John F Kennedy said "The Chinese use two brush strokes to write the word crisis. One brush stroke stands for danger, the other for opportunity. In a crisis be aware of the danger, but recognise the opportunity." The current economic and political uncertainties, and other threats and "disruptors" such as cyber issues and AI, are likely to create risks and opportunities with which law firms will need to get to grips. We consider below what trends and developments might in due course shape negligence claims and regulatory action.
Levels of claim
The volume of claims against law firms is currently generally down from its height in 2009 post the financial crisis, but ever-increasing claims severity remains a considerable concern.
The impact of changes to funding and in the Court system upon the economic viability of pursuing lower value claims may explain the dip in volumes in part. This in turn has led to an increased appetite for alternatives to litigation such as making a complaint to the SRA or Legal Ombudsman, or perhaps attempting to bolster a complaint via a subject access request under the Data Protection Act. To date, the PNLA adjudication scheme for professional negligence disputes has not taken off.
The anticipated introduction of a fixed recoverable costs regime for claims worth up to GBP 250,000 (and potentially upwards of that figure in the future), might lead to an increase in claims at the lower end of the scale, as well as changing the dynamics in relation to claims under the regime, as the parties will recover less if successful. This may be in force from as early as next year.
Heightened claims severity is undoubtedly in part driven by the complexity and scale of the transactions being done and work carried out by clients and firms operating with an ever-expanding global footprint. Litigation funders are taking an increasing interest in backing high value claims which is driving claims at this level which might not otherwise be brought. For example, we are seeing an increasing incidence of "vulture funds" (who buy up the debt in distressed companies and then take a driving seat in any litigation brought by the company) starting to take root in the professional indemnity arena. We have long predicted
a group action in the professional negligence field. It has recently been reported that a group negligence claim for more than GBP 500 million is being considered against lawyers who acted for buyers in "help to buy" leasehold housing schemes for allegedly failing to advise on onerous ground rent and other lease terms.
Anecdotally, we understand that large law firms are purchasing ever higher limits of PI cover, and this is undoubtedly a sensible move. As firms expand their operations and are more innovative in their practice there is a need to ensure that cover remains fit for purpose and that the boundaries of professional indemnity cover are properly understood. (See for example the Supreme Court case of Impact Funding (2016), in which it was held that a funding agreement, pursuant to which the funder provided monies to solicitors to pay disbursements, fell within the exclusion in the policy for the supply of goods and services to the solicitor, so that a six figure claim for negligently investigating the merits of claims brought by the funder was not covered.)
Politics and economics
Brexit, the inauguration of President Trump and the recent and forthcoming elections in the UK, France and Germany have brought new uncertainties into the political and economic climate. However, at the present time it remains difficult to predict what the exact effect may be for law firms and, in particular, negligence claims. That said economic and political uncertainty breeds risk which leads to more claims.
Predictions as to the economic effect of Brexit in the short and long-term vary, and currently there is a higher degree of uncertainty than normal around all forecasts, largely because geopolitical risks are so much greater than normal. However, past experience has shown that any turmoil or deterioration in the financial and property markets clearly creates circumstances where clients are more likely to suffer loss and, in turn, claim against law firms.
In the shorter term Brexit is likely to lead to an increase in work for law firms. Clients will need advice on the legal implications of the changes in law and the EU/UK relationship for their particular business, and this is likely to cross a number of practice areas. The application and interpretation of the law is likely to be uncertain and lawyers may see themselves advising on complex and sometimes novel areas in an uncertain environment. It will be important to ensure the usual risk management frameworks are in place by, for example, caveating advice appropriately, making clear potential uncertainties such as to the correct interpretation of legislation, and delineating in the retainer the areas that the firm is and is not advising on.
Counterparties to transactions may well be looking to find excuses to get out of deals they find unfavourable in light of Brexit, perhaps due to the unforeseen drop in value of the pound. Consequently, we are likely to see claims that lawyers have acted negligently, for example by failing to consider the impact of Brexit in relation to specific retainers. This might be due to a failure to include (or exclude) a "Brexit clause", or failing adequately to provide for or advise on the impact of currency fluctuations.
Other risk areas include failing to review whether boiler plate clauses in precedent documents remain appropriate, for example, whether an exclusive English jurisdiction clause in a standard commercial agreement will continue to be enforceable after Brexit.
In many of these cases it is likely that the distinction between commercial and legal advice will be highly relevant. The recent decision in BPE v Hughes Holland (2017) (discussed in more detail in our other article "Claims against lawyers recent key issues in case law") is also likely to be of assistance here. Depending on the exact fact pattern and how far in advance of the referendum the negligence is alleged to have occurred, we might also see arguments as to whether the outcome of the referendum was foreseeable. (Case law which considered whether the financial crisis was foreseeable by professionals went both ways (see, for example, Rubenstein v HSBC (2012) and Camarata v Credit Suisse (2011)).
Going forward, there is of course the possibility of a downturn in work with all the familiar attendant pressures on firms to stray outside their areas of expertise. In a major recession there is also the increased likelihood of law firm failure. Failure of a large law firm was considered a risk priority for the SRA a few years ago following the demise of Halliwells and Dewey. This may well be something moving up the agenda again, particularly following recent events at KWM.
Professionals, including lawyers, are increasingly coming under the spotlight in relation to the actions of their clients. The involvement of professional firms in giving evidence to Parliamentary Select Committees in the wake of a high profile corporate collapse is just one example. Worryingly, on occasion, we have also seen that individuals in Parliament have failed to note that lawyers should not be associated with their client's cases or have criticised a professional firm for protecting the client's confidentiality and/or legal privilege. The UN Basic Principles on the Role of Lawyers provide that lawyers shall not be identified with their clients or their clients' causes as a result of discharging their functions. There appears to be no sign of government lessening its focus on professionals as gatekeepers of their corporate clients' behaviour. For example, the proposed "tax avoidance enablers" legislation (in the event dropped from the Finance Act due to the election), had provided for a penalty for professionals marketing and enabling tax arrangements which were found to be abusive. April saw the Pensions Regulator bringing its first criminal prosecution against a law firm for failure to provide client documents. According to the firm, the documents were initially withheld due to client confidentiality concerns.
Law firm practice will continue to adapt and change apace. New models of working, managing or structure, must be assessed from a risk point of view, and existing risk tools adapted to deal with them. Law firm innovation may operate as a risk reducer. For example, the recently introduced practice of blind allocation of work to non-partner fee earners by means of a system that takes into account, for example, capacity and experience would appear to be a step forward, ensuring that particular individuals are not always overburdened and addressing potential diversity issues.
It is impossible to look forward without addressing the question of what impact artificial intelligence will have on the practice of law. A recent survey in The Lawyer indicated that 56% of the top 100 UK firms surveyed were already using some form of AI or very likely to do so in the next 10 years.
Firms are utilising forms of soft AI or advanced tech (where either the system is applying rules or applying some form of learning) and doing so in innovative ways, including developing systems by investing in legal tech start-ups or in-house. These include systems that carry out routine work usually undertaken by junior lawyers, and doing so in a fraction of the time, such as analysing or classifying complex legal documentation in the due diligence process or reviewing potentially disclosable documents in litigation. Some platforms are able to apply legal logic to analysing documents such as leases.
AI clearly has the potential to operate as a risk reducer. However, a number of risk concerns also arise, and these are certain to come increasingly into focus as AI encroaches on the work of more senior professionals, such as in the advisory arena. Law firms must now start to grapple with these issues. The scoping, in the retainer letter, of what the firm will and will not do, and avoiding mission creep thereafter, will be as important as ever, if not more so. Likewise, issues will arise about how professionals should satisfy themselves as to the quality of a robot's work product, and who will bear responsibility for errors which arise from failings in the software or failures in understanding how best to use the software. Law firms obviously need to be careful with regards to their contracts with software providers in relation to issues such as client confidentiality, and liability.
Leading commentators have predicted that the developments in AI will become very significant in the coming years. This will develop into true AI, taking on a role in relation to tasks seen as non-routine and requiring legal judgement, with the traditional role of a lawyer very much altered. For example, lawyers might increasingly work with coders to develop products, or in areas such as project management. If this comes to fruition then this will of course have a significant impact on regulation and traditional PI claims. As this area progresses, there will have to be new bargains/new contracts between providers and clients. Speed, cost and commoditisation of execution will clash with traditional client expectations. There will be questions around how the standard of skill and care will be judged when significant parts of the production leading to the professional service is automated. Firms will clearly face issues in recruiting, training and retaining top quality graduates, and in deciding how many people they will need in their business and with what skill sets, and how much accommodation, and where, they will need to house them. Firms that get it wrong will find their basic business model challenged and perhaps unsustainable.
Data security will remain a key issue. Perhaps unsurprisingly, the SRA has designated information security one of its priority risks and this was reiterated in its spring update to the Risk Outlook. In the document published by the SRA in December 2016 entitled "IT security: keeping information and money safe" it flagged up that in the last year the SRA had received reports of around GBP 7 million being lost to cyber crime (the true figure is undoubtedly significantly more), and that 75% of reports of cyber-crime were so called Friday frauds. It can be difficult for firms to keep up with a constantly evolving picture, but clearly it is crucial that they do so, and firms must ensure that they are up to date with current regulatory guidance. Data security can extend beyond hacking or other forms of cyber crime, and firms need to continue to attempt to embed data security principles within their firms' culture to avoid losses caused by human error. For example, we have seen recent fines for barristers who placed client papers in a household bin, and who accidentally uploaded details of client matters to the internet when another household member updated software on a home computer.
Agile working is a particular risk area on a number of fronts: for example:
- ensuring the technology utilised to allow fee earners to access the systems from outside the firm is not vulnerable to criminals;
- considering the issues that might arise when lawyers cross borders with devices that carry access to accounts containing client information where legal professional privilege might not be respected (see, for example, the reported increase in searches of mobile devices being carried out at the US border, and requests for details of social media and other accounts in the US visa waiver form);
- ensuring that lawyers are consistently reminded of the confidentiality and privilege issues that arise from working and travelling outside the office.
In Autumn last year the SRA published its consultation to overhaul the Handbook, by making a number of significant changes, including shortening the Code of Conduct further, introducing different codes for solicitors and firms and authorising solicitors to work in unregulated practices. The SRA has now published its response to the Consultation and has indicated its intention to press ahead with these changes. The SRA will consult further, later this year including on a new Enforcement Policy and has recently published the results of its previous consultation and the Question of Trust survey in which it sought to obtain views from solicitors and the public in relation to the seriousness of various breaches.
A number of issues emerged from the document, such as the public's perception of information security and what was considered the most serious misconduct. One of the particular issues brought out by the exercise was that events which occur in relation to an individual's private life were felt to be a relevant consideration for the SRA in relation to enforcement. We have seen several recent SDT cases in which individuals, who have faced criminal sanctions for non-dishonest behaviour wholly outside of their professional life, have faced further penalties imposed by the SDT for breaches of Principles, including Principle 1 (failing to uphold the law and proper administration of justice). Although there are, without question, some criminal offences that will merit SRA attention and enforcement, at the lower end of the scale there is a grey area that raises questions over the boundaries of what the SRA should or should not be regulating. This also raises issues from a risk point of view, as firms will wish to make clear to staff the extent to which the SRA may consider behaviour that would be considered well outside an individual's working life. We are likely to see more about the SRA's approach to this issue in the consultation on Enforcement Policy later this year.
We continue to see greater enforcement action from the SRA than in the past and a continuing level of focus on systems and control issues within firms. This has the potential to raise coverage issues, as to whether, in certain instances, there would be cover under a PI policy for such failings. The SRA is also increasingly making allegations of lack of integrity against individuals. This raises a number of considerations, including whether lack of integrity can be distinguished from dishonesty (two recent High Court judgments reached different conclusions on this point: Newell-Austin (2017) and Malins (2017), although we understand that permission to appeal has been sought in Malins) and when a lack of integrity by an individual might be attributed to the firm.
Parallel civil and regulatory proceedings continue to present an issue for law firms, and to place pressures on those defending allegations on several fronts. Privilege looks set to remain a key battleground in regulatory proceedings, with a number of thorny issues. These include the issue of privilege in respect of interviews with witnesses as part of an internal investigation, as well as around the extent of the client waiver of privilege in a claim or complaint, whereby a firm will be required to navigate the extent to which it can provide documents to the SRA where there is no client waiver and a section 44B notice has not been served.
Conflicts of interest
Own-interest conflicts continue to present problems for firms. We continue to see instances of failures to realise that the Code of Conduct places an absolute prohibition on acting where there is a conflict between the interests of the firm and the interests of the client. If the firm has committed an act of potential negligence but wishes to continue acting on the matter to put things right, it is possible that the firm cannot do so if this could be perceived to be an own-interest conflict, even if the client understands the conflict and has a strong wish for the firm to continue.
An enduring issue for firms is how to ensure that lawyers take individual responsibility for regulatory compliance and ethical issues arising in the course of their practice, rather than "outsourcing" it to their risk and compliance teams. This is something that seems to be particularly true in the case of conflicts where complete reliance might sometimes be placed on automated searches without much further thought. Further, whilst some developments might more obviously prompt a further conflicts search, such as a new party being brought into a deal, others might not for example, if the firm receives a piece of advice that their client has a knock-out defence in some litigation they may not turn their mind to the fact that this might potentially shift liability on to another as yet uninvolved party who happens to be a client. Another issue we still see regularly is that firms fail to define the extent of their retainer, or allow it to creep beyond its original confines, taking the firm into territory where there is an unanticipated conflict. Commercial conflicts can also be as important as legal conflicts here.
Our world is ever-changing and the pace of change and the complexity of the issues faced by law firms seem to move in only one direction.
We will continue to keep the issues under review and will aim to bring the important likely developments to your attention in good time.