that. As such, negligence was established. Of note, however, is the fact that the court was “deeply unimpressed” with the solicitor’s evidence and concluded that “he was simply making up his evidence in the witness box”.

Thorpe v Fellowes Solicitors LLP

The issue in play here was a solicitor’s duty to check capacity. This is a regular source of claim and the decision is good news for the profession as it exudes common sense. Again, witness evidence appears to have played a critical role and the court found the solicitor to be “an obviously honest witness and ... a careful and responsible solicitor who ... was fully aware of her obligations ...”.

In contrast, the court found that the motivation for the claim was not to redress any wrong, but the fact that the claimant was angered by the sale of a family home with the proceeds passing to his sister. While not relevant given the conclusions reached, the court expressed the view that there was no evidence to establish loss in any event.

Summary

There are four clear themes that emerge from the above cases, when looking at claims against law firms:

  • the importance of documenting in clear terms the extent of any retainer,
  • the importance of documenting both any changes to that retainer, and the advice given generally;
  • the critical role played by a witness’s performance at trial; and
  • causation as a complete defence.

There is nothing new about any of the above, but the collective nature of the decisions does provide a bed-rock for testing any risk assessment made on a particular claim.

Further, while of course law firms should always ensure their retainers are clear (and the profession as a whole has improved significantly in this area), it should equally not be taken as read that if, on occasion, this is not the case then additional duties of care automatically arise. Law firms do not exist to underwrite every conceivable negative outcome arising from a particular retainer, and clients do have minds of their own (even if subsequently they maintain the opposite).

Taking any case to trial inevitably involves an element of risk, and of course it is not known what strategies were adopted by those involved to seek resolution prior to reaching that point. However, in order to have the best possible chance of success, the strength of the witness evidence put forward in support plays a critical role, as the judgments in each of the above cases illustrate.