As lawyers, we are taught early in our careers that the word “business” should set off alarm bells. When a commitment is mentioned, we are often encouraged to refer it to a supervisor and/or the Risk team. It is true that giving or receiving an undertaking can be risky, but so are many other aspects of a lawyer’s retainer. Why, then, should lawyers treat this area with particular caution?
The Law Society has issued new guidelines on recognizances and while they emphasize the importance of recognizances as a regulatory matter, they do not resolve the current uncertainty as to their enforceability. This issue was considered by the Supreme Court in July 2021 in Harcus Sinclair LLP v Your Lawyers Ltd.2and this article will discuss the extent to which the new guidance corrects the inconsistencies highlighted by Harcus and provides adequate certainty to practitioners and clients. You can read RPC’s comment on the Harcus decision here.
Lawyers as “officers of justice”
The role of the lawyer as an officer of justice dates back to medieval times3. Throughout English legal history, the role of the solicitor has been subject to the supervisory control of the courts. The modern rationale for this is that those who come into contact with the justice system (i.e. the clients) must be able to have the utmost confidence in those responsible for guiding them through it. As Smith LJ said Briggs and another against the Bar4,
“Covenants are the foundation of our conveyancing system. The beneficiary of a covenant must be able to assume that once given it will be scrupulously performed. While property buyers and mortgage lenders cannot have complete confidence in the security of the money they put in the hands of a notary in a real estate transaction, our system of transferring property would soon collapse Breach of a covenant made by a notary undermines public confidence in the profession and in the system of commitments on which real estate transactions depend.
The corollary of this strict professional obligation is that the court can order a lawyer to carry out his engagement. The beneficiary of the recognizance need only bring a claim for specific performance and the court, if satisfied that the recognizance has been breached, will exercise its inherent jurisdiction to compel the attorney to keep his promise. . If a lawyer fails to comply, he may be in contempt of court.
As the Supreme Court held in Harcus, “the foundation of these undertakings by the availability of speedy summary execution within the scope of the court’s reviewing jurisdiction has been a significant asset to their reliability…the mere existence of this quick and ready means of execution [makes] it is inherently unlikely that a lawyer will not comply”5.
Inherent jurisdiction is intended to provide clients with a means of enforcing the terms of a lawyer’s engagement. In practice, however, there are significant gaps in this area of the law, which Harcus pointed out and which the new guidance does little to address.
Gaps in Inherent Jurisdiction – LLPs and Other Bodies
The dot in Harcus which has generated the most discussion and requests for advice from the Law Society is: does inherent jurisdiction apply to engagements made by a lawyer, for and on behalf of his firm which is an LLP or a limited liability (and therefore a separate legal entity)? ?
The answer, it seems, is no. The Supreme Court has pointed out that while it may be made up of a multitude of individual attorneys, an LLP law firm or limited liability company is not itself an officer of the court. This means that a covenant expressed for and on behalf of an LLP or limited liability company cannot be enforced under inherent jurisdiction.
Thus, unless the covenant is enforceable in the contract (and many covenants are unrequited), the recipient of the covenant has no means of enforcing it against the contractor, solely because of the structure business of the law firm – which some would characterize as a somewhat arbitrary distinction, from the perspective of the clients (for whose benefit inherent jurisdiction was established).
Risks for clients and lawyers
There is therefore a significant gap in the enforceability of undertakings upon which significant financial transactions and litigation depend. Uncertainty creates risk, and the risk now is that clients who receive recognizances from an LLP/limited liability company will mistakenly assume that because the recognizance is from an attorney, it will automatically be subject to jurisdiction. inherent.
The risk for lawyers representing this beneficiary – p. an assignment lawyer who acts on behalf of the buyer and receives a recognizance from the seller’s lawyer in connection with a discharge of mortgage – is that they do not inform their client that the recognizance is not summarily enforceable because it is on behalf of an LLP/limited liability company. If this leaves the client without recourse in the event of a breach of the undertaking, this failure to advise could constitute negligence. These risks are amplified by the fact that LLPs and incorporated companies represent approximately 68% of all SRA-regulated businesses.6.
The Law Society’s guidelines do little to reassure recognizance recipients, and the Supreme Court said “great reluctance” that he felt unable to fill this gap by expanding the inherent jurisdiction (although it is worth noting that he did not rule out doing so in the futureseven).
How can lawyers minimize the risks of dealing with companies?
Given that legislative intervention to remedy this shortcoming is unlikely in the near future, what can lawyers do to ensure that they are not exposed to claims/complaints from clients disappointed by an unenforceable undertaking?
Read the Harcus case and the Law Society’s advice in detail. Every attorney, and anyone working for or with attorneys, should be aware of recognizance law and should know when a recognizance will be subject to inherent jurisdiction. The Law Society’s recommendations include:
- Ensure that your firm has policies and procedures in place to handle requests for personal undertakings (as opposed to those on behalf of the firm);
- Considering whether your company’s level of professional liability insurance will cover any given liability;
- Ensure that the firm clearly documents its advice to clients on the inability to enforce commitments in certain circumstances;
- Include a limitation in the business terms of business regarding the extent to which engagements on its behalf can be performed, and ensure this is made clear to each individual customer (e.g. in the customer attention letter); and
- Training of staff on law, regulation and the company’s internal response to the implications of Harcus.
If you are acting for the recipient of a recognizance, before the recognizance is given, you must verify whether the funeral director is a sole proprietor / traditional partnership (which does not have a separate personality from its individual partners) or an LLP/limited liability partnership, and whether it is crucial that you inform your client of what this distinction means in practice.
You can request a personal undertaking from the individual attorney on the other side (although, given the Law Society guidelines outlined above, the funeral director is unlikely to agree). Another option would be to include a quid pro quo in the wording of the undertaking, to give it contractual weight, but again this is subject to the agreement of the other party. Most importantly, clients receive clear advice on whether the recognizance will be summarily enforceable.