The FCA – Transformation to Assertive Supervision
Every solicitor knows that an undertaking is serious stuff. Arguably it is the greatest power available to a solicitor. A promise, if broken, that will lead to immediate and serious consequences for the giver. As such it can be relied upon to the ends of the earth. The power of undertakings has meant that they sit at the heart of every property transaction, bridging the time gap between the sending of money and the receiving of title. They are also used in other areas of commercial life and as part of litigation. The “brand” of a solicitor’s undertaking is so powerful that little thought is given as to where their power comes from.
The power stems from a triple lock. First a breach is professional misconduct so can be the subject of a fine or worse by the SRA or Solicitors Disciplinary Tribunal. Second they are normally a contract and can be enforced as such although there are situations where there is no consideration. Third solicitors are subject to the supervisory jurisdiction of the High Court which has an inherent jurisdiction over them as officers of the court. This means the recipient of an undertaking can apply to the court for a summary order that a solicitor complies with an undertaking and if they fail to do so they can be held in contempt.
In Harcus Sinclair v Your Lawyers the Supreme Court considered the question of whether the third lock applied only to solicitors as individuals or whether it extends to incorporated law firms. The issue is of great significance. Most solicitors now practice through LLPs and when they give undertakings on behalf of their firm they do not bind themselves as they are acting as agents for a disclosed principal. So if law firms are not subject to the court’s supervisory jurisdiction then undertakings would lose part of their power.
The Court “with considerable reluctance” formed the view it should not extend the jurisdiction. This was for 3 reasons. It did not need to, having determined the case on other grounds. It would have wanted to hear from regulators and professional bodies and the matter could be better dealt with by legislation. However, the Supreme Court made clear in its decision that it thought that this left an unsatisfactory position.
First it meant the boundary between those undertakings subject to the court’s jurisdiction and those that were not was perverse (para 137):
“a solicitor’s undertaking given by (say) Smith & Jones LLP on a Friday would not be buttressed by the court’s power of summary enforcement, whereas an identical undertaking given by the Smith & Jones partnership on the previous Monday, before its members incorporated as an LLP on the Wednesday, would be. In that example exactly the same solicitors who had constituted the former partnership would be the members (ie owners and managers) of the LLP which succeeded to the same practice. But the LLP would not itself be a solicitor, or an unincorporated association of solicitors. It is a separate legal person, distinct from the solicitors who own and manage it.”
Second it recognised that the court’s inherent jurisdiction is an important element of the power of the jurisdiction (para 127):
“There can be no doubt that 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, and for the propriety of accepting them as part of the every-day machinery for modern conveyancing. This is not because there is a history of frequent non-compliance followed by court enforcement. Rather, the mere existence of that ready and swift means of enforcement made it inherently unlikely that a solicitor would fail to comply.”
Finally the court recognised the practical consequences of its decision (para 143).
“In the meantime, we share the judge’s concern about whether those dealing with incorporated law firms, and with solicitors’ LLPs in particular, are sufficiently aware that undertakings given by them are not currently buttressed by the court’s supervisory jurisdiction. We note, however, that the following passage appears in the latest online version of Cordery on Legal Services, at para 319:
“Given that most solicitors now practise through some form of entity, the practical effect of the decision [of the Court of Appeal] in Harcus Sinclair is that most undertakings can now only be enforced by a breach of contract claim. Alternatively, an aggrieved party can hope that the risk of being reported to the SRA will encourage compliance. This clearly falls well short of the protections that made undertakings such a powerful tool, and clients and law firms alike may want to review their reliance upon them.”
It may be that, as the judge suggested, the lacuna may be addressed by ensuring that a relevant undertaking is given personally by a solicitor, as well as, or in the alternative to, the incorporated law firm for which he or she acts. But that may not always be a satisfactory solution where summary enforcement is sought, if the individual solicitor lacks the power within his or her incorporated law firm to ensure that compliance occurs. We take the view that this is at best a partial and temporary solution. We therefore express the hope that Parliament will consider the lacuna that this judgment has confirmed in relation to undertakings given by solicitors working for incorporated law firms, particularly LLPs.”
It is important to appreciate that there is nothing new in the Supreme Court’s decision. As the passage in Cordery on Legal Services written by this writer and quoted by the Court above demonstrates, the issue has been known about since at least the Court of Appeal decision. What is different is that the Supreme Court has with characteristic clarity set out the problem for all to see.
Clearly one way of squaring the circle, and as contemplated by the Supreme Court, would be for recipients of undertakings to insist on a solicitor personally undertaking in addition to their firm. However, this “solution” is problematic. The Supreme Court described it as “at best partial and temporary”. First a solicitor will need to be careful to ensure that they can control performance of the undertaking by their firm otherwise they are placed in a personally difficult position. Enforcement of an undertaking by the court through its inherent jurisdiction is discretionary and a court might be more sympathetic to cases of individual enforcement arising out of this practice. Time with tell whether the desire to buttress undertakings in this way will become market practice. Of course other legal professions have never been subject to the court’s inherent jurisdiction, most notably, licensed conveyancers. That has not proved an insurmountable obstacle and it may be that the market accepts less enforceable undertakings. Alternatively, the Government may decide to legislate. However, if it does this will be to extend the court’s inherent jurisdiction to all authorised providers of legal services. The solicitors’ professions unique status as officers of the court will be lost and we will take one further step down the road to harmonising the legal professions.
A further impact of the decision is that it makes undertakings less attractive compared to their emerging alternatives which are third party managed accounts and blockchain type trust networks. It was likely that these would over time revolutionise conveyancing and replace the practice of giving undertakings. This may now happen more quickly because the existing system is not as robust as previously thought.
He is General Editor of Cordery on Legal Services and Editor of its Chapter on Undertakings. He acted as technical adviser to Your Lawyers in the case before the Supreme Court.
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