Lawyers Covered - April 2021

Welcome to the latest edition of our Lawyers Liability & Regulatory Update, in which we look back over the last month at key developments affecting lawyers and the professional risks they face.

Proposed changes to the MTC: time for mandatory cyber cover?

The SRA has proposed adding a clause to the minimum terms and conditions which would make it explicit that claims for losses resulting from a cyber-attack/event are covered. The SRA is consulting on the proposal.

Given the prevalence of cyber fraud and the attractiveness of law firms as targets, cyber insurance is more important than ever. It can be tempting just to rely on minimum terms cover (which does provide cover for some losses, such as thefts from client account creating a shortfall), but doing so can leave solicitors exposed to other substantial costs, such as the costs of instructing forensic IT experts to ascertain the extent of a suspected breach to enable solicitors and the firm to comply with their ICO and SRA reporting obligations.

Some insurers inadvertently include cover for cyber risks (so called "silent cyber" cover), but in order to address the uncertainty caused by this approach, Lloyds now requires insurers to state explicitly whether a policy includes or excludes cyber cover. Insurers of solicitors have been allowed an extension until 1 October 2021 to consult with stakeholders, such as the SRA.

In theory, insurers can choose whether to include or exclude claims arising from cyber events; however, participating insurers will not have a free hand due to the SRA's involvement in imposing the minimum terms and conditions. Unsurprisingly, the SRA has already indicated that it wants insurers to include cyber cover. It also considers that this will not increase premiums, but that seems optimistic when (a) the losses flowing from cyber incidents are often (very) substantial; and (b) this proposal would (arguably) increase the scope of cover.

The SRA's consultation opened on 13 April 2021 and you have until 24 May 2021 to add your view (consultation here). This is a difficult issue for the profession at a time when the market is hard, but cyber attacks are at an all-time high.

Another Solicitor falls prey to cyber fraud

The SDT's decision in SRA v Andrew Rugg is a timely reminder of the risks posed to law firms by cyber attacks and the importance of following basic safety checks.

Calling every recipient of a funds transfer in advance to verify their bank details is a tedious task, but – as a recent SDT decision confirmed – a necessary one. A sole practitioner accepted a fine this month for transferring £290,000 to a fraudster's account, believing that the fraudster's email containing their bank details came from his client. He replied to the fraudster's email to indicate that he needed to verify bank details by telephone, but was reassured by an email response so did not do so.

The SRA described the solicitor's failure to verify bank details as "particularly troubling given the critical importance of such steps to counter attempted fraud and criminality". Successful cyber attacks on law firms increased by over 300% in the first half of 2020, causing losses of £2.5m, according to the SRA. Often when a breach occurs, it can be difficult to tell immediately what client data has been compromised and can require forensic IT investigations. Click here to read more about RPC's data breach response service, Resecure (access to data breach management, technical forensic investigation, legal advice, notification, web and credit monitoring and public relations with one call)

The CMA takes action on escalating ground rents

The CMA's announcement that it is taking enforcement action against four large developers – ordering them to remove ground rents that double every 10/15 years from their leases - is a welcome development for law firms (and their insurers) facing a growing number of claims in this area.

The issues facing the purchasers of long residential leaseholds that contain escalating ground rents have been well publicised. In recent years, we have seen a sharp rise in the number of negligence claims by purchasers against their former solicitors concerning such leases.

The government intends to introduce new legislation, aimed at giving greater certainty to leaseholders (and reducing the cost of enfranchisement), but full details of the planned legislation are awaited. 

Meanwhile, the CMA has concluded that ground rent terms which double every 10/15 years contravene consumer protection law and are therefore unenforceable. It should be noted that the CMA's enforcement action is (for now) targeted against developers who still own the freeholds and not investors who acquire the freehold from the original developers. For more details on this development, please see our article here.

A case on the boundary between a solicitor's private and professional life

Where does the boundary lie between a solicitor's personal and professional life, and in what circumstances (and to what extent) might the SRA be interested in the former? This has been something of a "hot topic" since the decision in SRA v Ryan Beckwith was published at the beginning of last year. 

There has been another recent case in which this issue was raised. In Rocha v Law Society of England and Wales a solicitor appealed against an order requiring him to disclose documents sought by the SRA in an ongoing investigation into (what the solicitor claimed) was a private business matter between him and the wife of one of his clients ("W"). The judgment is not available and the reported facts are scarce, but it does not appear to have been disputed that the solicitor entered into an agreement with W to use money donated by the client to "buy out" an interest in a property held by the client's trustee in bankruptcy. It appears the SRA is investigating what actually happened to the money and whether the solicitor had "taken unfair advantage" of his client and/or W.

In making the disclosure order, the master apparently held that the evidence showed a clear connection between the solicitor's professional practice and the concerns being investigated. The solicitor's challenge to the order (based on an alleged infringement of his ECHR Article 8 rights) failed and the appeal was dismissed.

Based on the limited information that is publicly available, neither the original disclosure order nor the decision on appeal seem surprising. Those hoping for detailed guidance on how the SRA (and the courts) may approach what can often be controversial issues in this area will have to wait for another case (and a publicly available decision).

 Barristers do not owe a duty of care to solicitors under COMBAR terms

If a barrister's negligence causes their instructing solicitor to recover less fees than they might otherwise have done, can the solicitor sue the barrister for damages? The solicitors tried this (unsuccessfully) in the recent case of Denise Mcfarland-Cruickshanks v England Kerr Hands Solicitors Limited.

The solicitors claimed the barrister's acts/omissions had led to an under-settlement of the lay client's intellectual property claim, which in turn had caused the solicitors to recover less under a CFA than they might have hoped for. When the barrister sued the solicitors for unpaid fees, the solicitors counterclaimed in negligence / breach of contract.

The barrister applied (successfully) for strike out / summary judgment. In the judgment dismissing the counterclaim, HHJ Worster closely analysed the language of the COMBAR / Law Society model terms (Basis A) and concluded that they did not impose a relevant duty of care. Under the model terms the barrister's services are provided for the benefit of the lay client (not the solicitor), therefore HHJ Gargan held:

"I do not see that the solicitor can say that the barrister is liable to him in contract for any loss he (the solicitor) suffers if the barrister breaches that term of the contract. That is not what is contemplated by these terms."

The judgment then goes onto consider whether a relevant duty was implied at common law. The court found no authority in the case law for what it described as this novel proposition and found there were no reasonable grounds for the counterclaim.

Members of the Bar may breathe a sigh of relief that they are unlikely to face an avalanche further claims of this kind by their instructing solicitors. However, the profession should take heed of HHJ Gargan's observation (at paragraph 48) that it is open for solicitors and barristers to agree alternative terms under which a relevant duty to the solicitor might be owed. If a barrister were to agree to owe concurrent duties to both the lay client and the solicitors, the potential for difficulties to arise (not least, potential conflicts of interest) is well illustrated by this case.

Be prompt! Costs budgeting is not a retrospective endeavour

Costs budgets can be revised or varied (upwards or downwards) due to "significant developments" in a litigated case (CPR3.15A(1)). Persimmon Homes Ltd and Anor v Osborne Clarke LLP and Anor [2021] EWHC 831 (Ch) serves as a reminder for parties seeking to amend their budget to do so promptly and with good reason.

Persimmon concerned a £10m professional negligence claim against Osborne Clarke in which claimants, Persimmon Homes and Taylor Wimpey Homes UK, had an approved costs budget of £1.46m, of which just over £1m amounted to future costs. High Court judge, Master Kaye, dismissed their application to almost double their costs budget to £2.8m - including more than doubling the future costs to nearly £2.4m. The main reason for the application was said to be the increased costs of responding to the defendant's request for disclosure. The claimants argued that after budgeting for model A and B under the disclosure pilot scheme, model C was subsequently used and that this was a significant development allowed under the rules.

The court disagreed. There had been an earlier CCMC, at which point the claimants could have raised the disclosure issue and revised the costs budget but did not do so. The court was not impressed with the claimants citing a lack of time before the CCMC or that the level of the disclosure task could not be foreseen at that point, only retrospectively, as their justification. In any event, Master Kaye did not consider a 12-month delay before making the application was prompt.

Hong Kong: Anti-Money Laundering – Law Firms Should Review Compliance

Law firms in Hong Kong have had much to contend with in the last couple of years, as the profession adapts to new challenges brought about by the COVID-19 pandemic and certain geopolitical tensions. In addressing these developments, solicitors and foreign lawyers should not overlook other important regulatory challenges that persist. Law enforcement agencies and regulators have been paying closer attention to lawyers' compliance with anti-money laundering laws – particularly since 2018, when the Anti-Money Laundering and Counter-Terrorist Financing Ordinance was extended to professionals (such as lawyers and accountants), having previously applied only to financial institutions.

The relevant legal and regulatory environment is shaped by international standards established by the Financial Action Task Force (the inter-governmental body), whose last onsite inspection of Hong Kong was in 2018 when the focus was on certain professions – it is no coincidence that this is the same year that the Ordinance was extended to lawyers.

It is not enough for lawyers to have robust procedures for reporting suspicious transactions to law enforcement agencies. Solicitors and foreign lawyers must comply with the client due diligence and record-keeping requirements set out in Schedule 2 of the Ordinance, in addition to the regulatory standards set out in the profession's "Practice Direction P (AML)".

While investigation of the main money laundering offences ("dealing" with the proceeds of crime and "failing to report") is a matter for the police, enforcement of the anti-money laundering regulatory standards is a matter for the Law Society of Hong Kong and can, ultimately, result in referrals to the Solicitors Disciplinary Tribunal (s. 9A(1AA), Legal Practitioners Ordinance – part of the legislative changes adopted in 2018). Such a referral is a serious matter and should be of particular concern to lawyers engaged in (for example) real estate or corporate transactions.