Risk Update

Risk Reading — Engagement Letters & Insurance Best Practices in the UK, Client OCGs on Attorney Mental Health, Law Firm Regulator Seeks “Spot Check” Power

Jason Nash, Solicitor at law firm Browne Jacobson and Nicola Anthony, Risk Manager at Lockton write: “Law firms: limiting liability in engagement letters” —

  • “Most firms very wisely seek to limit their liability to clients in their engagement letters. It makes sense to do this so the firm and the client both know how much financial compensation might be available if things go wrong.”
  • “But while limiting liability is good risk management practice, such clauses must be drafted carefully to be effective. Problems arise where the perceived losses are more than the limit of liability contained in the engagement letter. And if restrictions and exclusions are too onerous, they could be deemed unenforceable, leaving liability unrestricted.”
  • “There are several parties who are very interested in the effectiveness of liability clauses – the client, the firm and their professional indemnity insurance (PII) insurers, lenders, litigation funders, or anyone else who is interested in the outcome of a professional negligence claim.”
  • “Professional indemnity claims are a significant concern for the profession and their insurers. In recent years, whilst the volume of claims has remained steady, the sums being claimed have risen significantly. As PII is one of the biggest costs to law firms, (together with rent and salaries) this means the higher costs of claims and resulting impact on premiums can have a devastating effect on a firm. “
  • “To protect themselves against the burden of claims, many firms seek to include a standard term in their engagement letters excluding liability for breach of contract or negligence or limiting the damages that can be claimed. This is sometimes linked to a clause seeking to reduce the limitation period to a shorter period of time than prescribed by statute.”
  • “It’s also useful to consider what might happen if a high value transaction went wrong. When claims arise, a simple mistake can have severe financial consequences.”
  • “A limitation of liability clause in an initial engagement letter is not a ‘get out of jail free card’; if it’s decided the clause is ineffective, the full limit of cover will be exposed – trying to use both the limitation of liability twinned with a lower level of cover might not be effective if the clause is found to be unenforceable. The firm itself is then at risk once the full limit of insurance has been eroded, either by one single claim or a number of aggregated claims.”
  • “Firms must also consider whether any limitation of liability clauses comply with SRA regulations. In 2021, the Solicitors Disciplinary Tribunal (SDT) imposed a fine on a firm for seeking to improperly limit liability and/or limit the timeframe for when a claim could be made. The SDT found these breached various provisions of the Solicitors’ Code of Conduct 2007 and the SRA’ Code of Conduct 2011.”
  • “Below, we’ve offered some key recommendations to keep in mind before and during implementation:
    • Document any challenges and/or negotiations concerning a limitation of liability clause, explain why it is fair and reasonable and does not breach SRA Code of Conduct.
    • Ensure adequate and appropriate insurance cover is in place to avoid a potential regulatory sanction
    • If possible, document the reasons for any attempt to limit liability to a figure below the level of insurance cover
    • Where a formula is used for determining a limitation of liability, make the basis for calculation clear
    • Remember that it is not possible to exclude liability for matters such as fraud or an SRA regulated activity
    • Where caps on liability are introduced, make clear whether the cap is an aggregate limit on liability, or applies separately to each breach or each claim
    • Where possible, the client should be given sufficient time to consider the matter and/or take legal advice”

“‘A Leap of Faith’: Some In-House Leaders Join Fight to Fix Big Law’s Mental Health Crisis” —

  • “Not all in-house lawyers watching the recent reckoning over the mental health of law firm lawyers have been passive observers… For instance, Minneapolis-based U.S. Bank in 2021 collaborated with seven of its law firms to develop wellness guidelines for outside counsel, an effort that has since expanded to another 11 firms. And Atlanta-based radio and TV station owner Cox Media Group added similar principles to its outside counsel guidelines after Eric Greenberg became general counsel in 2021.”
  • “‘The danger comes from people feeling like their meaning and humanity have become completely divorced from the pure, unadulterated radioactive challenge of what lawyers do,’ Greenberg said. ‘We as in-house counsel have an opportunity to reinject into our outside counsel’s work a sense of accomplishment and meaning that makes someone able to tolerate the challenges of the hard work,’ he said.”
  • “Some legal department leaders unnecessarily escalate the stress on outside counsel by treating routine matters as five-alarm fires, thinking outside lawyers’ hefty hourly rates entitle them to be extra-demanding.”
  • “While Stephen Mar, general counsel of the supply-chain-software firm Odeko, acknowledges the inconvenience of after-hours work and limits those asks to the most urgent matters, he said that ‘the primary responsibility to own and drive any initiatives related to the mental health of their lawyers lies with law firms and their leadership.'”
  • “The lawyers doing the work also need to prioritize their own well-being, ‘as it directly impacts their ability to provide high-quality service,’ said Michael Kraut, a partner at Morgan, Lewis & Bockius, one of the firms that helped create the U.S. Bank guidelines.”

SRA seeks power to launch ‘spot checks’ of law firms” —

  • “The Solicitors Regulation Authority (SRA) has called for the power to launch ‘wide-sweeping inspections’ of law firms without needing the trigger of a specific allegation of misconduct.”
  • “Chief executive Paul Philip made the request while revealing that the first two cases involving alleged SLAPPs (strategic lawsuits against public participation) have been referred to the Solicitors Disciplinary Tribunal (SDT).”
  • “He said the regulator had two legislative asks: new powers to issue unlimited fines, which has been a request for some years, and to make spot checks.”
  • “It came in the context of questions about the SRA’s two thematic reviews on SLAPPs, the second of which was only published last month. These involved visits to multiple law firms but Mr Philip stressed that thematic reviews were ‘an opportunity to highlight good practice and… sharp practice’ – they were not inspections of those firms, although any potential misconduct the SRA came across would be referred for investigation.”
  • “‘We don’t have the statutory powers to do a spot check or an inspection other than in anti-money laundering work,’ Mr Philip explained. ‘So in terms of asks, we would very much like to do spot checks or inspections of firms across the board but at the moment we need a very specific trigger in relation to an allegation of misconduct to do that.'”