Lawyers Covered - November 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 November 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.

Is an insurer responsible for 'the same damage' as its insured?

A recent High Court decision, in Riedweg v HCC International Insurance Plc & Anor [2024] EWHC 2805 (Ch), offers welcome clarity on the law surrounding an insurer’s liability under the Third Parties (Rights against Insurers) Act 2010 and its ability to share that liability, by way of contribution proceedings, under the Civil Liability (Contribution) Act 1978. The case underscores the complexities of the two acts and the way in which they interact, especially in cases of negligence.

Read our full article here.

Regulator Under Fire: SRA Faces Action Over Mishandling of £64M Axiom Ince Scandal

The Legal Services Board (LSB) has initiated enforcement action against the Solicitors Regulation Authority (SRA) following the SRA's mishandling of the collapse of law firm Axiom Ince in 2023. Axiom Ince, a law firm implicated in the loss of £64m from client accounts due to suspected fraud, was placed under SRA intervention in October 2023. However, an independent review commissioned by the LSB found significant shortcomings in the SRA's response to warning signs of financial misconduct.

The review concluded that the SRA failed to act "adequately, effectively and efficiently", despite having the resources and authority to intervene earlier, and that it did not “take all the steps it could or should have taken”. The delay allowed the misconduct to escalate and worsened the impact on clients and the profession. The review called for procedural changes within the SRA to prevent failures of this magnitude from reoccurring. The LSB is also considering the next steps under its statutory powers, which may include imposing directions to compel the SRA to enhance its regulatory processes.

In its response to the LSB's findings, the SRA acknowledged areas for improvement but highlighted its efforts in uncovering the fraud. Critics, however, argue that the SRA's focus on expanding regulatory powers detracted from its consumer protection responsibilities. The collapse of Axiom Ince also led to increased contributions to the SRA Compensation Fund to cover the losses, impacting solicitors and law firms alike.

The incident has prompted calls for the SRA to take accountability, reconsider its priorities, rebuild trust by prioritising robust consumer protection measures and ensure effective governance moving forwards. Watch this space…

Expanding the courts' powers: compulsory ADR

Following last year's decision in Churchill v Merthyr Tydfil County Borough Council [2023] EWCA Civ 1416 (which we first reported in Lawyers Covered in July 2023 here), significant changes to the Civil Procedure Rules (CPR) came into effect on 1 October 2024 to allow the courts to compel parties to a dispute to engage in alternative dispute resolution (ADR).

The Churchill case

Last November, in a landmark judgment, the Court of Appeal ruled that it was lawful for a court to stay proceedings whilst the parties took part in ADR (either on a voluntary basis, or, importantly, as ordered by the court). 

This was under the following three conditions:

• The order does not impair the parties' right to a fair trial.
  
  
• The order is made for the purpose of achieving a "legitimate aim" of settling the dispute fairly, quickly and at a reasonable cost.
  
  
• The order is proportionate to achieving that aim.
  
  
• This decision demonstrated the courts' continuing focus on encouraging parties to resolve matters via ADR, where appropriate.

New CPR Rules

Amendments to the CPR came into force on 1 October 2024, which reflect the Court of Appeal's findings in Churchill, namely, to give the English civil courts the power to order parties to engage in ADR.

These amendments include the following:

• Rule 1.1 – An amendment to the overriding objective, to provide that dealing with cases justly and at proportionate cost includes, so far as practicable, promoting or using ADR.
  
  
• Rule 1.4(2) – Active case management has been extended to include ordering parties to engage in/use ADR.
  
  
• Rule 3.1(2) – The courts' general case management powers now include ordering parties to engage in / use ADR, where appropriate.
  
  
• Parts 28 and 29 (fast track and multitrack) – The matters that the court should consider when making case management directions include whether to order or encourage the parties to engage in ADR.
  
  
• Rule 44.2(5) – When the court is exercising its discretion for the purpose of determining costs, the court may consider "whether a party failed to comply with an order for alternative dispute resolution, or unreasonably failed to engage in alternative dispute resolution".

Commentary

These amendments to the CPR reflect an emphasis of the courts encouraging parties to engage in ADR, where appropriate.  These amendments will no doubt be welcomed by many parties who will now be able to request the court makes an ADR order in circumstances where the opposing party has previously been unwilling to engage in ADR.

However, it remains to be seen when and how the courts will exercise their new powers to order ADR, and the CPR is silent in this regard.  This reflects the Court of Appeal's findings in Churchill, where the Court refused to provide a defined list of factors as to when such an order should be made (albeit the Court did note that several factors, including the merits of the case, whether the parties were legally advised or represented, would be relevant).

It will be interesting to see how the courts choose to exercise this power going forwards.

Oakwood Solicitors Ltd v Menzies – Supreme Court decision on 'payment' of solicitors' bills

In their recent Judgment in Oakwood Solicitors Ltd v Menzies [2024] UKSC 34 the Supreme Court overturned the Court of Appeal decision. The Supreme Court held that deducting fees, payable under a statutory bill, is not a "payment" within the meaning of section 70 Solicitors Act 1974 (the Act); even when deducted with the client's knowledge and consent.

In essence, this means that firms deducting fees from damages awarded to their clients will not be protected from the limitation periods under section 70 where they fail to secure agreement to a payment of a specific amount; it is not enough to rely on retainer provisions providing for the client's consent to general deductions for fees.

Read our full article here.

SRA's Comments on Anti-Money Laundering Training

The SRA's view is that Anti-Money Laundering (AML) training is one of the most important methods to prevent fee earners and law firms from inadvertently laundering money. Accordingly, the SRA conducted a review on AML training in the legal sector to understand how law firms are complying with the requirements of Regulation 24 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR). This regulation states that law firms must make sure fee earners who undertake legal work within the scope of MLR are made aware of these requirements, and provided with regular training to identify and report suspicious money laundering and terrorist financing.

The SRA's review established the following key findings:

• Where the Money Laundering Compliance Officer had undertaken additional AML training, law firms were around 50% more likely to comply with the MLR compared to law firms which have not undertaken such training.
  
  
• The SRA considered that AML training may overly focus on regulatory compliance and recommended interactive training with real-life case studies for AML training.
  
  
• The SRA suggested that law firms should not solely rely on external providers for training as a bespoke method may address each firm's needs by being more relevant, and therefore, more effective in fulfilling its goal.  

The SRA went on to provide a checklist for law firms to use when building an AML training programme. You may view the checklist here.

This checklist is intended to enable law firms to question whether they are covering relevant AML topics, repeating training, record-keeping and considering how this training content is presented.

It includes guidance of maintaining continuing competence, reminding fee earners through regular email updates; adding reflective discussions to team meeting agendas; encouraging mentoring and coaching; and utilising a tailored approach by inviting specialist speakers.

Hong Kong – Challenges to Plaintiff's authority to sue should be made before trial and promptly

In an important judgment in Re Bold Shine Investment Ltd [2024] HKCA 767, the Hong Kong Court of Appeal held that where a defendant wishes to challenge the authority of a plaintiff to commence a lawsuit the application must be made promptly and, in any event, before trial. Therefore, it is not within the courts' case management powers to leave such a challenge to be determined at trial or treat the issue as a matter to be determined as part of the defence at trial.

It is not uncommon in litigation in Hong Kong for an issue to arise as to a plaintiff's authority to sue – for example, in the context of whether a plaintiff company has properly authorised legal action according to its constitution. This is a matter that plaintiff lawyers need to address at the outset – a failure to do so carries the risk of professional liability and exposure to costs orders. 

In Re Bold Shine Investment Ltd, the Court of Appeal suggested two ways for a defendant to make such a challenge:

• apply to strike out the plaintiff's claim for want of authority; or
  
  
• apply to have the matter determined by the court as a preliminary issue.

The issue of a plaintiff's authority to sue is of fundamental importance in litigation because it goes to the issue of whether a lawsuit is properly constituted. The Court of Appeal's judgment puts defence lawyers on notice that they must act promptly. As the judgment states (at paragraph 36):

"If [the defendant] decides to make the challenge, he should do so before the action goes to trial. If [the defendant] does not make a challenge and allows the action to proceed to trial, he cannot raise the challenge and ask for it to be determined in the trial."

Additional Contributors: Robyn Crowter, Catherine Zakarias-Welch, Sally Lord & Aimee Talbot