Economic downturns: Managing risk in a troubled economy

If you practise in any one of these commercial areas, your services are a necessary component of your client's commercial venture. As the economy works against the success of that venture, you are first on the firing line in the event of failure. Even if you practise in a non-commercial area of law, appreciate that financial distress will cause clients — and others — to re-examine every step taken.

Take the time you need to think through the legal issues and strategies necessary to achieve your client's ends. Be sure to get clear, specific instructions. Ask, don't make assumptions, about your client's intentions or the factual matrix. Review documents and file materials carefully to avoid missing a critical fact or issue. Remind yourself and your staff to take a thorough second (or third) look for inadvertent clerical errors before any document you draft is finalized. Use the Law Society's practice checklists and keep your personal and firm-wide systems in good working order to avoid "dropping the ball."

Not only does writing help avoid misunderstandings, but it can give you the necessary evidence to defend your position.

Our claim files show that your ability to act competently — and in a timely manner — is affected by stresses in both your personal and work life. And if you are concerned about your staff's ability to manage their file load or any particular file — for any reason — intervene before delay leads to a real loss.

Incorporate into your practice the systems, practice checklists and best practices that will help you get things done in time.

Find concrete tips to help you avoid the mistakes that might benefit a party seeking to escape a contract in our real estate risk management material. Bullet-proof service is your best protection when prices are falling.

Business, investment and accounting advice and services may become more critical to your client in risky times. This step will ensure that your client's needs are met, and allow you to effectively pass the risk of any poor results to another party. As always, be sure to clarify in writing the division of responsibilities between you and other professionals.

The independent legal advice checklist will help remind you to ask the questions necessary to make sure that the client understands the consequences of the matter, while also serving as a record of your meeting. For additional ILA tips and suggestions, read the annotated copy of the checklist and Giving independent legal advice? Stop. Read this first.

Retainer letters clarify what you will and will not do and pass the risk of what you won't do back to the client. Non-engagement letters for prospective clients for whom you have provided some preliminary advice confirm that you are not taking any steps until you are properly retained. Disengagement letters, including warnings on deadlines and any outstanding matters that may affect the client, confirm that you have withdrawn from an ongoing legal matter. If you're retained on a new matter for an existing client, send an abbreviated letter that still outlines what you will and will not do, and any other critical aspects of the retainer. If another professional or specialist is involved, such as an accountant in a tax-driven scheme, confirm in writing to both the client and the other professional the separate obligations and responsibilities of each party. Sample letters are available here.

Good rapport may be your best "insurance" against claims by an unhappy client. Establish it from the outset and nurture the relationship.

Explain at the beginning of the retainer how you will keep time and how you will bill your client. Send fee accounts as frequently as your comfort level allows or your retainer agreement permits. If the matter is proving more expensive than expected, discuss that with your client. Do not let unpaid fees continue to accrue.

Prospective clients desperate for a miracle or who have been through several lawyers may have expectations that simply cannot be met. Clients who are needy, controlling or unreasonably demanding of your time without reward may blame you for an unsuccessful outcome. Practise defensive lawyering, even if a client may not seem risky. Advise the client about the potential downside of any decision, and provide enough information to allow your client to make an informed decision. Don't be afraid to give bad news, and put it in writing. Document everything — your advice, your client's instructions, phone calls and voice mails. Retain e-mails and any other e-communications. Copy your client on all correspondence — yours, and letters received by others. And if the relationship breaks down, it may be advisable to end the retainer.

Be aware of the risk inherent in third parties who are involved with your client's transaction but have no separate representation. If the investment or commercial venture fails, third-parties who suffer may target you. Be alive to this risk and take protective steps, such as confirming in writing that you do not act for anyone but your client and recommending independent legal advice, as needed. Your actions may create a duty when none had existed, so be sure to act in a manner consistent with your position that you represent only your client. If you do receive funds in trust, be crystal clear about the terms upon which those funds are held and make sure they are met before the funds are paid out.

Appendix C of the Code of Professional Conduct sets out the situations in which a lawyer can act in a conflict, but these exceptions are quite narrow. If you cannot act, explain why.

...either save the parties money by simply "papering the deal" or compromise your ethical duty in order to keep a client who is threatening to leave if you will not act for everyone. Individual interests are compromised when a lawyer attempts to serve more than one master, and you risk a claim once the individuals involved lose money and are able to argue that you were not focused exclusively on their interests.

..., then look for ways that you can control the overall costs and avoid unnecessary duplication without compromising your client's interests.

Fraudsters present themselves as legitimate clients in need of legitimate services, so keep your antennae up, especially if the matter involves a transfer of funds from a third party — or from you — to an unfamiliar client. Ask questions. Use critical thinking in examining all aspects of the transaction. Learn the "red flags" of potential frauds and the fraud prevention steps that you can take here.

If you are allowing use of your trust account simply as a conduit for funds, you are engaging in a highly risky activity. As you are not providing legal services, there is no defence or indemnity coverage available to you under the insurance policy for any losses.

Rule 3.2-7 of the Code of Professional Conduct highlights a lawyer's duty to refrain from any activity the lawyer "knows or ought to know" assists a fraudulent enterprise, and the commentary explicitly warns a lawyer to be wary of clients who promise third parties unrealistic returns on investments placed in trust with the lawyer. Rule 3.2-8 deals specifically with the lawyer’s duty in relation to dishonesty or fraud when the lawyer’s client or employer is an organization.

These Notices help to alert lawyers to new frauds as they're discovered, and e-mail means timely receipt. Read and share them with your staff.

It's wonderful if your book-keeper is a grandmother whom you've employed for thirty years or your partner is held in the highest regard in the legal community. However, you cannot abdicate your own personal responsibilities in relation to trust funds on the premise that you trust that each will always do what is right. Remember your own duties and make sure that only you discharge them. Complete information on your professional obligations relating to trust accounting is available here.

Implement appropriate checks and balances, including internal audits. Use the sample checklist of internal controls and contact Trust Assurance for more information, as well as best practices relating to trust assurance.

Silos work best for wheat, not people. Pay attention to your colleagues and staff, including their mental well-being. If you think someone needs help, contact the Lawyers' Assistance Program (604-685-2171 or toll-free 1-888-685-2171).

For example, what is the potential financial fall-out from your biggest file — the client with the most to win, or lose, as a result of your services? The adequacy of insurance depends, in part, on the nature of a lawyer's own activities, as well as those of partners, associates and employees and the potential impact of those activities, in a worst case scenario, on clients and third parties. Remember that the compulsory policy provides a limit of $1 million for all claims arising out of either a single error or numerous related errors, and this limit is eroded by defence costs. For more information, see My Insurance Policy: Questions and Answers and Cover Pages: A guide to insurance for private practitioners.

Excess insurance extends the limits of coverage offered by the compulsory policy, and may pick up risks not covered by it. It is available on the private market. Consult a broker experienced in lawyers liability insurance to help assess your own needs, and determine if excess insurance is appropriate for your firm. Find out more here.