Corporate/commercial law: 5 key causes of claims

 

Corporate/commercial law accounts for the most dollars the insurance fund pays out on claims. Of the $62 million in settlements, judgments and expenses that LIF paid between 2003 and 2017, this area of law accounted for 38 per cent of all of those dollars. It also gave rise to the biggest single payout on a claim in LIF’s history: $7 million. The top two risks? Tied for first place: oversights that result from simply forgetting or overlooking some step that needs to be taken; and legal issue failures in which you know the law but don’t think through all the steps or strategies required to achieve your client’s goal.

This area of law consists of the following subcategories of practice: commercial lending (lender/borrower), commercial other, corporate, securities and tax. You can find out more about each cause, including examples and video stories from actual claim files, as well as how the five causes break down by subcategory of practice, below.

Pie chart: 5 key causes of claims for corporate/commercial law

Date Range: 2003 - 2017

Find out more about each cause, including stories and videos of examples from our claim files, below.

These failures have nothing to do with your competence as a lawyer, but everything to do with how you manage the process of providing legal services. They break down as follows:

Not managing client expectations (35%)
You fail to appreciate the risk inherent in a client or their expectations of the legal process (24%), who is doing what (67%) or how much it’s going to cost (9%).

Claim file example
Lawyer prepared corporate documents required by the client’s settlement of a dispute. Tax implications from the settlement later arise, and the client alleges that it was relying on the lawyer to alert it to any possible adverse tax consequences.

Not managing third party expectations (38%)
You don’t appreciate that someone for whom you are clearly not acting thinks that you are somehow protecting their interests. 

Claim file example
Company A agrees to lend money to company B. The lawyer acts for company B, the borrower, and prepares the loan documents. When B defaults on the loan, A and its directors threaten to sue the lawyer, alleging that she failed to protect their interests.

Not managing the retainer (setting up or concluding) or emerging conflict effectively (27%)
At the start of the retainer, you don't adequately think through how you are going to deliver the legal services or if you are able to represent all parties (50%) or, once the legal work is done, you 'move on' without ensuring that the final wrap details are properly attended to (13%), or you fail to manage a conflict that emerges during the retainer (37%).

Claim file example
Lawyers acted for parents lending money to their son to help him with a struggling business. The loan was secured by a second mortgage. The lawyers’ firm had previously acted for the business in relation to a prior loan, secured by a first mortgage. When the parents discover that they may be foreclosed off title by the prior lender, they allege that the lawyers acted in a conflict and ought to have advised them against the loan.

For a video claim file story, watch: Who exactly is my client?

These reports involve failing to sort out the legal issues or strategies required to achieve a client’s goal.  They break down into two categories: 

Ignorance of the law (31%)
You don’t appreciate that you don’t know an area of law as well as you need to in order to provide proper advice.

Claim file example 
Lawyer thought that she had more time to file a Notice of Objection in response to a CRA Notice of Reassessment issued to a client, and missed the deadline. 

Not thinking it through (69%)
You know the law, but don’t fully think through all of the legal issues, or what strategies to implement or steps to take to achieve your client’s goal.

Claim file example 
Lawyer issues shares to a number of investors in a client company, believing that the client is exempt from the requirement to file a prospectus. The lawyer subsequently determines that his analysis was flawed, and that the exemption relied on does not apply. 

For a video claim file story, watch: The precedent trap

These failures in listening, asking and explaining often involve lawyers making assumptions that later prove wrong.  They break down into two categories:

Communication issues with clients (78%)
You don’t devote enough time or attention to ensure that a client understands you or provides you with the information that you need, or you fail to ask for instructions or consent.

Claim file example
The principals of a corporate borrower agree to guarantee a loan but, despite reviewing the loan document with their lawyer, did not understand the continuing nature of their personal liability under the guarantee.

For a video claim file story, watch: Dangerous assumptions

Communication issues with non-clients (22%)
You fail to communicate effectively with either other counsel on a matter or the other people on whom you rely to help you get the job done.

Claim file example
Lawyer acts both as counsel for the vendor and as escrow agent in relation to the sale of a business. The lawyer releases a portion of the escrow funds to the vendor, but the purchaser’s lawyer claims that they had agreed to extend the compliance date and that the funds ought not to have yet been released.

Simple, inadvertent, oversights break down into 3 categories:

Flawed systems (10%)
These mistakes would have been avoided through an effective, firm wide system to manage, for example, limitation dates and corporate records. 

Claim file example
Lawyer's firm acting as registered and records office for a corporate client fails to notify the client of the receipt of a Notice of Commencement of Dissolution. As a result, the company is struck.

Sloppy practices or oops's (88%)
These include the unintentional clerical errors that we make when drafting documents (26%), the mistakes that would have been avoided with a careful review of relevant file material (22%) and the mistakes that occur because we just ‘drop the ball’ and forget or overlook some step that needs to be taken (52%). 

Claim file example
Lawyer acting for the borrowers in a commercial refinancing transaction fails to attend to removing a PPSA security registered in favour of a previous lender.

Delegation without supervision (2%)
You delegate a task to an assistant or a student who makes a mistake, but only because you failed to provide proper supervision.

Claim file example
Lawyer instructs a new legal assistant to prepare a mortgage to secure a business loan, and to use a particular file as a precedent. The lawyer did not realize that the precedent had a ‘limited recourse’ clause, not applicable for this loan, and does not review the mortgage before filing. The mortgage is registered with the erroneous clause.

This relatively small risk has nothing to do with the quality of legal services you provide. These reports would have been avoided entirely if you simply had the necessary evidence to confirm advice that you gave (53%), instructions that you received (32%), or your dealings with other counsel and parties (15%).

Claim file example
Lawyer gives ILA to a client on a guarantee of his company’s debt. When the client is subsequently sued, he alleges that the lawyer failed to explain the legal effect of what he was signing. The lawyer has no record of the transaction. 

Find out even more. Learn how the 5 key causes break down for commercial lending (lender/borrower), commercial (other), corporate, securities and tax.

  Cause of loss

Subcategories of practice
for corporate/commercial

Engagement management failures

Legal issues
failures

Communication
failures

Oversights

No trail

Commercial lending - lender

19%

19%

13%

45%

4%

Commercial lending - borrower

34%

14%

15%

32%

5%

Commercial - other

27%

21%

16%

32%

4%

Corporate

24%

21%

10%

42%

3%

Securities

44%

23%

10%

22%

1%

Tax

14%

39%

11%

35%

1%

Date range: January 1, 2003 to December 31, 2017

       

Next Steps?

For the articles and publications that will help you avoid claims in your own practice, review:

Tax – risks and tips to read about GST traps for the unwary, the risky business of income tax, and property transfer tax risks
Franchises – risk and tips to read about managing the risks of a new statutory regime
Limitations and deadlines
Practice management - risks and tips
Areas of law - risks and tips

And remember, effective risk management also requires you to understand what’s covered under the compulsory Policy – and what’s not.  See Cover Pages and My Insurance Policy: Questions and Answers for more information.

 

Last updated: June 2018