He sums up the challenge facing solicitors well in two sentences.
We are a sector being squeezed like no other but for whom there is absolutely no sympathy because of how we’re perceived. What we need to achieve long term is to remind people we are composed of more than partners for property developers; we should take pride in our profession and make it worthy of respect and trust.
Legal costs in Ireland are high, yet the Minister for Justice could, overnight, activate an existing change to the law which could have a significant impact on such costs.
The legal professions are saddled with most of the blame for the high level of costs, but some of the problem is structural: as a rule of thumb, higher courts involve more work and higher costs. This is particularly the case for cases taken in the High Court. So: why not take a case in a lower court?
Dublin’s Four Courts, nicknamed the Four Goldmines by the Phoenix Magazine, gets its name from the four types of court that historically sit* there. Each court has different jurisdiction: its territory, so to speak. [* TJ McIntyre reminds me that the Four Courts gets its name, of course, from the courts that used to sit there (Chancery, King’s Bench, Exchequer and Commons Pleas) rather than the current varities]. The four courts of the Irish justice system are:
The District Court is the lowest court, with jurisdiction to deal with relatively minor, non-jury, criminal trials and civil cases up to a value of €6,349. There are 23 districts in the State (West Limerick is in District 13). The Small Claims Court is part of the District Court.
The Circuit Court deals with appeals from the District Court, more serious criminal cases and civil cases up to a value of €38,092. There are eight circuits in the State (Limerick is in the South Western Circuit).
The High Court is one of the two constitutional courts (see article 34 here) and has jurisdiction to hear all civil cases of whatever value. The Central Criminal Court is, in fact, the High Court when hearing criminal cases and it deals with the most serious criminal offences (there are a number of other special purpose courts). It may sit as a divisional court with three judges, as it recently did in Dellway Investment Limited & Ors v. NAMA & Ors (a.k.a. McKillen v. NAMA).
The Supreme Court is the second constitutional court and is the court of final appeal. Cases generally cannot be started in the Supreme Court and can arrive there only on appeal.
Anyone who has been involved in High Court litigation will know that it is generally an intensive and expensive undertaking. Yet, if you have a civil case seeking damages over €38,092, you have no option but to start your case there (except in the rare circumstances where both sides agree to the case being heard in the District Court with unlimited jurisdiction). The hierarchy of courts involves a hierarchy of fees, and some parties may find that their potential claim falls into the jurisdiction of the Circuit Court which may carry a risk of unsustainable fees. It is not uncommon to find claims of €10,000 or more taken in the District Court in the knowledge that only €6,349 can be recovered.
Given the very low thresholds at which cases must be initiated in the Circuit and High Courts, why not just increase the jurisdiction of the District and Circuit Courts? In fact, the Government did this in the Courts and Court Officers Act 2002, 8 years ago. Unfortunately, it is not unknown for recent governments to enact legislation but never commence it (meaning it is not operative) and sections 13 and 14 of the 2002 Act are a case in point. They provide that:
The jurisdiction of the District Court be increased to €20,000.
The jurisdiction of the Circuit Court be increased to €100,000.
As of 1st September 2004, the Minister had decided to await the experience of the recently established Personal Injuries Assessment Board and to assess the proposed increase in the light of that experience. The final report of the Motor Insurance Advisory Board recommended that the current limit not be increased, other than to express the figure in a convenient euro amount.
The MIAB’s position is that increasing the jurisdiction of the lower courts leads to inflation of personal injuries awards. Given the existence of the now well-established Injuries Board, however, why should jurisdictional increases be held up because of insurance industry concerns about a single type of case?
Making the change would have inevitable consequences for all three lower courts, and while the High Court might have its workload reduced the Circuit and District Courts would certainly require additional resources. However, it would appear to be a change that is long overdue and, given the IMF’s interest in legal costs (see p.14 of the EU/IMF Programme of Financial Support for Ireland),* one which that organisation could easily direct the Minister to make.
*Eoin O’Dell‘s article in yesterday’s Sunday Business Post outlines reforms of the Irish legal professions proposed some years ago and which are now “required” to be implemented by the IMF/EU programme. If these are implemented in the relatively short timeframe of the programme, they would represent something of a Big Bang for the professions.
Some major insurers, like Quinn and RSA, have left the market this year. The former was forced to leave the UK solicitors’ market earlier in the year as a result of its administration by the Irish Financial Regulator. However, in the past few days, two new entrants have been approved by the Law Society, suggesting that competition still exists and UK insurers see an opportunity to pick up new business. The full list of approved providers, including those not renewing cover this year, is available here.
Until last year, the SMDF was the largest insurer of solicitors and is a “for solicitors, by solicitors” organisation. However, it emerged in 2009 that the organisation suffered huge financial losses and subsequently lost around half of its customers. The SMDF benefits from a loan guaranteed by the Law Society, but that guarantee runs out next year so it remains to be seen what will happen if more customers are lost, as seems likely.
The rumour mill suggests that the huge surge in premiums has not ended for all solicitors. The premium for many firms, even small ones, can be the equivalent of an annual wage, or more.
29 November 2010: Existing insurance cover for all solicitors expires tomorrow (30 November 2010). As solicitors are required to have insurance in place as a condition of practice, this should mean that anyone without cover on 1 December 2010 has to close their doors. The Assigned Risks Pool (ARP) provides insurance to any solicitor unable to obtain cover on the open market, but the cover obtained is more limited than the minimum terms and conditions of insurance for solicitors and, obviously, significantly more expensive. Last year, many were faced with the theoretical prospect of closing the doors as insurance companies had not processed all applications and supplied quotes in advance of the renewal deadline and, to further add to the sense of crisis, the ARP was suspended. However, such solicitors were assured that insurance would be backdated to 1 December 2009 (ignoring the regulatory requirement to have it in place). This year, the ARP has been renewed and it would seem from this email that anyone without renewed cover tomorrow should apply to enter the ARP, even if as a temporary measure.
Solicitors in the UK appear to be going through a similar insurance crisis to that which hit their Irish colleagues last year. The Lawyer reports that this year’s renewal process, now in its final stages, will be “tougher than ever.” Ironically, it seems part of the difficulty has stemmed from the Irish Financial Regulator’s administration of Quinn Insurance, which had been aggressive in its attempts to into capture some of the UK market.
Meanwhile, the SMDFrecently reported a deficit of €15.9 million for 2009. Last year, the Law Society told solicitors that the SMDF insured over 60% of the market. Accordingly, emergency measures were taken to support the SMDF and to avoid the bulk of the profession facing a lack of cover.
Today, the Law Society informed solicitors that XL, a new entrant to the insurance market in 2009, captured 28% of the market for 2010 (1% more than the SMDF). Therefore, it would seem that the SMDF has lost over half of its customer base in one year, most of them being lost to XL.
It had been hoped that the changes made to the PI insurance system last year would lead to greater stability this year, but it remains to be seen what effect the dramatic loss in customers will have on the SMDF.
The announcement by the Minister for Justice that he intends to transfer the operation of the criminal legal aid system to the Legal Aid Board might seem like it makes sense, but is likely to result in delays and possibly higher costs.
Currently, the Legal Aid Board administers the civil legal aid scheme and deals almost exclusively with family law matters. It meets clients and assesses their means. Often the Board handles the client’s case itself from one of its law centres. In some cases, the Board refers the client to a private solicitor and issues a certificate to cover costs (with the Board paying the solicitor’s fees according to set rates). Due to increased demands on the system (as noted by the Minister himself), it appears to be increasingly common for the Board to refer clients to private solicitors.
The criminal legal aid scheme is administered by the Courts Service, with an application being made to the judge who first deals with an accused person. The assessment of means is done by the judge and can often be far less formal than that applied by the Board. For example, if the judge is told that the accused is not working and has no significant assets, (s)he may issue a certificate immediately to cover the costs of the defence. (There is no connection between the State funded legal aid schemes and the volunteer-led Free Legal Advice Centres.)
Having the two systems in operation may seem an unnecessary duplication, but there are differences in the demands made of each. Generally, criminal cases will move faster and involve more urgency. The Minister says the change is aimed at cutting costs and improving efficiency, so it is interesting to read the reaction of Frank Brady, director of legal aid at the LAB:
“There is no expertise and very little knowledge of criminal legal aid [in the Legal Aid Board]. The two systems are fundamentally different, and the board will face a difficult learning curve. Nevertheless, the board would welcome the opportunity to play a lead role in the future development of the criminal legal aid service.”
In the long run, streamlining the two schemes might make sense, but this story does not engender optimism. Rather, it appears we are faced with a rash decision to be rushed through the Oireachtas, followed by a period of disruption and delay.
Apparently, solicitors can break into these careers if they can just escape their “blinkered mentality”.
Further suggestions are provided in a box headed “Alternative areas to think about” which lists a diverse range of possibilities, some of which seem non-existent and most of which are another word for “solicitor”.
The final suggestion, “commission of inquiry”, is interesting. While I thought the Society might be eager to dispel any public perception that tribunals are gravy trains for lawyers, one hopes the forthcoming information evenings will advise on how best to encourage the Government to establish some more such inquiries.
In relation to the SMDF’s case against Bloxham Stockbrokers, pleadings have closed and discovery is being finalised. It is expected that the case will be listed for hearing in late 2010 or early 2011. A similar case taken against Bloxham by a former director of the SMDF has been settled.
The accounts show a deficit of €15.9 million. This amount primarily consists of a realised loss on disposal of investments of €14.3 million. While the SMDF’s losses on the Saturn bond obtained from Bloxham were known, less known was the fact that, in addition to realising a loss on that bond, “the company disposed of Irish equities, which resulted in a net realised loss of €6,195,182.” The accounts record a further unrealised loss on financial assets of €228,720.
The company’s auditors were unable to form an opinion as to whether the company’s financial statements give a true and fair view of the company’s affairs or whether they had been properly prepared in accordance with the Companies Acts. This is due to uncertainty caused by the availability of funding, notwithstanding the assistance provided by the Law Society.
The solicitors’ profession faced a situationin late 2009 which was not dissimilar to that faced by the Irish banking sector in September 2008. I wrote about it in January 2010, outlining the chain of events that led to the Law Society guaranteeing a commercial loan to an insurance broker. The guarantee was conditional on the Law Society receiving counsel’s opinion to the effect that they could give such a guarantee and that opinion was obtained. Some of us wondered if there were not legal or regulatory issues which could affect this guarantee, given by a de facto State agency to a private company with more than half of the PI market.
the difficulties experienced in the market for professional indemnity insurance for solicitors in 2009;
the resolution of the Law Society to guarantee repayment of a loan facility to be obtained by the Solicitors Mutual Defence Fund (SMDF) from a commercial lender; and
all communications to and from the Law Society, the SMDF and other insurance companies, underwriters and brokers in relation to same.
The Department of Finance had nothing. Some weeks after a decision was due I received 10 documents, all falling with the third category sought (the Department does not hold any records under categories 1 and 2).
The documents primarily consist of briefing notes for internal use within the Department of Justice, most of which reproduce or paraphrase the contents of the first note. They suggest that the Law Society, which sets the rules for the professional indemnity insurance (PII) scheme, operates independently of Government. Changes to the PII regulations do not require the Minister’s agreement but he can direct the Law Society to amend the regulations. For example, one note for the Minister says that although the Council of the Law Society met to consider the issue in August 2009 “we have no information on what transpired.”
The following points are of interest:
Ken Murphy, Director General of the Law Society, sought a meeting with the Minister for Justice in October 2009. This request is referred to in internal Department communications as relating to a briefing “on the looming ‘crisis'” in the PII scheme. The meeting took place on 15 October 2009.
The Minister indicated that the then Minister for Enterprise, Trade and Employment should be notified of the situation. A draft letter was prepared, but it is not clear if the letter was sent. The draft letter stated:
In the event that the measures already taken by the Society, and the additional measures planned, do not sufficiently address the concerns of insurers, there may be proposals to suspend or abolish the compulsory nature of the PII scheme for solicitors. I have indicated to the Society that, in the interest of protecting clients, I would not support such a proposal.
A later briefing note says that solicitors who have difficulty in paying their premium were told by insurance companies that they would “source the money for them (presumably involving a commission).” It also says that solicitors were being told that conveyancing should not make up more than 30% of their practice (hardly an issue for most solicitors at present).
The last document, from February 2010, states that 18 firms had failed to notify the Law Society of their insurers by 1 February. “This is 0.8% of the 2,249 firms on record and is on a par with previous years.”
The documents are interesting in that they show the extent to which the Law Society runs the show for PII, with the Government taking a detached role. They also show that the Minister is firmly of the view that abolishing compulsory PII is not an option.
However, the most interesting aspect of the documents is the lack of any reference to the Law Society’s provision of a guarantee in favour of the SMDF. Therefore, it remains unknown what the attitude of the Department of Justice and other insurance companies is to that arrangement.
One of the measures adopted by the Law Society last year was to exclude from PII cover the giving of undertakings by solicitors to financial institutions in commercial property transactions. However, additional top-up insurance could be purchased to cover such transactions. This morning, the Law Society announced the expected ban on giving such undertakings, to come into effect on 1 December 2010 (the first day of the new insurance year).
[T]he experience of the Society’s regulatory committees, in particular the Professional Indemnity Insurance Committee, in recent years is that the banks’ ad hoc ‘system’ (with no agreed basis or consistent usage) under which solicitors gave certain types of undertakings in order to complete commercial property transactions exposed the public interest to an unacceptable level of risk. It was essentially flawed and beyond regulatory control with a range of damaging consequences for the public interest, as experience has demonstrated.
The frailties of the commercial undertakings ‘system’, which has been the subject of critical comment by members of the judiciary, has been reviewed by the Society in the light of its capacity to facilitate reckless lending and fraud – with massive losses to lenders as in the Lynn and Byrne cases. The conflict of interest in which solicitors can find themselves, acting for both the borrower and the lender in the same transaction, is at the heart of the problem.
During the boom years solicitors were pressurised, both by borrowers and by lenders, to give letters of undertaking to lenders in commercial property transactions. This frequently led to situations where the undertakings were not complied with and many substantial loans were not properly secured.
An essential part of any banking system is to ensure that proper security is in place where loans, particularly of a substantial nature, are advanced. The risk of failure in this regard is greatly reduced if lenders retain their own solicitors to take responsibility for ensuring the security is put in place.
I wrote in January about the Law Society’s secret arrangement to guarantee a loan in favour of a private insurance company, the SMDF, to make up for huge losses suffered by that company as a result of a disastrous investment. The Society has now released its 2009 financial statements and only one, brief reference is made to the guarantee, including the news that it has not yet been finalised.
That January post also mentioned massive losses suffered by the Society in a disastrous invesment of its own and the summary of the 2009 statements distributed to solicitors inlcludes the following disclosure:
[The Society’s after tax surplus for 2009] includes an exceptional loss of €480k, representing a further write down of the value of the Benburb Street site in 2009. The write down required by our auditors in 2008 was €14.7m.
In 2006 the Society appears to have been gripped by the property mania affecting the nation and this property was bought for unspecified and unexplored development purposes, at a cost of €22.4m. In 2009 it was revalued at around €7.7m and the 2010 write down brings it to €7.22m.
The then-President of the Law Society said at the time of the purchase:
I believe that the great majority of solicitors today, and in the future, will view the purchase of this Benburb Street site, like the purchase of Blackhall Place, as a wise and practical decision made in the long-term interests of the profession.
In 2010, the Society says of the €15.2 million lost:
These write downs must be put in the context of the Society never planning to sell the site. Importantly, the site is free of debt.
I don’t know which one of those sentences is worse.