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Claims over Lost Client Funds?

The Law Society Gazette’s 25 September 2008 issue contained a lead article concerning fears about client money following the recent financial market chaos. The article was written on the basis of advice from both the Solicitors Regulation Authority and the Law Society and indicated that, if a UK bank collapsed, clients who held money in that bank via a solicitor’s client account could only sue their solicitor for loss of that money if a solicitor had been negligent in choosing their banking institution.  This advice has recently been confirmed by a Law Society Practice Note.

 

When a solicitor holds client money he/she holds it on trust for the client.  The solicitor owes a duty as a trustee of client money – this duty is similar to a trustee having a power of investment. If an investment fails, the solicitor is not automatically liable as long as he/she can prove that the investment was prudent. However, if the investment was negligent then the solicitor would be liable to account to the client for missing funds. Accordingly, if a bank containing client money collapsed, the client would be able to ask the solicitor to account for the money. The solicitor must prove that the choice of bank was prudent in all the circumstances. 

 

Accordingly, as long as solicitors hold client money in reputable UK banks, or reputable foreign banks with branches in the UK, they should be able to defend claims made against them for breach of trust should that bank collapse without warning and client money is lost.

 

If the failure of a UK bank meant that a solicitor was unable to comply with an undertaking that he/she had given, then the solicitor would be vulnerable to a claim for a breach of that undertaking (regardless of the fact that the reason for non compliance with the undertaking was not the fault of the solicitor).

 

The firm would be entitled to an indemnity for any claim made (either for breach of trust or failure to comply with an undertaking) under their Professional Indemnity Insurance which will provide the firm with cover for any “civil liability” arising from the firm’s practice. Coverage for any claim would apply regardless of whether the bank that collapsed was located in the UK or offshore (e.g. Iceland). The Minimum Terms and Conditions for solicitors’ indemnity insurance specifically provide cover for claims arising where a solicitor acts as a Trustee.

This articles was prepared by Beale & Co Solicitors.  It is not intended to constitute advice and is not a complete statement of relevant law.