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The Cost of Compliance – getting it wrong

12th June 2014

It is no secret that residential conveyancing files are a breeding ground for claims against legal services providers. In fact, when Lockton Companies LLP  (one of the leading professional indemnity insurance brokers) conducted an analysis of the claims (both paid and reserved) across its book of solicitor clients over a four year period from 2008 it concluded that a staggering 43% of claims arose from this work type alone!

With this in mind we thought it appropriate look at a residential conveyancing claim and see what lessons can be learned. The facts behind the recent Court of Appeal decision in Darby and Darby (a firm) v Helen Joyce are an excellent example of how a firm can be caught out, not by getting the law wrong, but by a catalogue of preventable errors that on this occasion led not only to a significant claim but also withering criticisms from the appeal judges.

The facts

The case arose from a solicitor’s (Mr D) failure to advise his client (Ms Joyce) that the property she wanted to purchase was burdened by a restrictive covenant that prevented any change of use or external alterations without her neighbour’s permission and is indicative of the type of oversight that every conveyancer hopes they will never have the misfortune to make. The purchase was completed in June 2007 and a few months later Ms Joyce commenced substantive external alterations to the property, only to ultimately find herself at the wrong end of an injunction.

Prior to the injunction being served, Ms Joyce had informed Mr D that her neighbour had objected to the works she was carrying out and had informed her of the existence of restrictive covenants affecting the property. Mr D agreed to look into the matter and extract the necessary consent from the neighbour to carry out the works. This may sound like a sensible approach to find a resolution, keep Ms Joyce happy and not unduly delay the works. However, Mr D should have appreciated that his failure to advise on the restrictive covenant meant that there was a potential negligence claim brewing, and if he continued to represent Ms Joyce during the dispute with her neighbour an ’own interest‘ conflict would arise. Furthermore, Mr D failed to keep attendance notes of his meetings with Ms Joyce so there was no contemporaneous record of discussions (how many times are we all reminded of their importance!) which was referred to by the court as an ’unprofessional omission‘. In fact Mr D’s overall conduct was referred to as a ’professional disgrace’ which is regrettable considering that each oversight by Mr D could have been easily preventable. It is easy to point the finger after the event but we should all take the opportunity to ask ourselves if over familiarity with a particular type of work has fostered a culture of short cuts.

Significantly in this case, and central to the Court of Appeal’s decision to substantially reduce the amount of damages awarded in the first instance) was that Mr D was found to have advised Ms Joyce to cease works until the matter was resolved and she had wilfully ignored his  advice thus exacerbating her losses and leaving her disgruntled neighbour with little option other than to apply for an injunction. For those of you interested in how much this all ended up costing Mr D (this was an appeal against the amount of damages awarded by the court of first instance) the court decided that his firm should pay:

  • the difference (if any) between the price paid for the property and the value of the property with the restrictive covenants when she purchased it; and
  • consequential loss i.e. the client’s wasted expenditure on the works to the property (which had not added value to the property but were to the client’s personal taste and requirements).

Whilst the precise figure of damages is still to be assessed, and the final figure will be substantially reduced from the £186,007 originally awarded by the court in the first instance, the final figure is likely to be a bitter pill to swallow and easily creep into the tens of thousands. Certainly not a conversation anyone would like to be having with their fellow partners when it comes to paying out the excess on the insurance policy!

What can we learn?

This case is a reminder that you never underestimate the potential for an avoidable error to unleash a chain of expensive consequences. Remember this case did not come about because Mr D got the law wrong. He knew exactly what a restrictive covenant was he just failed to spot it and advise on it.  There can be no doubt that a claim of this nature, should it creep out of the woodwork, will impact on a firm’s risk profile, batter its excess and affect its professional indemnity insurance premiums moving forward. With this in mind, the following practical tips should be considered:

  • Always tell clients about the existence of covenants and what they mean. If Mr D had followed the breadcrumb trail (the covenant was referred to in the Land Registry record – but the detail was in another document) it is quite likely Ms Joyce would not have proceeded with the purchase and been grateful to Mr D.
  • Use checklists where appropriate. No matter how long you have been undertaking this type of work, the routine nature of some transactional work means that things get overlooked. This is nothing to do with how clever people are or how experienced – simple human error catches us all out from time to time.
  • Have a procedure in place for spotting and managing own interest conflicts. Never allow the need to keep the peace or save face with a client to detract you from your professional obligations. If there is an own interest conflict it is because your ability to act in the best interests of your client is compromised – the odds are against you.
  • Keep attendance notes! Incorporate them into your file audit procedure and actively police your policy. Remember that the Lord Justices in this case agreed that failure to make them was an “unprofessional omission”.

Above all, remember that successful risk and compliance is not really about checklists and quality standards. These are risk management tools and only work if they are integrated into your risk management culture. Effective risk management is about identifying risks; managing and mitigating the likelihood of risks occurring; and recognising that everyone within your firm has an obligation to help meet objectives.


Michelle Garlick is head of Compl-i, a consultancy service for law firms and author of the Law Society’s COLP Toolkit and a member of Weightmans LLP’s Legal Services Group which is dedicated to providing compliance advice and support to lawyers, helping them navigate the legal and regulatory maze. Please contact Michelle at michelle.garlick@weightmans.com if you feel that your business would benefit from bespoke risk and compliance support.

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