At the best of times, it is a high-risk strategy to sue a client for unpaid fees. It so often leads to a counterclaim for professional negligence.
When times become harder, it is vital to preclude the need to sue. Firms should limit their exposure to clients by giving them full information on the likely costs at the outset, by billing very regularly to keep Work In Progress under control, and by obtaining money on account where possible. Client solvency is now a significant issue, given that even major financial institutions can fail. You should take into account even the possibility of sovereign risk.
'Client account' risk (the risk of liability for the loss of clients' money held in the firm's bank account) has become an issue which resulted in the Law Society hastily issuing a practice note, recently updated. The risk may appear to have receded with the government bail-out of banks, but it cannot wholly be ignored, and there are simple steps you can take to mitigate the risk.
Where work is scarce, as it is now in some sectors, overdependence on a client or market sector can be a significant risk. Not only can the scarcity of work subject people to undue pressure to achieve financial targets, but overdependence can also cause lawyers to bend to client pressure to push compliance with ethical standards beyond the limit.
Desperate clients may be applying pressure. AIRMIC (the Association of Insurance Risk Managers) has warned that the credit crunch may be a 'breeding ground for fraud', and mortgage fraud has already emerged as a significant issue. The only brake may be the unavailability of mortgages.
Equity release schemes also caused a substantial number of claims against solicitors in the 1990s property recession. Despite assurances that many of the schemes are now safe (particularly those accredited by SHIP), there are still complaints. They have been identified by mortgage brokers as a business opportunity to make up for the loss of other mortgage work, and we can expect inexperienced salesmen to be busy. The client should be told to get advice from a specialist financial adviser as to the scheme's suitability for his particular needs, and the solicitor should be alert to the fact that they are generally not suitable for a borrower who intends to move house again during his lifetime.
There are other, murkier, financial products, including examples of loan sharks buying houses from debt-laden homeowners and renting them back; soon afterwards, the rent increases dramatically, while in other cases the money is never handed to the debtor/seller. These are already giving rise to claims against solicitors. Lottery schemes for selling houses have been the subject of a Law Society Practice Note.
Unpicking complex financial instruments, particularly those relating to securitisation of subprime mortgages, will doubtless cause problems. For an early example of credit crunch litigation, see J P Morgan Chase Bank v Springwell Navigation Corporation [2008] EWHC 1186 (Comm), involving a failed allegation of a duty to provide investment advice in relation to investments in an emerging market.
Pensions may give rise to a number of claims issues. Pension trustees may be concerned about the strength of the company's covenant where the pension is underfunded (and note the guidance from the Pensions Regulator in October 2008); equally, however, there may be no benefit in putting the company in peril.
Clients' investments in emerging economies – where returns may appear better than at home – are already giving rise to claims. These cause particular difficulties because obtaining appropriate representation locally to defend the claims can be a problem. The odds may be stacked against you in some jurisdictions, too.