The cost of living is at an all-time high, with interest rates increasing and inflation currently sitting at around 9%. The chances of a recession in the UK over the next two years have increased.
It will come as no surprise that we expect the number of claims against law firms to rise as the economic downturn takes hold, as was the case in 2008 and recessions before it.
But what type of claims are law firms likely to face, and what steps can firms take now to ensure that they are best placed to weather the storm and keep claims at a minimum? We take a look at the new types of claims which might arise out of advice given during the unique COVID-19 pandemic and how a focus on a culture of risk management and openness might be the best way for firms to continue to thrive if a recession does materialise.
Professional Negligence Claims After 2008 It will come as no news that economic downturns often coincide with an increase in claims. The number of claims against solicitors issued in the Chancery Division increased by over 6 times between 2007 and 2009, showing the stark increase in claims arising out of the last recession. In fact, the increase in claims was probably higher as the data does not cover claims issued in the Commercial Court or which settled pre-litigation.
The types of claims which arose out of the 2008 recession centred on conveyancing, fraud (including mortgage fraud), and dispute resolution. Residential conveyancing transactions give rise to the highest number of claims even when the economy is doing well. However, during the last recession the rate of conveyancing negligence claims increased dramatically. This was due to the sudden drop in property values and the prevalence of sub-prime mortgages leading to an increased rate of defaults where the value of the lender's security was insufficient to cover the full amount of the loan.
Lenders scrutinised their files for possible professional negligence claims against their legal advisors. Numerous claims were pursued by lenders on the basis that their solicitors had failed to provide them with information regarding the title, property or borrower which ought to have indicated a risk of mortgage fraud.
What to Expect in the Wake of COVID-19? Claims will still arise out of residential conveyancing transactions, particularly because of mistakes caused by the pressure to complete quickly as clients sought to take advantage of stamp duty holidays. We also expect claims relating to fraud and dispute resolution to increase as they did in 2008. However, we expect that there will also be new types of claims arising out of the unique circumstances of the pandemic relating to employment law advice, commercial property transactions, general corporate transactions, and cyber risks.
Employment lawyers were flooded with inquiries during the pandemic, as employers sought to terminate contracts and navigate the health and safety guidelines for COVID-19 prevention. Lawyers were therefore required to provide urgent advice in the context of the novel and constantly changing situation of nationwide lockdowns where many businesses were forced to close. Employers now facing unfair dismissal claims or claims from employees who contracted COVID-19 at their workplace are likely to claim against their lawyers if it appears that the advice they received was incorrect.
There is also a risk of increased claims arising from commercial property contracts. Many businesses will now be looking to downsize to save costs as more employees work from home. Tenants will look to their lawyers for advice on how to exit leases early for minimal costs whilst landlords will be looking for advice on how to keep tenants in. Claims are likely where break clauses and rent review clauses fail to provide flexibility to tenants or certainty to landlords and they look to their legal advisors to try to recoup their losses.
Companies may also find it difficult to comply with their contractual obligations as the economy weakens, with some attempting to terminate agreements or rely on force majeure provisions. Claims may be pursued against lawyers for drafting errors for failures to include appropriate clauses in agreements to cater for this.
Cyber claims are also predicted to spike. Phishing and ransomware attacks increased during the pandemic due to inadequate IT and document management systems to accommodate remote working. This could lead to professional negligence claims if the ability of firms to work on client matters and meet deadlines is or was inhibited.
Most importantly, the way in which law firms operate has changed dramatically. Most firms have embraced flexible working with the result that lawyers now spend more time working from home. This presents a number of risk management issues which could lead to claims. More lawyers working from home increases the risk of inadequate supervision of junior lawyers. Junior lawyers may find themselves overwhelmed by an assignment and unable to approach supervisors with questions or concerns. This could lead to mistakes due to lack of experience coupled with increased stress as supervisors have little or no visibility on lawyers' ability to cope.
The Importance of Developing a Risk Management Culture The shift to more lawyers working from home and the risk management challenges which it presents is an opportunity for firms to develop and promote an open culture based on supervision and support, to minimise the risk of mistakes developing into claims.
The importance of a positive culture within firms is a focus point for the SRA, as its consultation on rule changes on health and wellbeing at work closed last month. The SRA has highlighted that the delivery of competent legal services depends on the culture and environment that solicitors work in, including adequate support systems and supervision. It has proposed changes to its Codes of Conduct to include explicit obligations on individuals and firms to treat colleagues fairly and with respect. The SRA has emphasised that:
"Unfair treatment of work colleagues in a legal environment can pose significant regulatory risks… This kind of environment... can also lead to mistakes and poor outcomes for clients or to serious ethical concerns, for example when staff feel under pressure to cover up problems…"
This comes at a time when more and more firms are realising the importance of these issues, with many firms (including this firm) now signatories of the Mindful Business Charter, for example.
There are a number of steps which law firms can take in order to cultivate a risk management culture which reduces the risk of mistakes and prevents mistakes from escalating into claims if they do arise.
- The importance of effective supervision of junior lawyers cannot be emphasised enough. Managers should be proactive in ensuring that lawyers are comfortable with the level of work which they are being asked to take on and should encourage discussion with a view to developing junior lawyers' skills and confidence. Although a clear line management system is important, the best approach is to encourage a culture where junior lawyers feel able to approach any senior lawyer to discuss a problem or concern.
- Senior lawyers should lead from the front in reassuring junior lawyers that mistakes do happen, and to encourage early reporting to managers or in house risk teams. Firms should ensure that systems are in place to support lawyers if things do not go to plan and to avoid a blame culture from developing. This applies just as much to partners and senior staff, as to junior lawyers.
- Lawyers at all levels should ensure that they check in with colleagues regularly to ensure that concerns with work or mental health are addressed early on. If there is a lot of remote working, regular video meetings should be encouraged to avoid individuals feeling isolated and to encourage a collaborative approach.
- The more flexible approach to working in the wake of the pandemic should be welcomed, though there is still a lot to be said for going into the office for work. It is much easier to ask questions in person than over a Zoom call. Managers are also better able to assess lawyers' capacity and ability to cope through meetings in person. The return to the office at least once or twice a week should therefore be encouraged at all levels to further develop the open and collaborative culture law firms should be striving for.
The firms which will cope best if and when there is an increase in claims will be those which have focussed on developing an open and supportive culture focussed on effective supervision, collaboration and a proactive approach to dealing with mistakes as soon as they are made. A positive culture and supportive approach to risk management will make all the difference to limiting a firm's exposure to claims.