Bad Apples

Solicitors have to comply with a code of conduct, which describes the standards of professionalism that the regulating body (Solicitors Regulation Authority) expects solicitors to uphold in their dealings with members of the public. An important part of this includes the way in which solicitors treat their clients, to ensure that the trust in the solicitors profession is maintained.

Indemnity Insurance

Solicitors are required to have insurance which complies with the SRA Minimum Terms and Conditions of Professional Indemnity Insurance, which includes the requirement of at least £2 million of cover. However, the minimum terms include an exclusion clause concerning fraud or dishonesty:

The insurance may exclude liability of the insurer to indemnify any particular person to the extent that any civil liability or related defence costs arise from dishonesty or a fraudulent act or omission committed or condoned by that person, except that:

• the insurance must nonetheless cover each other insured; and
• the insurance must provide that no dishonesty, act or omission will be imputed to a body corporate unless it was committed or condoned by, in the case of a company, all directors of that company, or in the case of an LLP, all members of that LLP.’

 Where the solicitor firm is large it is unlikely that all directors (or members) were dishonest and hence the exclusion clause will not operate to exclude indemnity. However, in the case of a sole practitioner the exclusion clause will be effective where that solicitor has been dishonest and thus the lay client will not have the benefit of the indemnity insurance.

In Momson v Haider Kennedy [2019] (unreported) the solicitor, a sole practitioner, had excessively charged the lay client for legal services in complex litigation. The solicitor held significant sums of the lay clients monies (from conveyancing transactions) in its client account and on its own accord transferred monies from the client account to pay for the legal services of the complex litigation. The lay client successively challenged the legal costs but the solicitor was unable to replace the monies taken from the client account. A claim was brought against Haider Kennedy which resulted in judgment for damages and costs.

The indemnity insurer did not seek to rely on an exclusion clause for dishonesty, presumably because whilst it turned out to be wrong to have taken such sums for legal costs from the client account the indemnity insurer considered that it did not amount to dishonesty. The indemnity insurer subsequently became insolvent and was unable to provide indemnity to the solicitor. Compensation was sought from the Financial Services Compensation Scheme (FSCS) which resulted in compensation being paid for both damages and legal costs.  The FSCS provides a 100% payment in respect of claims concerning indemnity insurance where the indemnity insurer failed after 3 July 2015[1].

In R v Sandra Campbell T/A Campbell & Co Solicitors [2022] the indemnity insurer refused to indemnify the solicitor in circumstances where the sole practitioner had settled a clinical negligence case at an undervalue and on a costs inclusive basis without instructions from the lay client and then dissipated the settlement sum.

Solicitors Compensation Fund

A discretionary fund of last resort, where no one has a right to a grant[2],  that makes payment to applicants where a solicitor steals or does not account for client money or where the solicitor did not have indemnity insurance in place. The rules[3] require amongst other things that the applicant make an application for a grant within 12 months of the date they first became aware or should reasonably have become aware of the loss[4].

The current version of the rules does not provide for the recovery of legal costs[5] in making the application to the fund and only in exceptional circumstances will the costs of proceedings for recovery of loss[6] fall within the remit of the fund.

In R v Sandra Campbell T/A Campbell & Co Solicitors [2022] the solicitor settled the lay clients clinical negligence claim for £50,000 including costs without instructions and then dissipated the settlement sum. Liability in the clinical negligence case was in dispute. The lay client sought compensation from the fund for the entire £50,000 on the basis that the lay client had lost the chance of pursuing a claim to trial or settlement and that the settlement monies were those of the lay client and the solicitor having acted in breach of contract had no right to any claim for costs that were carried out pursuant to the terms of a CFA. The solicitors acting for the insurer who provided the £50,000 settlement sum informed the SRA that its assessment of the settlement sum was £25,000 for damages and £25,000 for legal costs. The lay client was granted £30,000 from the Solicitors Compensation Fund. The decision was upheld on review.In Liu v Sandra Campbell T/A Campbell & Co Solicitors [2022] the solicitor maintained to the applicant, High Court and SRA that the reason that she could not release the client’s money (£164,264) held in the client account was due to banking issues. The application fell under the earlier rules[7] (similar rules on costs), and whilst the sum of £164,264 was paid from the compensation fund no sum was granted in respect of the legal costs incurred to:

• Establish that the solicitor was lying:

Third party disclosure order obtained against the bank holding the client account that established that the money had been dissipated;

• Seek to recover the sum lost or reduce the loss:
  1. a freezing injunction and claim against Sandra Campbell;
  2. bankruptcy proceedings against Sandra Campbell;
  3. claim against the indemnity insurer;

despite the earlier rules requiring the applicant to make good its loss by some other means[8] and to seek to mitigate its loss[9]. The decision concerning legal costs was upheld on review.

Conclusion

In all walks of life there are bad apples, fortunately in the solicitors profession they are rare.

Prompt action needs to be taken once it is suspected that a solicitor might have gone bad and has caused or may cause loss or further loss to the lay client.

Fortunately for lay clients whose solicitors have turned bad, they might be able to rely upon the solicitors mandatory professional indemnity insurance (unless a permitted exclusion applies) or the Solicitors Compensation Fund.

The Solicitors Compensation Fund has a short 1 year time limit for making an application to the fund. It is a discretionary fund and no one has a right to a grant from the fund.

[1] https://www.fscs.org.uk/what-we-cover/insurance/

[2] Rule 2.1

[3] SRA Compensation Fund Rules 2021

[4] Rule 15 (see 15.2, SRA may extend where circumstances justify)

[5] Rule 12(d)

[6] Rule 12(e)

[7] SRA Compensation Fund Rules 2019

[8] Rule 13

[9] Rule 10

Article by Robert Whittock