A question of principle and public interest -- the Law Society has issued this consultation paper on a proposed rule restricting the ability of firms to sue staff for losses caused by negligence.

In June, the Law Society Council debated the proposal from the Campaign for Regulations Outlawing the Suing of Solicitors (CROSS) that a rule should be made to prohibit principals from suing staff for losses caused by negligence, except in cases of fraud or dishonesty.After a full debate the Council resolved:-- To disapprove the practice;-- That, in principle, the practice should be prohibited by rule, subject to consultation.This consultation paper explains the Council's views on this issue and asks for the views of the profession regarding:-- the question of principle -- is this proposed restriction justified in the public interest?-- some matters of detail.BackgroundThe Young Solicitors' Group (YSG) has been campaigning on this issue for many years and was instrumental in setting up the CROSS task force with the Trainee Solicitors' Group, the Association of Women Solicitors, and the Freelance Solicitors' Group.

In the past, a number of Law Society presidents and committee chairmen have deplored the practice of suing staff, but no regulatory action has been taken.

The Council's usual policy is not to interfere with firms' employment or partnership issues except where justified in the interests of clients.

Occasionally, however, issues of the wider public interest can lead to a rule which, although not directly affecting clients' interests, is right for the profession to adopt and generally in the public interest.

The anti-discrimination rule, covering dealings with staff as well as clients, is a good example.In 1998, in the face of evidence from the YSG that there had been an increase in calls from young solicitors and others facing claims, the Law Society agreed to instruct the Counsel for advice on whether the Society has the power to make the rule under its statutory rule making power, given the concerns, which had been expressed, that:-- Such a rule might go beyond the power in section 31 of the Solicitors Act to regulate 'the professional practice, conduct and discipline of solicitors';-- Cases in the past (for example, Lister v Romford Ice [1957] AC 555) have suggested that there may be public policy reasons for not fettering an employer's ability to su e, and;-- The new Human Rights Act landscape will mean that any such prohibition will have to stand up to greater scrutiny.Counsel's advice is that these concerns are overcome if there are sufficient public interest justifications.The proposed rule -- in contextBefore looking at the public interest justifications, the Council considered the problem in context.

The Council recognised that some practitioners would consider the proposed rule to be an unwarranted interference in firms' internal affairs.

Nevertheless, the overwhelming majority of Council members who participated in the debate deplored the practice, and made it clear that they would not themselves seek to recover losses from an employee except in cases of fraud, dishonesty or perhaps gross recklessness.Why is this view so common? It is probably because law is an inherently risky business.

Even if all firms of solicitors practised excellent risk management, the cost of claims against the profession would still be higher than in most other professions or other businesses.

Even in well-run practices, where the training and supervision of staff is to high standards, mistakes can be made.

All solicitors know that, at any time, they could face a claim.

That is why this profession, in its own interests as well as for public protection, has a compulsory insurance scheme which provides better cover than any other.

It is also why negligence is not a matter of misconduct.

It is why nearly all solicitors, would not, in all conscience, blame a staff member for a single mistake -- or seek to recover any losses.So, the proposed rule will not affect the day-to-day running of many solicitors' firms.

It will not affect firms' ability to have internal policies dealing with what is expected of staff in terms of good risk management.

It will not affect the ability of firms to take normal disciplinary sanctions against staff members who breach written policies on risk assessment.

However, it will prevent the risk takers in a solicitor's business, who alone have the ability to take decisions about levels of insurance, from seeking, or threatening, to recoup that loss from employees who may have made no more than a mistake, but have no means of insuring themselves against that liability.Accordingly, although the new rule may appear to be framed as an absolute prohibition, affecting all principals, in reality it is unlikely to impact on those firms whose business success is being founded in good employment practice and who would not normally contemplate pursuing employees for indemnity in respect of negligence.

In this way the proposed rule is both proportionate and targeted.

As required by public policy considerations, the rule will not apply in cases of dishonesty, fraud, bad faith, or gross recklessness.Is there really a problem?The YSG identified an increase in calls from solicitors concerned about this issue at a time when the cost of indemnity was increasing, and the rules relating to claims loading were strengthened.

This was also at a time when claims against the profession were high.The examples provided to Council were, in some cases, deeply disturbing, as the threat to sue nearly always arose in cases where there had been a failure in the firm's supervision or management responsibilities.

The numbers known about are not great, but concerns remain that other instances do not come to light because staff fear the consequences of raising the issue.

However, the Council does not believe that the case for a rule rests on the number of cases.

The fact is that the cases which have arisen have created a high level of concern which the CROSS groups consider needs to be tackled in the interests of the profession as a whole.The public interest argumentsThese considerations, outlined above, informed the Council's view that the rule would not be, in practice, over-regulatory or an unwarranted interference in firms' affairs.However, it is also necessary to address the public interest arguments for the rule.

The Council believes the public interest arguments justify the proposed rule, bearing in mind that it is limited to situations involving negligence, rather than fraud, dishonesty or gross recklessness.The public interest in a proper insurance scheme for lawyersThe public interest in solicitors having effective compulsory insurance is clear.

The powers are provided under statute.

The purpose of the indemnity scheme is primarily to protect the public, but also to protect solicitors, and solicitors' staff.

The Law Society, from the outset of the scheme, has taken the view that the public interest is best served by ensuring that the cover is as wide as possible and is given to all members in a firm.

It is, therefore, against the spirit of the scheme for principals to pursue their employees.The fact that the scheme covers all members of solicitors' firms means that there is no market for members of staff in solicitors' firms to cover their own potential liability.

CROSS has always maintained that it is unfair that firms can seek to recover losses when:-- the principals in the firm take the benefits of the profits and the burden of the risk should go with the benefits;-- mistakes are an operational risk of any business;-- decisions about key aspects of insurance cover are not in employees' hands, and-- the employees cannot themselves find insurance for this eventuality.These arguments are reinforced by the provisions in the new indemnity scheme which enable firms to negotiate unlimited excesses, payable on each claim.

In practice non-principals will have no opportunity to share in the decision-making as to the level of excess the firm will carry.

It is in those circumstances particularly unreasonable that they might be at risk of having to pay the cost.Proper supervision and management of firms of solicitors is clearly in the public interest.

The 'business' of running a law firm can not depend on individual members of staff being left to deal with their own files.

Good business management and risk management means that principals in a firm must take full responsibility for ensuring that standards of service to clients are maintained.

It would be unsatisfactory for principals to abdicate that responsibility yet to retain the option of suing staff for the cost of mistakes.Good management requires all employees to be open and deal with problems and mistakes fearlessly.

The proposed rule would underline the importance of establishing the right risk management culture and the right culture of responsibility amongst partners towards management issues.The public interest in identifying mistakes earlyThe earlier a mistake is discovered, the easier it is to rectify for the benefit of the client and the firm.

Clients want their legal affairs to be dealt with as smoothly as possible first time round.

In reality good insurance cover is not as good as not having to make a claim in the first place.

Removing an inhibition on notifying partners promptly when mistakes are made would help to enable firms to rectify mistakes quickly.The public interest in encouraging people to enter and remain in the l egal professionThere is a public interest in a strong and independent legal profession.

It is important that those who have the ability and have undertaken the training to become competent lawyers can stay in that workforce.

The effect on young members of the profession of being threatened or sued for losses may well lead to them leaving the profession.

If the practice became more widespread or common, it could deter otherwise good entrants from entering the profession.

The impact would bear disproportionately on less affluent trainees or young lawyers.

This would work against the need for the profession to be as inclusive as possible.Comments and questions on the detail'Member of staff' is widely defined to avoid debate.

It will include trainees, paralegals, assistant solicitors and locums.

The rule, as drafted, only covers loss caused by negligence or incompetence in relation to services provided by the firm to clients.

It would not deal with the losses in the context of, for example, the negligent driving of a firm's car during business.

It is limited, in effect, to losses arising out of the normal legal work of the firm.

This is because the public interest justifications relate to legal services provided to clients.

'Member of staff' will not include external agents such as process servers, costs draftsmen etc.It is thought that no useful purpose would be served by debating the inclusion or exclusion of various categories of staff.

Paralegal and secretarial staff can be as much involved in the provision of services to clients (as part of the team) as those employed to provide legal services more directly.However, the draft specifically includes salaried partners and directors (who are technically employees of incorporated practices) as members of staff.

Although some salaried partners and directors may be seen as the equivalent of principals, technically both are in the same position as other employees in the firm in that, as individuals, they could be in the same vulnerable position as any other member of staff.

However, some may take the view that a distinction could be drawn between someone who is a director, and therefore part of the decision making process on matters of insurance and management of the practice, and a salaried partner who may not have any such role.

The Council would appreciate views on this issue.The draft has drawn on the work of the regulation review working party in that it attempts to be in plain English without too much detailed definition -- relying on the application of a plain meaning to the words.

Deliberately, no attempt has been made to define terms such as 'grossly reckless'.The effect of breachThe rule cannot itself prevent a solicitor from suing or threatening to sue a member of staff.

The rule would mean that such action could be referred to the Office for the Supervision of Solicitors to be dealt with as misconduct.

In addition, if court action were to be taken, a defendant could use the rule in defence and a court may recognise that, as the rule will have statutory force, it has a more direct effect on the plaintiff's ability to sue.

Some recent cases have recognised that some practice rules, as secondary legislation, can affect legal rights, as well as being a matter of misconduct.

However, the law is not clear as to whether this proposed rule would have that effect.Questions1.

Do you believe that there are sufficient public interest justifications for the proposed rule? Please give your reasons.2.

Do you think that there are any other considerations the Council should take into account in balancing these different interests?3.

Do you agree that 'member of staff' should be widely defined? If not please give reasons.4.

Do you agree that salaried partners and directors should be included in the definition? If not, why not?5.

Do you have any other comments on the draft?THE PROPOSED RULEThe proposed rule set out below is a first draft prepared to help raise some of the issues of detail.1.

A principal in private practice, or a recognised body, must not seek, by legal action or otherwise, to recover from a member of staff any losses incurred through the negligence or incompetence of that member of staff in providing services to clients of the firm.2.

The prohibition in 1 above does not apply to an act or omission which was grossly reckless, or dishonest, fraudulent or in bad faith.3.

'Member of staff' in 1 above means anyone, including a salaried partner or a director, who was at the time of the alleged act or omission, employed in the firm, whether on a permanent or temporary basis, and whether under contract of service or a contract for services.