Managing the regulatory risks of outsourcing

They, whoever they are, are constantly telling us that as a profession, lawyers must all start to embrace new business models and practices if we are to survive the ABS revolution. They, whoever they are, are probably right. However, and it is an important however, as lawyers we must approach any changes with a degree of circumspection and ensure that we are not moving forward in a way which places our clients, or own firms, at risk.

Nowhere is this more topical than in relation to the ever growing trend for firms to outsource.

The following article looks at some of the regulatory issues and risks which firms face when considering this.

The forms of outsourcing

Outsourcing is big business and over the past six or seven years has gained a rapidly growing prominence in the legal world.

Outsourcing can take many different forms, including:

• outsourcing office services such as word-processing and secretarial services,
• having elements of the legal work outsourced to lawyers outside of the firm, sometimes overseas where labour costs are lower,
• sharing serviced offices so that the firm does not have to worry about problems relating to premises, and
• cloud computing – where firms store their data off site, run computer programmes remotely and access files and records via the Internet.

In the USA, where outsourcing has taken off far more than in the UK, many firms are having substantial parts of cases handled externally to the firm, including:

• discovery,
• document review,
• due diligence,
• drafting,
• legal research, and
• paralegal support.

In one way, solicitors have outsourced aspects of their work for a considerable time – instructing counsel to draft pleadings or give an expert opinion. This, however, has never been viewed as a problem since barristers form another group of professionals with rules of ethics and conduct as strong as those affecting solicitors. The problems only start to arise when firms outsource matters to businesses that are not subject to strict rules of conduct, which are not tightly regulated or even who are in a foreign country and may not even be subject to the same rule of law as solicitors here.

Whilst many firms continue to be uncomfortable about outsourcing legal work to third party providers, the reality of the situation is such that that a great deal of the work undertaken by law firms is relatively routine and does not need to be undertaken by highly qualified and costly solicitors and barristers. Overall costs, therefore, cam be reduced substantially if the more routine aspects of a case can be dealt with elsewhere.

The benefits of outsourcing

There can be no doubt that for many firms, the benefits of outsourcing are considerable. Law firms’ costs, particularly staff, premises and insurance costs are constantly increasing whilst at the same time the pressure upon firms to reduce fees, do more work for less money and limit disbursements places many firms between the proverbial rock and a hard place. Added to this, many clients are seeking improvements in speed and efficiency from firms whilst at the same time requiring that firms increase their levels of accountability.

Understandably then, outsourcing, which allows many firms both to reduce cost and to improve service, is becoming an increasingly attractive option.
Many of the providers of outsourced services are basing themselves overseas in economies where labour costs are lower, premises are cheaper and where the employment rules are less onerous and the benefits lower, or even non-existent. Even were the actual individual costs not lower, the ability of outsourced service providers to ensure that staff are more effectively utilised can in itself reduce costs. If a secretary or junior fee-earner is not employed fully then the incremental cost of their time increases.

From a perspective of continuity of service, the use of external providers can ensure that peaks and troughs are ironed out and that there is always a sufficient resource to undertake the work which needs to be done. Moreover, it means that the firm can simply purchase that support which it needs at the time at which it needs it.

Furthermore, fixed costs can be reduced because the firm does not have to rent space to house workers or purchase equipment and technology for them to use. There are no pension contributions to be made. There is no sickness pay to be found. There are no redundancy payments if levels of work decrease. There are no recruitment fees to pay when work levels pick up.

If one looks more widely and considers issues such as cloud computing external IT services, the benefits become even more apparent. Not only can firms can reduce capital expenditure on expensive IT equipment and the cost of IT support departments, but also they can allow fee-earners the greater flexibility of being able to access data and programmes anywhere where they can gain access to the Internet.

It looks like a win all round. But is everything really that easy? Can the firm simply find the cheapest supplier of services and watch the overheads fall?

The simple answer to that question is “No”. There are risks associated with all forms of outsourcing – not least of which are the regulatory risks – and it is these which we will consider in the remainder of this article.

The regulatory risks of outsourcing

So what are the risks associated with outsourcing and to what extent should firms be concerned about them?

There are at least ten separate regulatory risks associated with outsourcing:

• data security – information being lost or corrupted,
• lack of confidentiality – information being disclosed to third parties or even the use of information to assist in crime,
• risk of conflict of interests – there are a limited number of outsourcing suppliers and therefore a real danger that outsources may become involved in both sides of the same matter – firms wishing to outsource must therefore ensure that appropriate conflict checks are undertaken at the service provider and that where appropriate information barriers are put in place,
• loss of supervisory control – the outsourcing firm not knowing what the service provider is doing or how they are doing it,
• quality of service – the work undertaken by the service provider not being of a sufficiently high quality or of a variable quality,
• level of understanding and knowledge of the work being undertaken – service providers may not keep up to date with relevant developments or may miss cultural indicators that would have been picked up locally,
• availability and the reliability of ready access to information – the outsourcing firm not being able to gain access to information, data or files when required,
• consumer perception – whatever the safeguards that are put in place many consumers may have concerns about work being outsourced generally, may have objections to work being outsourced abroad (and thus depriving the home market of jobs) or may have concerns about the security of data outsourced abroad,
• contractual problems – breakdown in the contractual relationship during the work being undertaken – ability of the outsourcing firm to recover papers and data or to be able to handle the work without the service provider’s assistance,
• problems with local staff – an increase in outsourcing could cause local staff to fear that their jobs are at risk. This could lead to low morale, unwillingness to work with the outsources or even straightforward sabotage of the outsourcing arrangements,
• regulatory problems – breach of rules in the jurisdictions of either the outsourcing firm or the service provider, irrespective of whether any of the foregoing risks exist. This could include, for example, reserved work being undertaken by unqualified staff where the regulator felt that inadequate supervision existed.

In April 2005, the FSA produced a report on the risks associated with outsourcing to India. It concluded that “The main risk identified is the complexity of achieving suitable management oversight and control from a distance.”

Clearly the level of risk will depend upon the particular type outsourcing. Thus a firm that outsources part of its secretarial function will have fewer concerns than a firm which uses an Indian-based company to undertake a part of the legal work. However, both would need to be conscious of the requirement for confidentiality and data security.

The SRA in their response to the LSB’s consultation “Alternative business structures: approaches to licensing” made it clear how they would regard outsourcing when they stated that it would be allowed “subject to the regulated firm remaining at all times responsible for the activities of the outsourcer [service provider], which brings with it the necessity to monitor outsourced activities to ensure that the desired outcomes are being achieved.”

The SRA Code of Conduct

The SRA Code of Conduct 2011 has some important things to say about outsourcing – especially in relation to issues such as confidentiality, supervision and practice management – and places the duty upon firms to measure outcomes as an indicator of compliance, confidentiality, supervision and management.
So far as confidentiality is concerned, outcome O(4.1) makes it quite clear that a solicitor must keep the affairs of clients confidential and goes on to state in Indicative Behaviour IB(4.1) that the solicitors’ systems and controls for identifying risks to client confidentiality are appropriate to the size and complexity of the firm or in-house practice and the nature of the work undertaken, and that they enable the solicitor to assess all the relevant circumstances. In other words, the controls must be appropriate to what the firm actually does, and if this includes outsourcing then the controls must assess this too.

This is further reinforced in indicative behaviour IB (4.3) which provides that a solicitor should only outsource services when they are satisfied that the provider has taken all appropriate steps to ensure that the solicitor’s clients’ confidential information will be protected.

It is perhaps worth bearing in mind guidance note 8 to Rule 4 of the Solicitors Code of Conduct 2007 which stated:

“(f) If you outsource services such as word processing, telephone call handling or photocopying you must be satisfied that the provider of those services is able to ensure the confidentiality of any information concerning your clients. This would normally require confidentiality undertakings from the provider and checks to ensure that the terms of the arrangements regarding confidentiality are being complied with. Whilst you might have implied consent to confidential information being passed to external service providers, it would be prudent to inform clients of any such services you propose to use in your terms of business or client care letters.”

Thus, firms planning to outsource any aspect of their work where confidential client information – or even information capable of indicating that the firm acts for a particular client – must take all necessary steps to ensure that those providing the service will keep that information confidential and should ensure that the client is aware – for example through the firm’s terms and conditions – that such outsourcing could take place.

The main requirements in the SRA Code of Conduct in relation to outsourcing are, however, to be found in Chapter 7 which deals with business management.

Whilst outcomes O(7.9) and O(7.10) are the ones which specifically relate to outsourcing, nevertheless provisions which could affect outsourcing are also to be found in outcomes O(7.2),O(7.3), O(7.6), O(7.7) and O(7.8). These largely replace the provisions previously to be found in rule 5 of the 2007 rules.

Outcome O(7.9) provides that a solicitor should not outsource reserved legal activities to a person who is not authorised to conduct such activities – in other words this places a duty upon a solicitor to ensure that anyone to whom reserved activity is outsourced is adequately qualified.

Outcome O(7.10) goes on to provide that where a solicitor outsources legal activities or any operational functions that are critical to the delivery of any legal activities, that they ensure such outsourcing:

1. does not adversely affect their ability to comply with, or the SRA’s ability to monitor the solicitor’s compliance with, their obligations in the Handbook;
2. is subject to contractual arrangements that enable the SRA or its agent to obtain information from, inspect the records (including electronic records) of, or enter the premises of, the third party, in relation to the outsourced activities or functions;
3. does not alter the solicitor’s obligations towards their clients ; and
4. does not cause the solicitor to breach the conditions with which they must comply in order to be authorised and to remain so.

However, the duty to take care goes wider than the provisions contained within these provisions.

Outcome O(7.2) provides that a solicitor must have effective systems and controls in place to achieve and comply with all the Principles, rules and outcomes and other requirements of the Handbook, where applicable. In other words, if the solicitor is outsourcing aspects of their work to a third party, then they must make sure that, for example, confidentiality is maintained, discrimination does not take place and so forth. that may be a difficult requirement to achieve if the provider of the services is many miles distant – possibly even based in a different jurisdiction with different rules and a different culture.

Outcome O(7.3) further reinforces the duty in O(7.2) by requiring the solicitor to “identify, monitor and manage risks to compliance” and to “take steps to address issues identified” – a task which might be difficult to achieve where the solicitor does not have easy access to the premises from which the outsourced work is being undertaken.

Outcomes O(7.6) requires that you train individuals working in the firm to maintain a level of competence appropriate to their work and level of responsibility – which inevitably raises the problem of ensuring that the solicitor satisfies him/her self that those who are undertaking outsourced work are adequately qualified – whilst outcomes O(7.7) and O(7.8) both address issues of supervision – again something which could be problematical when undertaken remotely.

Firms who outsource work must, therefore, ensure that there are sufficient procedures in place to ensure that those responsible for the work – i.e. the partners and senior managers within the outsourcing firm – are able to monitor:

• how it is undertaken,
• by whom it is undertaken,
• the level of expertise of those who undertake it,
• the extent to which those doing the work are supervised at a local level and the qualifications of those supervising,
• the safeguards that are put in place to ensure that it is undertaken securely and confidentially,
• that conflicts of interest do not arise, and
• that criminal activities are not supported by the work.

Finally, firms who are considering outsourcing should also give thought to a number of other issues, including:

• equality and diversity implications – see Chapter 2 of the SRA Code of Conduct – although note the problems that this might raise in cases where what is discriminatory in this jurisdiction may not be in another;
• money laundering prevention measures,
• employment legislation, and in particular the implications for redundancy within the firm, and
• contingency arrangements to ensure that they are able to resource the work being done by the service provider should the agreement with that service provider come to an end.

Conclusion

In conclusion, therefore, there are undoubtedly substantial benefits to be derived for many firms in looking to outsource elements of their work and practice.

The caveat to that, however, is that great care needs to be taken in how and to whom the outsourcing is undertaken.

The risks which we have looked at here are only the regulatory ones. We have made no attempt to look at some of the practical risks such as:

• failing to clarify objectives at the start of the process,
• not setting a starting point against which including costs, benefits and delivery can be measured,
• failing to ascertain necessary changes to internal processes and the impact on other work areas,
• underestimating the impact upon employees and others and not putting in place plans to deal with any morale issues, and
• failing to undertake a full risk analysis.

All of the ten risks set out above need to be looked at closely and firms need to be satisfied that they will be able to control those risks at all stages of the relationship with the organisation to whom the work is outsourced.

Above all else, firms must bear in mind the needs of clients and the requirement for confidentiality, competency of service and trust in the integrity of the legal process. Do not overlook the need to draw to the attention of the company to whom work is outsourced the importance of confidentiality and that there is an adequate confidentiality agreement in place. Tell the client that your firm outsources work and the type of outsourcing that it does, make sure that if there are confidentiality issues that the client is aware of these and above all else ensure that the client does not object.

Contact the Lawyers Defence Group

If you require further information about, or help with, outsourcing then the Lawyers Defence Group can assist you.

For further information, or to contact the Lawyers Defence Group about outsourcing:

• phone on 0333 888 4070;
• email on help [Email address: help #AT# lawyersdefencegroup.org.uk - replace #AT# with @ ];
• request a callback using the form in the right hand menu and someone will call you back at a pre-arranged time;
• write to Lawyers Defence Group, Richard Nelson LLP, Priory Court, 1 Derby Road, Nottingham, NG9 2TA

(revised December 2011)

The following draft policy can be adapted by you to suit the needs of your practice. Used in conjunction with the item on implementing a draft policy it should make easier the task of putting such a policy into force.

The draft has been written to take account of the needs of different types and sizes of practice and addresses complaint policies for solicitors, legal executives and licensed conveyancers.

The content of this section is available to registered members of our web site. Registration is free. Just go to the registration page and fill in your user name and email address. When you then log in all of the information will be available to you.

Alternatively, if you require specific assistance in dealing with a particular complaint or simply need help putting in place a new complaints procedure, then the Lawyers Defence Group can assist you.

You can contact the Lawyers Defence Group by:

• phoning us on 0333 888 4070,
• emailing us at help [Email address: help #AT# lawyersdefencegroup.org.uk - replace #AT# with @ ],
• requesting a callback using the form in the right hand menu and someone will call you back at a pre-arranged time, or
• writing to Lawyers Defence Group, Richard Nelson LLP, Priory Court, 1 Derby Road, Nottingham, NG9 2TA.

(revised December 2011)

Introduction

Knowing why you need a complaint handling process may be an essential step, but actually getting down to producing a policy which deals with all of the appropriate issues is quite another. In this section we look at some of the factors to be borne in mind and some of the issues which will need to be addressed. This, combined with our draft complaint policy for clients, should help to make the task an easier one.

The content of this section is available to registered members of our web site. Registration is free. Just go to the registration page and fill in your user name and email address. When you then log in all of the information will be available to you.

Alternatively, if you require specific assistance in dealing with a particular complaint or simply need help putting in place a new complaints procedure, then the Lawyers Defence Group can assist you.

You can contact the Lawyers Defence Group by:

• phoning us on 0333 888 4070,
• emailing us at help [Email address: help #AT# lawyersdefencegroup.org.uk - replace #AT# with @ ],
• requesting a callback using the form in the right hand menu and someone will call you back at a pre-arranged time, or
• writing to Lawyers Defence Group, Richard Nelson LLP, Priory Court, 1 Derby Road, Nottingham, NG9 2TA.

(revised December 2011)

Introduction

There are a number of very good reasons why a firm should – indeed must – have a complaint handling system. Some of those reasons are regulatory whilst others, often the most convincing arguments, are practical, business-focused and competitive.

In this section we will look at both the practical and regulatory imperatives for having a complaint handling system – not simply from the perspective of solicitors, but also from the point of view of barristers, licensed conveyancers, legal executives and patent or trade mark attorneys.

The content of this section is available to registered members of our web site. Registration is free. Just go to the registration page and fill in your user name and email address. When you then log in all of the information will be available to you.

Alternatively, if you require specific assistance in dealing with a particular complaint or simply need help putting in place a new complaints procedure, then the Lawyers Defence Group can assist you.

You can contact the Lawyers Defence Group by:

• phoning us on 0333 888 4070,
• emailing us at help [Email address: help #AT# lawyersdefencegroup.org.uk - replace #AT# with @ ],
• requesting a callback using the form in the right hand menu and someone will call you back at a pre-arranged time, or
• writing to Lawyers Defence Group, Richard Nelson LLP, Priory Court, 1 Derby Road, Nottingham, NG9 2TA.

(revised December 2011)

Introduction

Keeping clients happy is not always easy, no matter how well you do the job and how little you charge. Fortunately, in the vast majority of cases, clients are satisfied with the services which they receive from their solicitor, barrister, legal executive or other lawyer. Every so often, however, things either do not go according to plan or the client feels let down. This may be because the lawyer has not done good a job, it may be because the client has not obtained the result he or she wanted or it may simply be that the client has not understood what was being done and what the likely outcome would be.

Whatever the reason for the dissatisfaction, the problem needs to be addressed in such a way that the client is happy with the outcome and the firm is not left in a position where time, resources and money have been unnecessarily expended.

All firms need to adopt and implement an effective, robust and transparent complaint handling process. To help you in dealing with this we have compiled a series of guides which provide an introduction to complaint handling and look specifically at:

• The need for complaint handling procedures;
• Implementing complaint handling procedures; and
• The content of a complaint handling policy.

All of these items are available to registered members of our web site. Registration is free. Just go to the registration page and fill in your user name and email address. When you then log in all of the information will be available to you.

Alternatively, if you require specific assistance in dealing with a particular complaint or simply need help putting in place a new complaints procedure, then the Lawyers Defence Group can assist you. You can contact the Lawyers Defence Group by:

• phoning us on 0333 888 4070,
• emailing us at help [Email address: help #AT# lawyersdefencegroup.org.uk - replace #AT# with @ ],
• requesting a callback using the form in the right hand menu and someone will call you back at a pre-arranged time, or
• writing to Lawyers Defence Group, Richard Nelson LLP, Priory Court, 1 Derby Road, Nottingham, NG9 2TA,

(revised December 2011)

As the date for professional indemnity insurance renewal approaches, it is becoming clear that in many cases it will again be the indemnity insurers who have the final say as to which firms live and which die. Anxiety is running high in some quarters as to whether insurers will make an offer and whether that offer will be economically viable.

Some firms have expressed frustration that having applied early, in some cases months ago, they are still awaiting a response from their Insurers. Others, who fears that he may have to close as a result, are concerned that they will be in breach of the SRA?s guideline as to the notice to be given of clients in the event of a transfer of a live matter.

But what will happen to those who have to accept that there is no way forward on the same basis as before?

There are essentially five main options:

• find another firm with whom to merge,
• sell the practice,
• close the practice,
• go into the assigned risks pool, or
• run away and abandon the practice.

Needless to say, we could not possibly condone the latter!

As the renewal date approaches, each of these options becomes more difficult to achieve.

There are, of course, many solicitors who have their heads firmly in the sand and who cannot bring themselves to believe that an acceptable offer will not be forthcoming.

Many are concluding, however, that since merger partners are not easy to find that even a merger on mediocre terms can be better than the alternative.

So how do you find a merger Partner? Who is in the market to acquire or, indeed, to be acquired?

Increasingly many firms are offering themselves for sale through Agents. However, there is sometimes a suspicion of those Agents and the costs that may follow.

In the light of these difficulties, and to assist those firms who would like to dispose of their practice or who wish to merge with, or acquire, another firm, the Lawyers Defence Group has created a free Practice Register for firms to make others aware of their intentions.

Firms who would like to take register their interest in merger or takeover can provide details of their firm, including:

1. some background basic statistics,
2. nature of work,
3. location,
4. area of work of interest, and
5. geographical areas of interest,

and of course, whether the firm wishes to acquire, would be prepared to be a successor practice, wishes to sell, and any other key criteria of importance.

We will keep the list and introduce individuals to firms who are potentially interested. In submitting your name and details to this firm, you will of course be authorising the release of your identity to another firm whose interests appear to match your own.

There is no fee for the introduction and, from then on, you are free to negotiate your own arrangements, although you can consult us further if you wish, to assist in the process.

If you are interested in registering, please either complete the form in the registration section of this web site or alternatively send your details to Lawyers Defence Group, 8 The Courtyard, 707 Warwick Road, Solihull, B91 3DA or email register [Email address: dfinlyson #AT# lawyersdefencegroup.org.uk - replace #AT# with @ ].

Where insurance is not obtained on the open market and where a merger or takeover is not possible, options remain extremely limited.

The Law Society has negotiated a scheme to secure further insurance quotes but, in some cases, insurance at an acceptable premium is impossible to fund.

The options tend to boil down to entry to the Assigned Risk Pool (ARP) or a closure of some kind.

Entry to the ARP is automatic if you practise on 1st October without having qualifying insurance, but incurs a penalty premium. However, you can apply to go into the ARP at the basic rate.

If you apply before 1st October to go into the ARP, your premium is based on the previous year?s turnover. Typically, this will be somewhere in the region of 27% of last year?s gross turnover. The calculation is higher for LLP?s and limited companies. The period of cover has been reduced this year from 1 year to 6 months, meaning that the premium is halved.

Closure requires you to take run off cover which if taken from your current Insurer is typically between two and three times your last annual premium.

If you choose to close and take run off cover under your current policy, you will need to notify your Insurer and cease to practise before the policy expires on 30th September and pay the premium. If you go beyond that date, you will need further insurance for 2011/12 and to enter the Assigned Risk Pool and will then take run off cover from the ARP. In effect, if you enter the ARP and then take run off cover, the cost to you will be the cost of 6 months in the ARP plus one full year?s ARP premium.

Please note that if you fall into the ARP rather than apply to enter in a timely fashion, you will pay an additional 20% of the premium as a penalty payment.

The important thing is that you need to make a decision before the end of the insurance year and so by 30th September. You will need to do your sums but, usually, it will be better to take run off cover under the terms of your commercial professional indemnity insurance policy rather than through the ARP. However, the ARP should be considered in circumstances where either your turnover was particularly low or your premium represented a particularly high proportion of your annual fees.

Remember, if you take run off cover, you may not subsequently do any further work to assist, advise or represent a client or to further that client?s interests. You may not even submit a form on a client?s behalf or offer telephone or friendly advice. This would invalidate your cover.

You may, however, during a period of grace of 3 months, deal with administration to allocate files to other Solicitors, repay client funds, issue bills and collect fees and take the necessary regulatory steps in connection with the closure of the practice. You will, for example, need to submit a Cease to Hold report confirming that you no longer hold clients? monies.

One final matter that is often overlooked is that insurance premiums and any excess payable under any insurance policy are personal liabilities of the Partners even where the practice itself was an LLP or limited company. There is no distinction between equity and salaried Partners for this purpose.

Not only is it time to do the sums and budgetary planning but the insurance renewal round is a time for making a decision whether, when and how whether to close. Whatever that decision, it seems it is important it is made on or before 30th September and accepting a higher premium now may have the effect of increasing the costs of closure later.

Can you succeed without being a successor? Happily, the answer is yes provided the cheque book can come out.

The definition of ?successor practice? is contained in the Minimum Terms and Conditions of Professional Indemnity Insurance for Solicitors. Minimum Terms are varied occasionally and not always for the benefit of Solicitors. For example, from 1st October 2010, Solicitors lost the right under their PII cover to recover the costs of being represented in disciplinary.

However, there has been a commonsense inclusion allowing a practice to pay its way out of future liabilities for claims arising despite there being a successor practice.

In short, it is possible now to become a successor practice for all purposes save that of insurance liability, so that the succeeding firm does not pick up the liability for the knapsack of claims past and present of the practice that it is taking over.

This is achieved by paying run off cover on the one firm, thereby drawing a line under its own insurance liability for negligence up until the date of closure whenever those claims may arise. It has the effect that the acquiring firm?s Insurers will not need to inflate the premium based on the danger of claims and the claims history of the other firm.

There is, however, nothing to stop the Insurers taking into account the history of individuals and their attitude to work and compliance if they are continuing in the new firm.

Of course, there is a cost to run off cover and the cost itself will have to be balanced against any likely increase in insurance premiums. The arithmetic will have to be done in each case and you will usually need to consult your Broker and/or the Insurance Company but paying run off cover in this way is one way of limiting your risk and your future exposure.

Hopefully, this will open the way for the reputation and goodwill of many firms to be developed. It may even allow firms that are facing intervention to be continued albeit at a cost.

Remember, however, that there is a time limit to notify the SRA of the arrangement.

Please note that this item was written prior to the introduction of the SRA Handbook on 6 October 2011. Some of the references are to regulations and rules which no longer apply. This item will be reviewed and updated shortly. Until then, please refer also to the SRA Handbook.

Introduction

To the already harassed solicitor, it can often seem that the decks are well and truly stacked against them in terms of getting paid for the work they do. Increasingly, clients are objecting to some aspect of the charges, often for what appear to be the most spurious of reasons. What is more worrying for many is that, rather than not getting away with it, those clients are having their objections upheld by regulators, complaints services, Ombudsmen and Courts.

To come to the defence of the client for a moment, one has to bear in mind that for them the whole process of the law can seem obscure and confusing. Nowhere is this more likely to be the case than in relation to a lawyers terms, conditions and charges.

In a world where builders, plumbers, dentists and garages appear to be able to give a fixed price for work to be done, it can often seem bizarre to clients that their solicitor, who should have undertaken work of that nature for many years if he is claiming an expertise, cannot give them a fixed price and instead relies on what to many seems an exorbitantly high hourly rate.

It is in an effort to protect clients from charging by ambush that Rule 2.03 of the Solicitors Code of Conduct 2007 exists and firms who do not abide by its requirements are likely to find that not only are they potentially in breach of the rules (and thus face the possibility of disciplinary action) but also that the courts will refuse to support them when they attempt to recover that which they believe they are owed.

If therefore solicitors want to stay on the right side of the regulations and, ultimately, be paid for the work that they do, then they need to ensure that they comply with the regulations that exist, that it is clear to the client what is expected both of the solicitor and the client in this relationship and, above all, that the firm communicates with the client at all relevant stages.

The “Minkin” case

Nowhere is this need for clarity and communication more clearly evidenced than in the recent case of Minkin v Cawdery Kaye Fireman & Taylor [2011] EWHC 177 (QB) and it should act as a salutary lesson to all solicitors as to the importance not only of exercising great care when terminating retainers but also of ensuring that the retainers themselves are clearly worded, in compliance with Rule 2, observed by the firm and understood by the client.

In this case, Cawdery Kaye Fireman & Taylor (CKFT) were instructed by a Mr Minkin in relation to an occupation and non-molestation order obtained by his wife. CFKT initially quoted ?3,000 + VAT and, when a retainer letter was sent, estimated costs to be in the region ?3,500 + VAT – although they stated that they would try and keep the costs down as much as possible. Mr Minkin paid ?2,000 on account of those costs. The firm’s retainer letter was headed “Non Molestation and Occupation Order”, but it contained no other indication of what CKFT was undertaking to do.

Their letter stated:

“Any such overall step by step estimates are not intended to be fixed or binding and other factors may mean that the estimate will be varied from time to time. We will update you on any such estimates in writing at your request and will in any event inform you in writing if it appears that any previous estimates may be exceeded. Our invoice will also keep you informed of the level of charges being incurred on a monthly basis with a statement as to the actual level of charges incurred as against the relevant estimate. In any event we will communicate with you by telephone or in writing (including by email) when our charges have reached ?3,500 and at increments of ?1,000 thereafter”.

In addition, Clause 6 of their terms and conditions provided:

‘If an account is overdue for payment, without reasonable justification, we may suspend or terminate our services to you’

whilst Clause 13 provided

“We may only decide to stop acting for you on reasonable grounds and on giving you reasonable prior written notice.”

The actual sequence of events in terms of the steps taken by CFKT and the subsequent responses from Mr Minkin are slightly complicated but, in essence the facts were that following the first hearing, CFKT sent their client a bill for ?5,462.50 which Mr Minkin declined to pay on the basis that it exceeded the estimate. Mr Minkin challenged the costs. In response CFKT refused to undertake further work until they were paid. The client responded by informing them that he no longer wished them to act for him as he had lost confidence in them. CFKT responded by sending Mr Minkin another bill for ?950 for work done.

Mr Minkin applied under the terms of section 70 of the Solicitor’s Act 1974 for a detailed assessment of the two bills alleging that CFKT had refused to follow instructions and then refused to act for him, thus breaching the retainer and rendering no further costs payable.

The Master at the Senior Court Costs Office decided that the firm was not entitled to any costs because they had breached the retainer by terminating it without giving reasonable notice. Subsequently at a later hearing the Master reaffirmed his earlier decision but revised the reason, stating that the firm was in breach of contract for stating that they would not continue to act without further payment. The basis for this was that, although Mr Minkin was contractually obliged to pay the CFKT bills upon receipt, and although CFKT were entitled (under clause 6 of their terms and conditions) to suspend work “‘If an account is overdue for payment, without reasonable justification”, that nevertheless Mr Minkin had reasonable justification for delaying payment because the first bill exceeded the estimate and he had not been advised that the estimate would be exceeded and because CFKT had not given reasonable notice under Clause 13.

In the Master’s judgment the termination of the retainer by CFKT amounted to a repudiatory breach of contract because Mr Minkin had a reasonable justification in not paying. The firm was therefore not entitled to any costs and in addition was required to refund all the amounts paid, less counsel’s fees.

CFKT appealed. During the appeal various issues were considered including a review as to the extent to which solicitors can refuse to undertake further work until outstanding fees are paid – especially where the amount in question exceeds a previous estimate.

In dismissing the appeal, Cranston J stated:

“It is clear that solicitors can terminate a retainer for good reason and on reasonable notice. That is the position at common law and under the Solicitors’ Code of Conduct. At common law it is not good reason that a client has not paid part of the profit costs as an ordinary claim or statutory appeal proceeds. If solicitors wrongly terminate on that basis they cannot sue for outstanding fees, having not performed the obligations undertaken. By the terms of their retainer, however, they may require payment on an interim basis. If pursuant to that they tender an interim statutory bill they can sue on it in the event of non-payment; if they request a reasonable amount on account, they can terminate the contract under section 65(2) of the Solicitors Act 1974 if the client does not pay within a reasonable time. Termination under section 65(2) applies only in the case of contentious business and must be on reasonable notice.”

Cranston J further held that the Master was entitled to reach the conclusion that Mr Minkin was justified (as provided in clause 6 of CFKT’s own terms and conditions) in withholding payment on the balance of the original invoice.

” The estimate was important to Mr Minkin because he had limited funds, a fact [CFKT] knew. Although in the retainer letter the firm undertook to give written notice of an estimate being exceeded, no advanced warning had been given to Mr Minkin when the estimate was exceeded. The first time he knew that this had occurred was when he received the invoice. ”

In the circumstances, therefore, the firm did not have the contractual right to terminate its retainer on the ground of non-payment under clause 6 and as a consequence was in breach of contract when it refused to continue to act.

Cranston J concluded by stating:

“The outcome may seem harsh on the firm. But the fact is that it should have been clearer in its retainer letter as to the nature of the engagement. …… It should also have complied with the terms in its retainer letter and those in its standard terms of business. Under these it should inform a client in writing when it appears that any previous estimate may be exceeded. It must then consider whether, in the circumstances, the client has reasonable justification for not paying and whether it would be reasonable to terminate the contract for non-payment. And it can only do that with reasonable notification.”

What are the lessons to be learned?

There are several salutary lessons for all firms which arise from the Minkin case, and firms who fail to heed those lessons are likely to find the courts equally unsympathetic. Solicitors are, quite rightly, regarded as the experts on issues relating to law and regulation. What is more, if they fail to abide by the letter of the law, and in cases such as this do not even follow procedures laid down in their own terms and conditions, then they can expect little in the way of support from the courts who see the client as very much the underdog in this arrangements.

So what are those lessons?

Keep the client informed - both as to progress of the case and as to the level of costs being incurred.

This may seem like common sense but it is often overlooked, despite the requirement to “keep the client informed of progress, unless otherwise agreed” contained in of Rule 2.02 (1)(d) of the Solicitors Code of Conduct 2007 (the Code).

In particular you must make sure that the client receives adequate costs information. Rule 2.03 (1) of the Code states ” You must give your client the best information possible about the likely overall cost of a matter both at the outset and, when appropriate, as the matter progresses.” If you provide a client with an estimate as to costs, and if you anticipate that those estimated costs are going to be exceeded, let the client know as soon as is practical so that instructions can be modified, if necessary.

It follows from this that you should have a system in place which allows you to monitor costs and which is capable of alerting you to when an estimate is likely to be exceeded. The client needs to be told before the limit is reached so that, if necessary, instructions can be modified – not after it has been reached and the only option is either to cease acting or incur further costs.

Although Mastercigars Direct Ltd v Withers LLP [2009] EWHC; [2009] 1 WLR 881 does give firms some leeway in terms of the ability to exceed an estimate it is not a good practice to rely upon this. In Mastercigars it was stated that it did not follow in every case that a solicitor was limited to recovering the sum in the estimate. However, an estimate is a factor in assessing the reasonableness of any charge – that is to say what, in all the circumstances, it is reasonable for clients to be expected to pay and the extent to which they have relied on any estimate given. The position where a private client with limited resources is facing a bill which exceeds an estimate is likely to be viewed very differently.

Be clear as to what the retainer is intended to cover.

Legal work is complex and clients rarely understand that which is involved. It is essential, therefore, that you are clear and precise as to what the retainer is intended to cover. If there is a limitation upon the scope of a solicitor’s retainer, or if the retainer is only intended to take a matter up to an agreed point in proceedings, then the retainer should make that clear.

The 2007 case of Phelps v Stewarts [2007] WTLR 1267 is an example of this very point. The case, which centred around a failure to give relevant advice on the tax consequences of setting up of a discretionary trust, involved a specialist trusts lawyer, Rosemary Phelps, who failed to give relevant advice resulting in her client losing ?181,000. In claiming a contribution from the firm instructing her, Phelps claimed she had not been asked to advise on discretionary trusts generally, but simply on a specific aspect of the trust. Clearly a point which should have been dealt with in detail in the original retainer.

The presumption in a case where a retainer is unclear is usually going to be in favour of a client – especially an unsophisticated client. As the judge in Phelps stated the obligation is upon the solicitor to ensure that steps are taken to ensure that the client understands the position.

Ensure that as a firm you know what is in your own terms and conditions and that you abide by them.

In the Minkin case the firm’s own conditions stated that the retainer could be terminated only “on giving you reasonable prior written notice”. This notice was not given and so the firm was held to be in breach of the retainer.

Importantly, it is essential that everyone undertaking client work knows what is in any standard retainer letters and the firms terms and conditions. It is not enough that they are drafted carefully – they must also be explained fully.

Be circumspect as to the means by which you end a retainer

Rule 2.01(2) of the Code states “You must not cease acting for a client except for good reason and on reasonable notice.” Thus you are not entitled to stop acting without good reason and it is vital that the client be given adequate notice – if only so that they have the opportunity to put in place alternative representation arrangements.

The Code goes on to state at notes 8 & 9:

“(8) ……Examples of good reasons include where there is a breakdown in confidence between you and the client, and where you are unable to obtain proper instructions.

(9) If there is good reason to cease acting, you must give reasonable notice to the client. What amounts to reasonable notice will depend on the circumstances. For example, it would normally be unreasonable to stop acting for a client immediately before a court hearing where it is impossible for the client to find alternative representation.”

It is good practice to set out in the retainer the grounds upon you may cease acting for the client. It is also good practice to take steps to ensure that the client understand these.

More to the point from a practical perspective, if your firm does want to stop acting for a client, then you must write to them stating why, if there are steps the client could take to prevent this from happening, what those steps are and the deadline for taking those steps – for example the payment of outstanding costs. As we saw in Minkin, failure to do this may result in a breach of contract by the firm and loss of entitlement to be paid anything.

So far as contentious work is concerned, section 65(2) of the Solicitors Act 1974 provides that in respect of contentious business solicitors may request a client to pay a reasonable sum on account and failure to do so is good cause for them to withdraw from the retainer. However, note that the Act specifically that reasonable notice must be given to the client.

Manage the clients expectations – don’t assume that simply because you view something as expedient that the client will necessarily agree with you or that because a particular outcome has been achieved that the client will view that outcome as a reasonable one.

Many problems that arise with clients do so simply because the firm has failed to manage the clients expectations. The Code states at Rule 2.02(1) that you should:

“(a) identify clearly the client’s objectives in relation to the work to be done for the client;
(b) give the client a clear explanation of the issues involved and the options available to the client;”

If the client does not know what to expect – either as an outcome at the end of the matter or as to what needs to be done during the continuance of the retainer, then they are going to be less likely to be satisfied with that outcome or with the work that has been undertaken to achieve.

Handle complaints effectively

If and when things do go wrong, the difference between a disappointed client and one who refuses to pay or takes the matter to court can be as simple as how their complaint is handled. Indeed sometimes a client who is dissatisfied can be turned into a satisfied client.

Firms should, therefore, take care over the complaint handling procedures and ensure that where a procedure exists that clients are aware of it and that the firm follows it. First tier complaint handling – i.e. complaint handling by the firm as opposed to complaint handling by the Legal Ombudsman or the courts – is a fundamental plank in the plans of the Legal Services Board to improve client care and the whole client experience. Don’t underestimate its importance to your firm in preventing minor client problems from escalating into major ones.

Conclusion

Many of the problems that arise between clients and solicitors can be laid at the door of poor communication and in adequate understanding on the part of the solicitor of the clients own lack of understanding. In a 2009 article in the Law Society Gazette, Deborah Evans, Chief Executive of the now defunct Legal Complaints Service stated:

” Problems usually arise when there is a breakdown in communication between client and solicitor, but with good client care practices these complaints can actually be the easiest to avoid. In an economic climate where looking after existing clients has never been more important, it is an oversight which few can afford to ignore.”

Many of the problems which arose in Minkin could have been avoided by the simple expedient of adequate communications.

Please note that this item was written prior to the introduction of the SRA Handbook on 6 October 2011. Some of the references are to regulations and rules which no longer apply. This item will be reviewed and updated shortly. Until then, please refer also to the SRA Handbook.

Need for a bespoke plan

Right. So you are convinced that you need a plan. What do you need to do to implement one? Is there one perhaps that you can just go and copy – perhaps someone else’s that you have found on the Internet. No one is going to know if you just copy and paste one into your office manual, are they?

Wrong. A BCP has got to address issues for your practice and has to reflect the type of practice you are and the work that you do. The BCP for a multi-national commercial firm is going to be different from that for a small high-street practice, just as the plan for a firm that does conveyancing and probate is going to be different from the plan for a firm that does only criminal litigation.

Fortunately, help is at hand in that there are some basic processes that you will need to follow in setting up your plan and there are common elements which will be found in most BCPs. The following checklist will assist you in creating a BCP – although do remember that the plan is not only about what you write down – it is about what you do, the protections you put in place and how you train and update your.
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The Implementation Checklist

There are effectively five main stages to the creation of a BCP.

Stage One – Analysis – what are the threats and what could go wrong
Stage Two – Solution – what processes need to be put in place, or actions taken, to minimise the impact of those threats on the firm and its clients and staff
Stage Three – Testing – seeing whether the processes and actions which form the solution will work and if not making changes to them to ensure that they do
Stage Four – Training & Documenting – ensuring that everyone knows about the BCP and what they need to do to implement it and when
Stage Five- Review and maintenance – ensuring that the BCP continues to be valid and that where changes occur either within or outside the firm, that the BCP is updated accordingly.

Within those five stages are nine steps which you will need to take.

Stage One – Analysis

Stage One involves accepting that the firm needs a BCP, appointing those who are to take the BCP forward, getting buy in from all personnel, and assessing the nature, impact and severity posed by threats to the firm.

Step 1 – appoint a BCP Champion – a person or persons (depending upon the size and complexity of the practice) to be responsible for the process and to drive it through to completion. That person needs to make themselves aware of the needs of business continuity planning so that they can help direct others within the firm. They should also either be a partner or someone else with similar seniority so that they can ensure that everyone within the firm takes the process seriously and contributes accordingly.

Step 2 – consult with relevant staff, partners and managers – this can either be on a one-to-one basis or through a meeting, or meetings, to ascertain what for them would be an event which could affect their work or require steps to be taken. All personnel are going to need to be involved should the plan need to be implemented, so getting their buy in at this stage is a good idea. In addition, it will ensure that those analysing the likely events against which contingencies need to be made are fully aware of the factors in all parts of the firm. If need be, a team can be appointed from within the process to help take the BCP forward

Step 3 – carry out a risk assessment – based upon the results of the consultation and upon the analysis of those involved in creating the BCP. This will involve:

• identifying the range of potential threats the firm faces;
• analysing their potential impact on the business;
• assessing the likelihood of each threat occurring.

In other words, the firm will need to:

• create a list of all of the matters which could present a risk, e.g. flooding, fire, power outages, illness/death of key staff, vandalism, theft, terrorist activity etc.;
• consider the extent to which the firm will lose out as a result of each type of unexpected event and how much processes will be interrupted. Included within this is an analysis of whether the damage or loss will get worse the longer the disruption lasts;
• determine the probability of each threat occurring so that the firm can decide which threats to prioritise in the planning process.

Thus, for example, the initial assessment may reveal that a potential threat to the firm is from flooding from a local river. In looking at the extent to which the firm will be affected consideration would be given to the fact that the firm has third floor offices and so would not be affected by flooding to the same extent that a firm with ground floor offices or basement storage would be in that the water would be less likely to cause physical damage to files, equipment, furnishings and decorations. However, if members of the firm were unable to get to the office because the flood waters prevented access to the building, then in the short-term the firm would be equally as affected as the ground floor firm in terms of getting to client files and data. Finally, consideration would have to be given to the likelihood of flooding occurring – has it occurred in the past, has work been undertaken to prevent flooding in the future and so forth.

Stage Two – Solution

Having identified the nature, impact and severity of the threats, Stage Two looks at what the firm will do in order to avoid the threats, minimise their impact and mitigate the losses the firm is likely to suffer.

Step 4 – Develop plans to deal with the various threats that have been identified. This will involve going through each of the identified threats to the firm and devising processes which will deal with those threats.

Bear in mind that the threats may themselves have different levels of severity. Taking the example above, flooding may be slight and may only affect the roads surrounding the office making it difficult for staff to get to the office, they may be severe in the general area of the office affecting the supply of electricity and telephones to the area the office is in or they may be severe in the immediate vicinity of the office causing actual flooding of the premises. Each separate level will require a different level or type of response.

A summary of many of the issues which you should be considering is set out at the end of this section.

Step 5 – write up the plans and ensure that the first steps towards putting in place contingency plans are taken. This may involve, for example:

• systems for backing up IT data – preferably off-site;
• systems for ensuring that work can continue to be undertaken from other sites – use of cloud computing, access to systems via the Internet, etc.;
• having a telephone system which defaults to another number of your main number becomes unobtainable or at least back-up numbers which can be given to clients;
• setting up an emergency web site link where staff can log-in to get updates on emergency situations;
• identifying alternative premises from which work can be undertaken – for example branch offices, homes of partners/directors, short-term accommodation;
• identifying agents who could undertake court appointments if firm unable to attend;
• training staff to be able to take over from other key staff in emergencies;
• keeping duplicates of important documents off-site;
• having a plan for dealing with adverse press coverage – for example if a member of staff is accused/convicted of fraud.

Stage Three – Testing

So far as is possible, going through the plans that have been put in place and making sure that they work before they are rolled out to the firm as a whole.

Step 6 – Testing a business continuity plan. Whilst it can be difficult, time consuming and expensive to simulate potential threats to the firm it is nevertheless an important part of the BCP since it will help show whether you have covered all angles, and whether your plan is achievable.

In addition, it can increase your business and trading partners’ confidence in your business’ ability to recover from disruption and help to raise staff awareness of the plans.

Before you undertake any tests, whether practical or technical, you should have a clear objective as to what you hope to achieve – for example how long it takes to get the IT system up and running again, how easy it is to contact key personnel other than via their office phone or how effectively can staff access data at an alternative site.

Having carried out the test you should decide whether the response which you achieved is satisfactory – for example in terms of the time taken to set up the system or the length of time before a client would be able to get hold of a staff member.

Amongst the outcomes that you will want to test will be:

• the extent to which staff can do their jobs without access to either data or files and at what point the lack of access becomes critical;
• how easy it is to restore data and whether that data is up-to-date. If not, how much is lost and is that loss critical;
• whether any third parties involved have performed adequately;
• how prepared staff were for dealing with the threat and the extent to which they knew what to do – clearly some staff will have to be trained (the next step) before this can be tested;
• how easy it is to notify clients of the problem and the contingency plans put in place.

Stage 4 – Training and documenting

Having ensured that the solutions work in practice, it is essential that the firm documents fully what should be done and by whom in the event of a threat to the firm and that all personnel are trained in their roles and know what to do and in what circumstances.

Step 7 – documenting procedures. It is essential that all of the solutions to dealing with threats to the firm are recorded, documented and, most importantly, made available to those who will need them in a format which they can access wherever they are and whenever the threat arises. Thus it is no use producing a paper only version which staff will keep in their office if the threat arises when staff are elsewhere. Similarly, a plan which is accessible only through the internal network will not be of use if the threat is that the network is no longer available.

For this reason, firms should consider making the BCP available online (suitably passworded of course), that staff know how they can access it and that there is a number they can ring in an emergency to check on any specific aspects of the response to the threat.

Step 8 – training in the procedures. Whilst much of the BCP will be self-evident, there may be aspects which require that the staff be trained in what to do and how to do it. This may include how to access data when they are not in their office, how to set up auxiliary telephone systems or how to respond to contact from the press.

Stage 5 – Review and maintenance

It is essential to ensure that the BCP continues to be valid and that where changes occur either within or outside the firm, that the BCP is updated accordingly in order to accommodate those changes.

Step 9 – ongoing review and update – specific review dates need to be scheduled so that the plan continues to be looked at regularly. Changes in the firm, the way it operates, the areas of work it covers, the number and location of offices and other factors should also prompt an automatic review of the plan.

Specific issues for inclusion in a plan

Information Technology

One of the key areas for inclusion in a BCP is information technology – in its widest context. The firm should therefore look not only at the robustness of the data which it holds but also at how staff access that data, the equipment they use to do so, where they can access it from and how easy it is for back-ups to be re-installed.

The plan should certainly provide for all data to be backed-up at a location other there where the data is normally used/stored and for staff to be able to access that data in the event that the primary source fails. If the firm is unable to afford to have a mirror of the data on another server then the firm should at the very le