Common pitfalls in transactional work 2

Although the frequency of claims arising out of corporate transactions is relatively low, the sums in issue are usually substantial and such claims therefore represent a significant area of exposure for firms active in this market. This article looks at some of the common pitfalls which may arise and offers some practical suggestions as to how these may be avoided.

Lack of Time: The 4am Syndrome

Corporate transactions frequently have to be completed within very tight constraints of time, with input being required from a number of specialist departments at short notice. Work is often undertaken late into the night and the risk of errors and oversights is exacerbated by the increasing complexity of large transactions.

The potential for claims to arise in these circumstances is probably the single biggest area of concern for transactional lawyers. A particular difficulty is the need to identify all the "knock on" effects of last minute changes to the documentation. The agreements may be voluminous and the final review of this material may need to be undertaken in the early hours, when mistakes are more likely to be made and access to specialist lawyers is more difficult to obtain.

In the event that a claim does materialise, to what extent will a court take the surrounding circumstances into account when determining the issue of liability?

The answer, based upon established principles, is that, whilst lack of time is a factor to be taken into account when assessing whether the solicitor was negligent, it is not an argument that can be pressed too far – i.e. although it may be a mitigating factor, a shortage of time is not a licence to be negligent.

Where the solicitor does not have adequate time properly to research or check the position but the client is insistent upon proceeding to completion, the solicitor has (in broad terms) one of two choices:

1. he could, at least in theory, invite the client to terminate the retainer and find alternative representation; in practice, this is a highly unlikely scenario;
2. alternatively, the solicitor could inform the client that;

• the advice is given on the basis of the research and analysis which he has been able to undertake in the limited time available;
• the advice may have been different if further time had been available; and
• there is, accordingly, a risk to the client that the advice may be incomplete or even incorrect.

An explicit warning of this nature should always subsequently be confirmed (or at least evidenced) in writing in order to avoid any subsequent conflict of evidence or misunderstanding. There is, in this respect, no conflict between a solicitor qualifying his advice where it is appropriate to do so and providing a constructive approach to the issues which he is being asked to address. On the contrary, the solicitor's duty is to ensure that his client is in a position to reach an informed decision as to the correct course to adopt and this will not be achieved by ignoring or "glossing over" any difficulties to which time constraints may give rise.

It is submitted that the legal position was accurately summarised by Smith J in the Canadian decision of Elcano Acceptance Ltd –v- Richmond, Richmond, Stambler & Mills (1985) 31 CCLT 201, Ontario HCt:

"As a matter of policy, it seems to me that a Court should not lightly lower the requisite standard of care because the solicitor was rushed by his client. The solicitor's duty is, at a minimum, to tell the client very explicitly that certain dangers arise if, under the pressures of deadline, certain matters are not attended to, and, at a maximum, to withdraw from the relationship."

Whilst there are inherent difficulties in this area, there are a number of practical steps which can be taken in order to try and minimise the risk of claims, including the following:

• plan ahead and try and agree a reasonable timescale wherever possible. In so far as it is practicable, do not leave things to the last minute;
• ensure that specialist advice is available or "on call" if it may be required;
• try and ensure that the client at least reads the key provisions of any agreement;
• where practicable, try and arrange for the documentation (or at least the key clauses) to be read prior to completion by a colleague who has not been involved in a series of all night negotiations. A fresh pair of eyes may detect potential problems or ambiguities.

Drafting Errors

The solicitor's core duty is to produce an agreement which reflects and gives legal effect to the client's instructions and its understanding of the commercial deal.

• Where input is required from more than one department, there is a potential for a "mismatch", with the result that an internally inconsistent document is produced. In order to avoid this, it is essential for someone with a sufficiently general legal experience to have overall responsibility for reviewing the documentation as a whole, with a view to seeing that it works and that it achieves the commercial objectives that it was intended to achieve.
• Where it is alleged that an agreement does not give effect to a client's instructions or understanding of the commercial deal, the prospects of mounting a successful defence may depend upon the existence of a proper paper trail. This should evidence both the discussions with the client and the introduction of various amendments into earlier drafts of the agreement. Files and papers therefore need to be organised in a systematic manner so that a third party coming to them at a later date can make sense of what happened and obtain an understanding of each step of the transaction. It may, in this regard, also be helpful to number and date successive drafts of the agreement, so that the timing of the various amendments is apparent from the file
• Where (as is now usually the case) travelling drafts are e-mailed between the parties' solicitors, arrangements should be put in hand for a hard copy of all incoming and outgoing material to be placed on a master file, in addition to material stored by fee earners electronically.

The Need for Specialist Assistance

A solicitor is not taken to be an expert in every field. A prudent solicitor:

• knows the limits of his expertise;
• does not attempt to become an instant expert; and
• however specialised he may be, recognises when different expertise is required.

One area of concern is the risk of younger lawyers becoming over-specialised and failing to identify the existence of an issue (e.g. tax, employment, competition or IP) which calls for the expertise of another department. An effective training programme is required in order to ensure that young transactional lawyers are sufficiently well educated in other relevant areas of practice, failing which, there is a risk that they will "get the difficult points right and miss the obvious ones". Effective supervision and co-ordination by a senior lawyer is also essential to avoid such issues being overlooked.

Failures of Co-ordination Internally

Large transactions require input from a range of specialist areas across a firm and they are, to a very significant degree, an exercise in project management. Overall responsibility for co-ordinating all aspects of the assignment will rest with a partner who is, in effect, "conducting the orchestra".

Where specialist input is required from other departments, it is important that they are given full and proper instructions and adequate time to consider and formulate their advice. Similarly, where a solicitor is asked for advice or assistance from elsewhere in his firm, he should ensure that he has all the information and material needed to provide an adequate and accurate response. Specialist departments must not proceed on the basis of "half baked" instructions.

It is, in addition, good practice to confirm such internal advice in writing in order to avoid any misunderstandings, particularly where the recipient is not familiar with that area of law. Imperfect communication could result in the client receiving incorrect advice.

Failure to Evidence Advice

The only relevant facts in litigation are those which can be proved.

The need to keep an adequate written record cannot be over-emphasised as, in the event of a subsequent dispute, it may be critical to prove precisely what, if any, advice was given to the client.

For example, transactions relating to the sale of a company or a business will almost inevitably involve some element of compromise in relation to the terms of the sale and purchase agreement. The parties' lawyers will, in the usual way, be responsible for advising their respective clients on the legal effect of, and the potential risks arising from, any proposed amendments.

Should an acquisition prove unsuccessful for reasons connected (in whole or in part) with such amendments, the purchaser's solicitor may find himself in an exposed position if he is unable to demonstrate: (a) that he gave suitably qualified advice to his client; (b) that he explained the actual or potential impact of the amendments; and (c) that the client was in a position to make an informed decision as to whether to proceed. The fact that the solicitor's advice was given at the end of a lengthy meeting (or piecemeal during it) and that the transaction was completed against a stringent deadline will not obviate the evidential difficulties facing the defence.

In the absence of any contemporaneous notes, a solicitor in this type of case will face a number of difficulties:

• he may be thrown back on general assertions such as "I would have advised …" or "It is my invariable practice to advise …" In circumstances where there is such a conflict of oral evidence, there is a risk that a court may prefer the client's recollection of events on the grounds that, whereas the solicitor has been involved in many similar matters in the intervening years, the client may have been involved in only one or two transactions during the relevant period;
• the courts tend to regard it as incumbent upon solicitors to confirm important matters in writing in accordance with Law Society recommendations ("A solicitor should consider whether it is appropriate to confirm in writing the advice given and the instructions received"). In the absence of any written record, a Claimant's counsel will probably invite the court to infer that no such advice was, in fact, given;
• even if a Judge does not prefer the Claimant's evidence to that of the solicitor, he may conclude there was a genuine misunderstanding as a result of a failure of communication by the solicitor. In that event, a finding of liability is likely to follow.

It is, on occasions, extremely difficult to keep a detailed written record - for example, during long meetings which are part of a fast moving transaction. Nevertheless, it should be possible to make a manuscript note of important matters which arise, even though a comprehensive note of the meeting is not practicable. Such notes must be retained on the file.

In addition to the general requirement to evidence advice, certain transactions and clients may demand special attention (e.g. where the client has a tendency to provide inadequate, late or inconsistent instructions). In such cases, all material advice should be confirmed in writing.

Other Issues

• Time limits – most problems arise from commercial deadlines, although a failure to register charges pursuant to the Companies Act legislation continues to be a source of claims.
• Checklists of outstanding points - these will help to ensure that everything that should have been done, has been done, properly and accurately before completion of the transaction. Similarly, if a transaction goes into abeyance, the preparation of a list of outstanding points at that stage will reduce the possibility of any important issues or steps being overlooked, should the matter revive.
• E-mail and its impact on file management – the much greater use of e-mail in recent years (with messages and attachments being copied to a larger number of individuals) presents a challenge to the file management of law firms. On large transactions, someone should be deputed at the outset to ensure that a full and complete record of all incoming and outgoing e-mails and attachments is maintained.
• Internet based dealrooms – the principal liability risks in relation to dealrooms relate to the inadvertent disclosure of information to third parties, e.g. the disclosure of price sensitive information, which may lead to a transaction aborting and to substantial losses in respect of wasted professional fees. This may occur as a result of information being inadvertently placed on the site or the wrong part of the site (i.e. human error) or from third party "hackers" obtaining access to material on it. Subject to the utilisation of standard industry safeguards, unauthorised third party access is an inherent risk in the use of this medium and it is prudent to obtain the client's informed consent to this. A number of firms have also introduced rules for the use of dealroom facilities, which include limitations on their liability.

Practice Points

1. Do not compromise the quality of advice for speed of response, even where a transaction has to be completed urgently. In the absence of an express warning, the courts will be very reluctant to lower the requisite standard of care because the solicitor was rushed by his client.
2. Ensure that specialist advice is available if it may be required.
3. Try and ensure that the client at least reads the key provisions of any agreement.
4. Where practicable, try and arrange for the documentation to be reviewed prior to completion by a colleague who has not been working through the night.
5. In order to avoid the potential for a "mismatch" where different departments are involved in the drafting of an agreement, the document should be reviewed by someone with sufficiently broad experience to ensure that it works and achieves its commercial objective.
6. Ensure there is a proper record (whether paper and/or electronic) of all amendments to successive drafts.
7. Know the limits of your expertise and recognise when different expertise is required from elsewhere in the firm. Where assistance is needed, seek it early and provide full and proper instructions.
8. Ensure that your advice is recorded in writing and that all contemporaneous notes (including manuscript notes) are retained on the file.
9. Make use of checklists to ensure that no important issues or steps are overlooked.

For further information please contact Peter Maguire at [email protected]