Lawyers Covered - March 2024

It can be tough for busy lawyers to find enough time to service clients, make it safely through the regulation obstacle course, win new work and keep up-to-date with developments, but we've got you covered!

Welcome to the March edition of our Lawyers Liability & Regulatory Update, in which we highlight the last month's key developments affecting lawyers and the professional risks they face.

New law to send PACCAR packing

On 19 March, the Ministry of Justice published the Litigation Funding Agreements (Enforceability) Bill, which seeks to reverse the Supreme Court decision in R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others [2023] UKSC 28. 

In PACCAR, the Supreme Court was forced to conclude that a litigation funding agreement fell foul of the damages-based agreement (DBA) regulations and, as such, was unenforceable. As this was an unintended consequence of the DBA regulations, litigation funding agreements were not being drafted with the DBA regulations in mind and many therefore did not comply.  This decision threw the litigation funding space into brief disarray, with disputes arising over the enforceability of litigation funding agreements being felt most acutely in cases which had already settled.

The Government promised to reverse PACCAR and the new draft bill (which is only two clauses long) does so by amending s58AA Courts and Legal Services Act 1990 to expressly state that litigation funding agreements are not DBAs, removing any issues caused by their potential non-compliance with the regulations. The amendments are intended to have retrospective effect.

The Lord Chancellor has also asked the Civil Justice Council to review the third-party litigation funding market with a view to considering what regulation or safeguards might be needed, so watch this space as more regulation may be on the way.

"It was just a mere error, M'Lud, not a breach of duty…" Law firm was reasonably entitled to consider that work undertaken by a previous firm was done to a reasonably competent standard

The King's Bench Division in Dziugys v Ersan and Co Solicitors Ltd [2024] EWHC 434 (KB) recently dismissed a negligence claim against the defendant firm for allegedly failing to detect that the firm previously instructed by the claimant had made serious errors.  The claim arose from the dismissal of the claimant's underlying personal injury claim and the claimant being ordered to pay the underlying defendant's costs on the indemnity basis.

The defendant firm had taken conduct of the claim when previously instructed solicitors ceased trading. It failed to detect that the claimant's signature on his witness statement in the underlying claim was forged, or that the witness statements otherwise did not comply with the Civil Procedure Rules (CPR). The claimant further alleged that the defendant breached its terms and conditions by "refusing to return" its file to him as it had been sent to the claimant's ATE provider instead. The Master ordered that breach of duty and causation be tried as preliminary issues.

The court held that the claim failed entirely on both liability and causation, particularly:

• It had been reasonable for the defendant firm to have considered the pre-trial work undertaken by the previous firm had been done to a reasonably competent standard.
• The relevant fee earner had conducted a review of the file upon receipt by the defendant, and there had been no reason to believe the witness statement signatures had been forged.
• The signatures on those statements were not CPR-compliant, and the lack of enquiry into this alone did not amount to a breach of duty, as it was the making of a mere error rather than a question of reasonable competence.
• The court also held that there was no breach of terms and conditions or any duty of care by the defendant by providing the file to the ATE provider. It was entitled to do so to act in the claimant's best interests under its terms and conditions, given the alternative was a personal liability for a large costs order for the claimant. The defendant firm did what it could to retrieve the file when requested by the claimant.
• The final and perhaps most damning nail in the coffin, was that the problematic witness statement had been only one of numerous factors in the underlying claim being dismissed, another being that the claimant was found to be an 'utterly unreliable witness'.

Many litigators will be familiar with the feeling of inheriting a claim under the pressure of an already running court timetable, and can take some comfort that, in such urgent conditions, the court may allow reliance on the work carried out by its predecessor firm. Firms should, however, ensure that a review upon receipt is reasonably detailed given the time available, as in this case.  

Lawyers may also want to rely on Dziugys to support an argument that the reasonably competent solicitor may make "mere" errors without this conduct amounting to a breach of duty.  This echoes the comments made by Sir Brian Levenson P in Dunhill v Brooke & Co [2018] EWCA Civ 505:

"The law does not… demand either omniscience or infallibility in lawyers any more than it does in doctors or architects. The law’s standard of reasonable competence means not only that there will be errors which are not compensable but that legal advisers are not expected to divine every claim that a client may theoretically have."

Unfair to apply today's standards to yesterday's conduct: Dentons cleared of alleged AML failures

After a 6-day hearing, the SDT dismissed the SRA's case against Dentons for alleged breach of anti-money-laundering regulations dating back to 2013.  The SRA alleged that Dentons had failed to carry out adequate source-of-funds checks against a former client reportedly from "an authoritarian former Soviet state with a reputation for high levels of corruption" and who was the chairman of a majority state-owned bank. Dentons took on the client in 2013 as a result of a merger with another firm and no file notes documenting Dentons' AML checks had survived the passage of time.

Dentons accused the SRA of taking a "revisionist approach" and adopting a "2024 mindset" by applying its current AML rules to conduct which took place more than 10 years ago. In fact, Dentons argued, it had taken adequate steps at the time, in compliance with then-current regulation and guidance. The SDT evidently agreed, dismissing all of the allegations and ordering the SRA to bear its own £189,000 costs bill, following Dentons' submissions that the SRA had ignored its own guidance from the time of the targeted conduct

Legal Services Board reports on potential misuse of NDAs by lawyers in covering up illegal or wrongful activities

The Legal Services Board (LSB) has published a report on the misuse of non-disclosure agreements (NDAs) by lawyers in the context of the LSB's wider work on professional ethics in the industry.

The report is said to follow considerable public concern over the use of illegitimate and/or unethical NDAs aimed at concealing unlawful activity or other types of wrongdoing which are not illegal.

In response to the LSB's call for evidence, respondents gave examples of unethical and/or illegal acts concealed by NDAs, which typically involved an imbalance of power between the parties, often in the context of employment disputes. Respondents reported NDAs being used to conceal bullying, unlawful harassment and discrimination, sexual assault, settlements over consumer products, construction disputes, fraud and tax evasion.

This is said to arise from individuals lacking understanding of their legal rights and feeling pressured into signing NDAs, including by lawyers. Respondents reported "devastating impacts" from signing such agreements, including mental health issues, reputational damage and negative financial impacts.

The report concludes that there is sufficient evidence for the LSB to progress a review of how regulation can address lawyers' unethical conduct, including in the context of NDAs. This may include a tightening up of the existing regulatory framework or further regulation in this area. The LSB has indicated plans to publish a policy statement to strengthen professional ethics conduct towards the end of the 2024/2025 business year.

In response to the report, the president of the Law Society has encouraged solicitors who advise on NDAs to read the SRA's warning notice and the Law Society's practice note which "clearly set-out a solicitor's legal, regulatory and ethical responsibilities when advising on the use of NDAs"

SRA is top in class in latest assessment – but next term's predicted grades may not be so good

On 20 February 2024, the LSB published a 70-page assessment in which it reviewed the performance of the eight legal regulators between October 2022 to May 2023. Of the eight regulators, only the SRA and the Council for Licensed Conveyancers received the grade of 'sufficient' and 'no concerns' in the categories of being 'well led' and having an 'effective approach to regulation'.

Notably, due to the time frame covered by the report, the handling of Axiom Ince, the Horizon Post Office scandal and Daily Mail's exposé of a number of immigration lawyers were not considered when grading the SRA. The assessment does address this and outlines that the LSB has commissioned an independent review of the SRA’s intervention into Axiom Ince which is due in spring 2024. The next annual assessment will begin later in 2024. This assessment will include consideration of the SRA's handling of the Post Office scandal and the conduct of lawyers advising on immigration matters as well as the SRA's intervention into Axiom Ince. 

Despite the high grading received by the SRA in the latest assessment, some critics have argued that the SRA has substantially increased its powers (since its inception in 2007) without a relative increase to its accountability. In particular, critics argue that the lack of accountability has been signified by failures from the SRA in its handling of the scandals mentioned above.

The SRA has recently moved to address these concerns and is currently in the process of reviewing its overall approach to consumer protection, following the collapse of Axiom Ince. Within a discussion paper which the SRA published in early February it stated that: 'We are taking action now because the legal landscape is going through significant changes'.

It remains to be seen if the SRA will retain its high grading in future LSB assessments following its handling of these notable issues. However, it appears that the SRA has already recognised that there is a need for a change to its approach. 

SLAPP – a drive to dismiss and deter

How to tackle the growing issue of Strategic Litigation against Public Participation (SLAPP) has gained momentum in recent years. There is not yet one definition of SLAPP, but it has been described as "legal threats brought to intimidate and financially and psychologically exhaust journalists, campaigners and anyone who would criticise or expose corruption".

The SRA published a warning notice in November 2022 highlighting their concerns regarding SLAPP. They reminded solicitors of the SRA's power to investigate conduct, in particular abusive correspondence, that may be considered SLAPP. This power extends to pre-action threats.

SLAPP captured the attention of the UK government, with the Economic Crime and Corporate Transparency Act being passed in 2023. This legislation is now being bolstered following the introduction of a Private Members Bill in February 2024. The aim of this bill is two-fold: (1) to ensure that SLAPP claims are identified and dismissed as early as possible, (2) to introduce a cost protection scheme. The government's actions aim to clarify the current law and act as a deterrent to claimants intending to embark on abusive litigation. This two-fold approach is in line with new rules introduced by the European Parliament soon to enter into force.

The Law Society, whilst welcoming the Bill and its aims, has expressed caution towards the Bill in its current form. Their key concern is that there is a risk that it could increase costs and cause satellite litigation. The Law Society have provided several recommendations to ensure that the measures are effective and that the objective of pushing out SLAPP will be achieved.

Hong Kong: Judge reminds lawyers of their role in challenges to arbitral awards

The judge in charge of the "Construction and Arbitration List" has delivered a strongly worded decision reminding parties and their legal advisers of the limited grounds to challenge arbitral awards.  While there are no specialist courts in Hong Kong (save for the Family Court and a few specialist tribunals), there are specialist court lists presided over by experienced judges. In CNG v G [2024] HKCFI 575, 27 February 2024, the judge stated: 

"The Court can only look to and trust legal professionals to carry out their duties to the Court and to act responsibly when advising their clients on whether an award can be properly challenged, bearing in mind that public resources are involved when judicial time is taken up by lengthy but at the root unmeritorious applications."

In Hong Kong, with its busy international and domestic arbitration sector, there has been a perception in recent years that too many unsuccessful parties have engaged lawyers to embark on expensive and unwarranted challenges to arbitral awards, pursuant to section 81 ("Application for setting aside") of the Arbitration Ordinance. Unsuccessful challenges to arbitral awards are routinely met with more generous cost orders in favour of respondents – although, as the judge acknowledged, this may not be an effective deterrence in certain high-value disputes.  Hence, the judge's warning that it was high time that "legal professionals" played a much more vigilant role at the same time as being aware of their duties to the court. Indeed, the judge's decision goes on to state:

"They should only prepare papers for such applications to the Court and raise issues therein which have merit, instead of irresponsibly 'massaging' a case to fall within the limbs of section 81."

The reference to "legal professionals" is primarily to local practising solicitors and barristers – who can conduct arbitrations and litigation in Hong Kong – although, foreign lawyers who are instructed in connection with arbitrations should also take careful note.

Additional contributors: Aimee Talbot, Sally Lord and Cat Zakarias-Welch

Disclaimer: The information in this publication is for guidance purposes only and does not constitute legal advice. We attempt to ensure that the content is current as at the date of publication, but we do not guarantee that it remains up to date. You should seek legal or other professional advice before acting or relying on any of the content.