Across the lawyers' liability field, experience continues to be that claims volumes in general are down, although the severity of claims continues on an upward trajectory (albeit we are seeing a growing difference between the sums initially claimed and ultimate settlement or judgment values). What is driving the reduction in claims numbers, where are the claims still coming from, and what are the current issues which might give rise to future claims?

The economic climate

Our experience is that claims arising from the financial crisis have now largely worked their way through the system or become time-barred. The teams lenders put in place to review loan books and pursue potential claims are, we understand, being wound up, or are keen to dispose of the last remaining claims.

However, it remains to be seen how long this period of relative calm in terms of lender claims will last. We have started to witness once again some of the trends and behaviours in the residential property market which contributed to the last spate of claims: rapid price increases; significant lender appetite including willingness to lend at high loan-to-value ratios; and interest rates which many take the view can only go up. Against this backdrop, a fall in the property market, perhaps in the event of a Brexit (as to which see further below), could see a resurgence of this type of claim.

This is not the only sphere in which the economic climate might lead to vulnerabilities for lawyers. As oil and other energy prices fall, contractual arrangements entered into by companies in those industries may well come under scrutiny.

The funding landscape

It is difficult to assess to what extent the April 2013 Jackson reforms to litigation costs and funding, including the removal of the recoverability as against defendants of after the event (ATE) insurance premiums and conditional fee agreement (CFA) uplifts, have deterred claimants from pursuing claims. Nevertheless, these recoverability changes, now extended so as to apply also to proceedings brought by insolvency officeholders and companies in liquidation or administration (with effect from April 2016), have no doubt been a positive development for those on the receiving end of claims. Although significant numbers of cases involving pre-April 2013 CFAs and ATE policies are still working their way through the system, so that the impact has not yet been fully felt, in more recent cases we are no longer facing the same kinds of pressures to settle from claimants who have effectively been able to divest themselves of risk and enter into arrangements whereby an unsuccessful defendant will ultimately have to pay a wholly disproportionate sum in costs. It also appears that in some cases the costs management process has caused some claimants to take stock of both their own potential legal spend and the extent of their exposure to adverse costs should their claim fail, leading to some welcome results from a defendant perspective.

Claimants' appetite to bring claims has also been impacted, principally at the smaller end of the scale, by the very significant increases in Court issue fees, which now stand at GBP 10,000 for claims of GBP 200,000 and above. This has also given rise to a spate of claims, both reported (for example, Lewis v Ward Hadaway (2015)) and unreported, in which claimants have issued claims with an inadequate issue fee, leading to satellite debates about whether claims should be struck out on these grounds, particularly where limitation is in issue.

It remains to be seen if and how claimants will overcome these funding issues. Will we, for example, see an increase in uptake of the hitherto little used damages based agreement (DBA)? Further, although we are not always made aware if a claim is being backed by a professional funder, our perception is that there is a growing interest in third party funding of professional liability disputes, attracted perhaps by the relative predictability of professional liability disputes brought by features such as the use of the pre-action protocol, the general availability of a matter file which eases the process of disclosure and therefore parties' understanding of the factual matrix, and the fact that judgments will usually be met by insurance. For example, it has been reported in the press that claimant law firms are using third-party litigation funding to sue other solicitors for professional negligence, with Augusta Ventures saying recently that 75% of the 56 cases it had funded since 2014 were for breach of contract or professional negligence, with more than half of the latter brought against solicitors. Since funders may well have different motivations from parties, their involvement can impact on the dynamics of a matter and the appropriate defence strategy.

Claims trends

Common causes of claims

Broadly speaking, the common causes of claims have not really changed for many years, though we are seeing these being shaped by changing business practices. For example, conflict of interest issues can arise in corporate matters from increasingly complex group structures.

Similarly, supervision processes can be challenged by new ways of working such as outsourcing, off-shoring and remote working, as well as cost-cutting in lean times or under client pressures which may lead to work being carried out by more junior staff such as paralegals. An interesting reported example of the latter issue was seen in Dunhill v W Brook & Co (2016), a case relating to an alleged under-settlement at Court of a personal injury action, in which it was held that, had the barrister acting been negligent in settling the matter, the solicitors would also have been held to be negligent because they had only sent to Court a trainee, who was described as "out of his depth" and would not have been knowledgeable or experienced enough to detect any negligent error on the part of counsel. Outsourcing is a trend which looks set to continue, with the outsourcing of major disclosure exercises having been given a boost in the UK by the recent case of Pyrrho v MWB (2016), in which the English Courts approved for the first time the use of predictive coding. Firms which outsource such tasks will need to think carefully about who will be carrying out the relevant work, how it will be supervised, the provider's data security measures, and what insurance the provider carries, as well as how to protect other clients' confidential information when the provider is given access to the data in question. That said, if advocates of predictive coding are to be believed, the concept carries significant potential benefits for firms in terms of increasing accuracy, which may reduce the scope for claims relating to the carrying out of disclosure exercises.

We have also noticed some pockets of claims arising in particular areas of work, including the following:

International work

As we have explored in previous editions of the Lawyers' Liability Briefing, as firms continue to expand into new and relatively unchartered territories, work with an international or cross-border element continues to prove a major source of claims. The internationalisation of firms' clients is also a driver, with law firms more frequently being asked to advise on issues such as sanctions – an area of great complexity and change, with significant differences in approach between the US and UK approaches which could prove a trap for the unwary. Sanctions issues are not only a claims issue but also a regulatory one, and views have been expressed that the new Office of Financial Sanctions Implementation, set up within the Treasury with effect from 31 March 2016, may show greater interest than the Treasury has previously done in professional services firms and their compliance with sanctions.

When claims with an international or cross-border element do arise they are frequently complex to defend because of issues which may arise in relation to, for example, which Court has jurisdiction over the dispute and what the governing law is (with expert evidence on foreign law often being required where there is a mismatch between the venue in which the dispute is heard and the applicable legal regime), operating under less familiar or conflicting procedural and regulatory regimes, and marshalling witness and documentary evidence in the face of legal, cultural and linguistic differences.

Our own experience in this area has been reflected in recent reported case law. For example, Various Claimants v Giambrone & Law (2016), in which an Italian lawyer giving advice to UK investors in relation to Calabrian property developments was held to have acted negligently in failing to advise them of the need for enhanced due diligence due to mafia involvement in the construction industry in the region, advice which in Italy it might not have been thought necessary to give. This case illustrates some of the issues which can arise when lawyers operating outside their 'home' jurisdiction fail to appreciate differences between the understanding and expectations of clients in the different regions. Jurisdiction and choice of law issues are not only an issue when claims against lawyers arise but may also be the source of those claims: it is interesting to note that in the last year alone the Courts have reportedly been presented with at least two cases in which alleged failures of advice as to jurisdiction and/ or choice of law clauses in international employment contracts have given rise to claims against lawyers (Wright v Lewis Silkin LLP (2015), where the claim was successful but which is under appeal, and a further claim by a former EY Moscow CFO against his lawyers, the making of which has been reported in the legal press.) The challenges for firms of trying to ring-fence the liabilities of particular offices or local firms from the rest of the business was also touched upon in the Courts last year in Symrise AG v Baker & McKenzie LLP (2015) where the (successful) defendant UK LLP conceded that the UK LLP's liabilities were not limited simply to selecting and instructing the local firm.

Litigation

We continue to see significant numbers of claims arising out of litigation, which continue to be time and labour intensive to defend, particularly where (as is increasingly the case) the underlying matter was a substantial piece of complex litigation, because of the need effectively to "re-live" the litigation. The growth of third party litigation funding (see also above) may contribute to the issues which arise in this area, as firms find themselves facing claims brought by funders, which are not their clients. For example, difficult issues may arise as to duty of care and privilege, including the question of what firms can say in their defence in circumstances where there has been no implied waiver of privilege in the matters on the client file.

In recent times we have seen significant numbers of claims relating to the alleged under-settlement of personal injury (including industrial disease) and matrimonial cases (in particular relating to pension-sharing orders), driven at least in part, we believe, by certain firms of claimant solicitors targeting this work in terms of advertising and the sourcing of claims.

To date, we have not witnessed the swathe of claims which some predicted arising out of post-Jackson breaches of Court deadlines and procedural rules to which the Mitchell v News Group Newspapers (2013) decision was applied leading to the striking out of claims or other draconian sanctions. This may be due to a combination of lawyers acting in a particularly cautious manner in light of the widespread publicity which Mitchell received, and/or the subsequent softening of judicial approach in later decisions such as Denton v TH White Ltd (2014).

However, in the last issue of our Lawyers' Liability Briefing we predicted that we might see more claims arising out of funding advice, and there have been some recent reports of costs issues arising in cases which have now worked their way through the Courts under the post-Jackson regime, for example relating to advice about funding which was given at around the time of the reforms (when there was something of a rush to get arrangements in place in advance of the 1 April 2013 commencement date). As more matters in which costs management has taken place come to a conclusion and final costs orders are made, we may also see an increase in claims arising out of work done in relation to costs budgets, although firms may opt to accept a reduced payment of fees from their client rather than risk facing a professional liability claim. If and when damages based agreements become more popular, we might see claims relating to whether or not these arrangements were adequately explained to clients.

Tax advice

Tax advice continues to be a source of claims and has come under the spotlight of the media and regulators once again – together with the issue of data security – in light of the Panama Papers leak. The activities of offshore firms are likely to be the subject of particular scrutiny.

It remains our experience that many of the claims we are seeing in the tax arena (and expect to continue seeing) relate to historic tax advice. This is perhaps because governmental and regulatory crackdown on large scale tax avoidance schemes has largely brought such activity to an end, but also because clients will often wait until any dispute with HMRC has finally been determined and they have had to make a payment to HMRC before considering a claim against their advisors. It remains to be seen, for example, what impact the Supreme Court's recent ruling in favour of HMRC in the Eclipse 35 film partnership scheme litigation will have in terms of knock-on claims.

Against this backdrop, limitation defences are important: often, the primary six-year limitation period, running from entry into the scheme, will have expired, and the claimant will be seeking to rely on date of knowledge arguments pursuant to section 14A of the Limitation Act 1980, alleging that they did not have the requisite knowledge to bring a claim until (say) the HMRC assessment. The recent decision in Iain Paul Barker V (1) Baxendale Walker Solicitors (A Firm) (2) Paul Baxendale-Walker (2016), concerning the recommendation by a solicitor of an employee benefit trust as a tax avoidance scheme, illustrates the fact-sensitivity of such arguments: although obiter (because the issue in relation to which breach of duty was found failed on causation), the Court held that the claimant would have been able to rely on s.14A because, although he had questioned the advice received from the defendants on a number of occasions, his questioning was not on issues which were relevant to the reason for which the scheme ultimately failed.

We are also seeing a spate of disappointed beneficiary claims relating to inheritance tax advice and estate planning.

Pensions

Pensions is another area, like tax, where the sheer rate of change continues to give rise to the potential for claims.

We continue to see issues with the implementation of amendments to and consolidation of pension scheme rules. Along with alleged failures to effect equalisation of retirement dates for men and women following the Barber judgment (1990), which we continue to see, these sorts of issues can give rise to claims against those responsible for the documentation in question.

Another exposure for firms advising on corporate acquisitions, sales and restructuring arises from the powers of the Pensions Regulator to take action under the "moral hazard" provisions of the Pensions Act 2004 in relation to corporate changes or structures which have a detrimental effect on the security of the pension scheme. These provide for the Regulator to take various steps including, for example, issuing a contribution notice requiring a company or individual to pay monies to the pension plan or Pension Protection Fund or a financial support direction requiring a company to provide on-going support for a scheme. The circumstances in which the Regulator may exercise these powers is complex and there is relatively little case law about the scope of its powers. Moreover, our experience is that the Regulator is taking an increasingly interventionist approach and we foresee this trend continuing. These factors combine to make it more difficult for lawyers confidently to advise on transactions, including with regard to the risk that the Regulator might investigate and take steps further down the line, and therefore increase firms' vulnerability to claims being made against them in this area.

Again, limitation issues can often be very live in pensions advice cases but are highly fact-sensitive.

"Friday frauds", imposters and sham law firms

We continue to see firms, particularly in the property sector, falling prey to fraudsters, who are using ever-more sophisticated techniques to access and make off with client funds. "Friday frauds", which seek to capitalise on the pressure of tight deadlines faced by solicitors handling large amounts of money on behalf of clients, continue to be prevalent and are growing in sophistication, with fraudsters using a combination of identity fraud and cyber techniques. It also continues to be a common scam for fraudsters to set up a bogus firm of solicitors and/or to impersonate the seller of a property (although sometimes the fraudster is a true owner with the threat of repossession looming), and again the increasing sophistication of the methods fraudsters use to "prove" their identity or make bogus firms seem authentic – for example, cloning websites and letterheads – make it all the more difficult for solicitors to detect frauds. This is both a claims issue (with recent authority, Purrunsing v A'Court & anor. (2016), making it clear that viable claims for breach of trust may lie against solicitors acting for both purchaser and imposter vendor) and a regulatory one, since if money is lost due to a scam the firm will be in breach of the Solicitors' Accounts Rules 1998 which oblige a firm to reinstate the missing monies immediately (and failure to do this risks regulatory sanction). The onus on firms to ensure that they have in place robust policies, procedures and training on money laundering and the identification of fraud more broadly is therefore greater than ever.

Parallel proceedings

We continue to see an increase in parallel civil and regulatory action and envisage that this trend will persist. Reasons for this trend include: the SRA's increasingly proactive approach towards enquiries of firms and investigations, particularly in relation to high-profile matters; claimants approaching the regulator in the hope that this will enable them to obtain documents which they might not otherwise be able to obtain, or will elicit admissions, which will assist in a civil claim; and the fact that a civil claim may raise issues of misconduct which trigger self-reporting obligations on the part of the professional firm (indeed, we are seeing an increasing tendency on the part of claimants to assert regulatory infractions in pleading their civil claim, perhaps for this reason). Given the difficulty of achieving a stay of regulatory proceedings while related civil proceedings are disposed of or vice versa, dealing with claims with a parallel regulatory dimension continues to cause real issues for firms and their insurers, both practical (the strain of having to deal with both elements) and legal. One of the many issues which arise is the risk that documents created in the regulatory action may be disclosable in the civil proceedings. Insofar as concerns settlement discussions with a regulator, it is helpful that in Property Alliance Group Ltd v Royal Bank of Scotland (2015) the Court has recently confirmed that, as a matter of principle, communications genuinely aimed at a settlement with a regulator can be withheld from disclosure in civil proceedings on the basis of a rule akin to the "without prejudice" principle. The Court's confirmation that privileged documents can be disclosed to regulators on a "limited waiver" basis, without thereby losing privilege as against third parties, is also welcome. However, the decision also serves as a warning: in that case RBS lost its right to rely on privilege in these documents because it had put the basis and terms of its settlement with the FCA in issue by the way in which it had pleaded its defence in the civil proceedings (in broad terms, it had relied on the absence of any finding of misconduct by the FCA).

We are also seeing an increase in references to the Ombudsman, either instead of or often in tandem with beginning a claim by way of the Professional Negligence Pre-Action Protocol, and the attempted use of subject access requests under section 7 of the Data Protection Act 1998, which again have potential to divert attention and resources from the defence of a claim or complaint.

Other regulatory matters

The SRA continues to take a particularly keen interest in issues relating to money laundering, the use of client accounts as bank accounts and old client balances. Turning however to regulatory matters more broadly, it is an interesting time for regulation of the legal profession. We are currently awaiting the SRA's consultation on a new Handbook, which is likely to propose a significantly shortened rulebook which jettisons yet more of the non-mandatory guidance which currently appears. Such a move towards even more outcomes-focused regulation would require firms to reassess once again their compliance and risk management policies and procedures. The government's consultation on the structure of the regulatory framework, including further separation of representative and regulatory bodies, is also expected shortly. We are keeping a keen eye on these developments and will report on the consultations when they are published.

Risk management

As the common causes of claims remain relatively unchanged, so the key issues for risk managers largely remain perennial ones, albeit that (as discussed above) these are shaped by changing business practices. However, one area which has come into particular focus in recent times is the impact on firms of pressures from clients to agree to particular terms of business. This was the subject of the recent SRA-commissioned report "Independence, Representation & Risk: An Empirical Exploration of the Management of Client Relationships by Large Law Firms", which looks at the claims, regulatory and ethical implications of the perceived shift in the balance of power which has taken place between law firms and major clients. How law firms can and should address these issues is a very substantial and important topic, but on a day-to-day, claims-focused level, firms need to remain wary of requests to agree to, for example, uncapped liabilities, indemnities or responsibility for the work of third party providers.

What next?

In addition to the areas of current and future concern discussed above, there is of course a major event on the horizon: the upcoming referendum on the UK's membership of the EU. The legal work which would be necessary to implement changes following a Brexit would of course present great opportunities for the legal industry; it would no doubt also give rise to significant risks, as lawyers would be advising on unchartered territory in an uncertain and rapidly developing environment. The legal sector, like the rest of the UK, awaits 23 June with baited breath.

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