Corporate/commercial law accounts for the third highest number of legal malpractice claims in Ontario, after real estate and civil litigation. An article in the January edition of the LAWPRO Webzine examines the causes of these claims in detail, and tells lawyers what they can do to reduce their exposure to claim in this area of law. This post reproduces the portion of that article that dealt with communications-related claims – the biggest cause of claims in the corporate-commercial area.
Over the last ten years, corporate/commercial-related claims (including bankruptcy, tax, and securities-related claims) averaged 14 per cent of LAWPRO’s claims count (279 claims per year), and 23 per cent of our claims costs ($14.9 million per year). While there has been some fluctuation, the number of claims in this area has remained consistent over this time period, while the cost of resolving claims in this area has increased. On average, resolving a corporate/commercial claim cost LAWPRO $53,340 over that period.
As the the above chart shows, the main cause of claims against corporate/commercial lawyers is a breakdown in communications. The relative proportion of corporate/commercial claims and the types of errors that occur in other Canadian and U.S. jurisdictions mirror the claims experience in Ontario.
Communications errors fall into three general categories:
- A failure to inform the client or obtain the client’s consent;
- A failure to follow a client’s instructions; and
- Poor communication with the client.
A review of common fact scenarios for each type of error will give you a better understanding of why these errors happen and the steps you can take to avoid a communications-related claim.
Failure to inform client or get consent
The most common type of communications error on corporate/commercial files – 28 per cent of communications-related claims – involves a failure to obtain the client’s consent or to inform the client. Examples of this type of error include:
- Failing to explain to a client the consequences of a personal guarantee in a commercial lease, mortgage or other transaction involving security. Failing to make it clear that the client is personally responsible for the borrower’s debt.
- Failing to specify the limits of the retainer in writing. Failing to specify in writing which services the lawyer will perform and which things the client will do. For example, if you are involved in a transaction that includes the dissolution of a corporation, ensure that the client is aware of – and agrees to undertake – any final-year filings outstanding after the termination of your retainer.
- Failing to state in writing that a client has not provided sufficient information to complete the retainer on an incorporation and organization of a corporation. Do not allow the client to develop the mistaken impression that the incorporation is proceeding when it is stalled.
Failing to set out in an accompanying letter the limited purpose of a draft document, together with instructions that it is only to be used for the specified purpose and may not be suitable for other purposes.
- Failing to clearly and unambiguously inform a client in writing that you are declining to act on a particular matter, either because of a conflict of interest or because you don’t practise in that area.
- Failing to recommend that the client retain another lawyer to handle that matter. For example, if tax considerations might influence the choice between two different courses of action, but you don’t have enough tax expertise to take these considerations into account, document your recommendation that the client obtain tax advice. If the client wants you to take a course of action without the recommended tax advice, document that instruction.
- Failing to clearly and unambiguously inform a client in writing that you are terminating the retainer and failing to recommend that the client find another lawyer. Failing to clearly and unambiguously spell out any tasks you will not be completing and that the client needs to do or retain another lawyer to do.
- Failing to inform a franchisor client about the disclosure requirements under the Arthur Wishart Act and the severe consequences of inadequate disclosure.
- Failing to inform a franchisee client about the disclosure requirements and rescission remedies under the Arthur Wishart Act.
Failure to follow client’s instructions
A “failure to follow client instructions” is the second most common communications related error and accounts for 35 per cent of communications-related claims. It really amounts to nothing more than a simple failure to follow a client’s specific instructions.
The most frequent scenarios for this error include:
- Failing to file the requisite notice of change form to remove the old officers and directors when a company is sold. (Failure to do so could, for example, leave the former directors on the hook for tax or other liability.)
- Failing to ensure that all the clauses in a commercial offer to lease are carried over to and appear in the final form of commercial lease.
- Performing additional services for the client that the client did not specifically ask you to do but doing so carelessly, for example, making unsuccessful or incomplete attempts to terminate existing tenancies on behalf of a vendor or purchaser in connection with a commercial lease transaction.
Poor communication with client
Poor communication with the client is the third most common communications-related error and causes 24 per cent of this type of error. Common scenarios for this error include:
- Failing to ensure that the client understands what you are telling him/her and that you understand what he/she is telling you, particularly if there is a language barrier.
- Failing to ensure that the client understands clearly what you will be doing as the lawyer and what the client is responsible for doing.
- Failing to establish clearly who your client is, e.g., where two or more family members have an interest in the transaction.
- Making assumptions about a long-standing corporate client’s intentions and instructions without confirming these in writing. A long-standing relationship is no substitute for clear communication.
- Failing to document in writing that a client instructed you to take a different course of action in a corporate transaction from the one you recommended.
- Failing to include restrictions on the use and applicability of your advice in an opinion letter, including details of any qualifications or limits to the opinion.
- Also, a failure to document the assumptions upon which your advice in the opinion letter is based.
AVOIDING COMMUNICATIONS ERRORS
As a means of avoiding communications-related claim, the value of carefully documenting instructions, advice, and steps completed cannot be overstated. While the failure to have written confirmation of instructions and advice is not negligence in and of itself, such written communication can be extremely helpful in defending you in the unhappy event that a claim is made against you (or you are the target of a law society complaint or you are defending your account before an assessment officer).
Why is having something in writing so helpful? Because more often than not, this type of claim involves the lawyer recalling that one thing was said or done, or not said or not done, and a disappointed or upset client who alleges something different. These claims are very hard for LAWPRO to defend successfully, because they tend to come down to a question of credibility. Judges tend to prefer the client’s evidence, as the client usually has a much better recollection of what transpired and what was said.
Remember, most clients are involved in relatively few corporate/commercial transactions in their lifetimes, and they are more likely to remember specific details about what happened. By contrast, lawyers who have handled hundreds of corporate/commercial matters often have little or no specific recollection about what happened on a specific transaction, especially one in the distant past.
Unfortunately, we frequently find inadequate documentation in the lawyer’s file to back up the lawyer’s version of what occurred. We frequently see files with no notes or correspondence documenting what was said and done, and on occasion, even files with no reporting letters whatsoever.
Communications-related errors are among the easiest to prevent. You can significantly reduce your claims exposure by documenting your work. Confirm the information that your client provided to you, your advice to the client, the client’s instructions to you, and what steps were taken on those instructions. Document the time spent reviewing the file and note what issues were discussed with the client. This documentation can take the form of notes to the file, marginal notes on draft documents, comments in interim or final reporting letters, or even in an email message. Admittedly, you can’t document everything on every file, but taking the time to document unusual things or issues that seemed to concern the client can be very helpful in the event of a claim, especially if you have a difficult or demanding client.
Some corporate-commercial lawyers do not track or docket the time they spend on files. This is a shame, as there are two benefits of doing so. First, by tracking lawyer and staff time, you can determine the actual amount of time you are spending on each file – a critical piece of information for determining the profitability of the transactions you complete. Secondly, even taking just a few seconds to make detailed dockets can be a lifesaver in the event of a claim. “Conference with client re need for more information to complete incorporation and organization of Acme Widgets” is much better than just
“Conference with client re Acme Widgets incorporation”; “Conference with client re consequences of signing personal guarantee in Smith Co. financing” is much better than just “Conference with client re Smith Co. financing.” Weeks, months or even years after a deal is completed, detailed dockets such as these can serve to confirm that particular issues were discussed with the client.
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You can’t totally eliminate the risk of a malpractice claim. However, you can substantially reduce your risk of a claim by improving your lawyer/client communications and documenting your work.