The nature of the tripartite relationship between law firm, corporate client and LPO provider has increasingly been a common discussion thread for both regulatory bodies.

An interesting practical dilemma for law firms arising out of this relationship is whether a firm can limit its liability with a corporate client for engagements in which the corporate client mandates the utilisation of an LPO provider for certain legal functions and contracts directly with the LPO provider. This contractual arrangement is not uncommon practice, particularly in the arena of large-scale document review in connection with a disclosure/discovery matter or due diligence in support of a merger or acquisition. For example, envisage the scenario in which a corporate client contracts directly with an LPO company to undertake a “first pass” review of a significant volume of electronic documents while instructing its outside counsel law firm to undertake a “second level” review and provide comprehensive case strategy and advocacy.  This is a frequently encountered occurrence within the world of LPO.

Both statute (s 60(5), Solicitors Act 1974) and the Solicitors’ Code of Conduct (rule 2.07) restrict a law firm’s ability to limit liability to its clients; however, these rules only apply to work that falls within the scope of the client engagement (i.e., detailed within the retainer agreement between client and law firm). If the law firm excludes particular tasks from the scope of legal services (e.g., “first pass” document review), the Solicitors Act and Code of Conduct would not apply. It then becomes a risk-versus-reward consideration on the part of the corporate client who is free to instruct the LPO provider and outside counsel to undertake distinct and separate legal tasks pertaining to the same matter, and to accept that each will be liable for its own work.

It would, however, be extremely hasty to conclude that this was the end of the matter. The engagement letters must clearly define who is responsible for a particular task. This is where, in practice, difficulties may arise, particularly as in the example stated above, in which the law firm has been engaged to undertake a “second level" review. The practical reality of a document review engagement is that it should be a fluid, iterative process with ongoing communication, deliberation and consultation between the parties.  It is extremely rare and arguably a bad practice for there to be such a clear hand-off from one team (the LPO) to the other (outside counsel). An effective document review team should serve as a “force multiplier” that attempts, as closely as possible, to approximate the decisions that the lawyers most intimately familiar with the underlying case (i.e., outside counsel providing the case strategy and advice) would make if they had the time and opportunity to review each of the documents themselves. A best-practices review is one in which outside counsel assures that the LPO provider has the proper processes in place to apply counsel’s guidance properly and establishes a communication protocol in which this guidance is assimilated into many discrete decisions across a team of reviewing attorneys, and those many discrete decisions can be calibrated to deliver consistent results.  It is therefore readily apparent that the wording in the retainer agreements of the parties requires extremely careful drafting to satisfactorily delineate each party’s distinct tasks to ensure the proper allocation of liability while still ensuring that the end client is provided with a document review conducted in accordance with best practices.

Furthermore, if the law firm has played a role in the selection or recommendation of the chosen LPO provider, there remains the possibility of a claim for either negligent selection or negligent misstatement. In the scenario mentioned above, it would appear difficult for the law firm to exclude its duty of care, as it is clearly accepting some responsibility for the work performed by the LPO provider. The law firm could limit the potential for such claims in its terms of engagement with the client, by expressly excluding liability (in the retainer agreement) in relation to the tasks being performed by the LPO provider. Alternatively, the law firm could require the LPO provider to indemnify it for any loss suffered as a result of the provider’s negligence.

UK law firms contemplating limitation of liability in this three-way relationship are well advised to take extreme care in the drafting and delineation of responsibilities in the client retainer letters. Limitation of liability may be possible in an LPO engagement; however, law firms must be aware of the practical difficulties of such a separation and the remaining possibility of a claim for negligent selection or misstatement.

Source: outsourcemagazine