Risks remain after Law Society guidance on solicitors' undertakings
As solicitors, we are taught from an early stage in our careers that the word "undertaking" should set alarm bells ringing. When an undertaking 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 fraught with risk – but this is also true of many other aspects of a solicitor's retainer. Why, then, do solicitors need to treat this area with particular caution?
The Law Society has published new guidance on undertakings and although it serves as a reminder of the significance of undertakings as a regulatory issue, it does not resolve the current uncertainty over their legal enforceability. This issue was considered by the Supreme Court in July 2021 in Harcus Sinclair LLP v Your Lawyers Ltd2, and this article will discuss the extent to which the new Guidance addresses the inconsistencies highlighted by Harcus and gives adequate certainty for practitioners and clients. You can read RPC's commentary on the Harcus decision here.
Solicitors as "officers of the court"
The solicitor's role as an officer of the court originates in medieval times3. Throughout English legal history the role of the solicitor has been subject to the supervisory control of the courts. The modern justification for this is that those who come into contact with the legal system (which is to say, clients) must be able to have the utmost confidence in those entrusted to guide them through it. As Smith LJ put it in Briggs and another v The Law Society4,
"Undertakings are the bedrock of our system of conveyancing. The recipient of an undertaking must be able to assume that once given it will be scrupulously performed. If property purchasers and mortgage lenders cannot have complete confidence in the safety of the money they put into the hands of a solicitor in the course of a property transaction, our system of conveyancing would soon break down. The breach of an undertaking given by a solicitor damages public confidence in the profession and in the system of undertakings upon which property transactions depend."
The corollary of this strict professional duty is that the court may order a solicitor to perform their undertaking. The recipient of the undertaking need only make an application for specific performance and the court will, if satisfied that the undertaking has been breached, exercise its inherent jurisdiction to hold the solicitor to their promise. If a solicitor then fails to comply they may be in contempt of court.
As the Supreme Court held in Harcus, "the underpinning of those undertakings by the availability of rapid summary enforcement under the court's supervisory jurisdiction has been a significant buttress for their reliability… the mere existence of that ready and swift means of enforcement [makes] it inherently unlikely that a solicitor would fail to comply"5.
The inherent jurisdiction is intended to provide a route for clients to enforce the terms of a solicitor's undertaking. In practice, though, there are significant gaps in this area of law, which Harcus highlighted and the new Guidance does little to resolve.
Gaps in the inherent jurisdiction – LLPs and other corporate entities
The point in Harcus that has generated the most discussion and a clamour for Law Society guidance is this: does the inherent jurisdiction apply to undertakings given by a solicitor, for and on behalf of their firm which is an LLP or limited company (and therefore a distinct legal entity)?
The answer, it seems, is no. The Supreme Court highlighted that even though it may be comprised of a multitude of individual solicitors, an LLP or limited company law firm is not itself an officer of the court. This means that an undertaking expressed to be for and on behalf of an LLP or limited company cannot be enforced under the inherent jurisdiction.
So, unless the undertaking is enforceable in contract (and many undertakings are for no consideration), the recipient of the undertaking has no way of enforcing it against the undertaker, purely as a result of the law firm's business structure – which some would describe as a somewhat arbitrary distinction, from the point of view of clients (for whose benefit the inherent jurisdiction was established).
Risks for clients and lawyers
There is accordingly a significant gap in the enforceability of undertakings upon which important financial transactions and litigation have come to depend. Uncertainty creates risk, and the risk now is that clients who receive undertakings by an LLP / limited company will wrongly assume that because the undertaking comes from a solicitor, it will automatically be subject to the inherent jurisdiction.
The risk for lawyers representing that recipient – e.g., a conveyancing solicitor who acts for the purchaser and receives an undertaking from the seller's solicitor over a mortgage discharge – is that they fail to advise their client that the undertaking is not summarily enforceable because it is on behalf of an LLP/limited company. If this leaves the client without a remedy for breach of the undertaking, this failure of advice could amount to negligence. These risks are amplified by the fact that LLPs and incorporated companies make up around 68% of all SRA-regulated firms6.
The Law Society's guidance does little to reassure the recipients of undertakings, and the Supreme Court expressed "considerable reluctance" that it felt unable to address this lacuna by expanding the inherent jurisdiction (although interestingly it did not rule out doing so in future7).
How can lawyers minimise the risks of dealing with undertakings?
On the basis that legislative intervention to address this loophole is unlikely in the near future, what can solicitors do to ensure they are not exposed to claims/complaints by clients disappointed by an unenforceable undertaking?
Read the Harcus case and the Law Society's guidance in detail. Every solicitor, and everyone working for or with solicitors, should be familiar with the law on undertakings and should know when an undertaking will be subject to the inherent jurisdiction. The Law Society's recommendations include:
- Ensuring that your firm has policies and procedures in place to deal with requests for personal undertakings (as opposed to those on behalf of the firm);
- Considering whether your firm's level of professional indemnity insurance will cover any undertaking given;
- Ensuring that the firm clearly documents its advice to clients about the inability to enforce undertakings in certain circumstances;
- Including a limitation in the firm's terms of business regarding the extent to which undertakings in its name can be enforced, and ensuring this is flagged to each individual client (e.g. in the client care letter); and
- Training staff on the law, regulation and the firm's internal response to the implications of Harcus.
If you are acting for the recipient of an undertaking, before that undertaking is given you should ascertain whether the undertaker is an individual solicitor / traditional partnership (which has no distinct personality from its individual partners), or an LLP / limited company, and it is crucial that you advise your client what this distinction means in practice.
You could seek a personal undertaking from the individual solicitor on the other side (although bearing in mind the Law Society guidance discussed above, the undertaker is unlikely to agree). Another option would be to provide for consideration in the wording of the undertaking, to give it contractual weight, but again this is subject to the other side's agreement. Most important is that clients are given clear advice on whether the undertaking will be summarily enforceable.
RPC's market-leading solicitors' liability team is more than happy to advise law firms and professional indemnity insurers on steps that can be taken to minimise these risks.
1 https://www.lawsociety.org.uk/topics/regulation/professional-undertakings
3 See paragraphs [95] – [100] of Harcus
4 [2005] EWHC 1830 (Admin), [2005] 7 WLUK 549 at [35]
5 Harcus at [127]
7 Harcus at [138] to [143]