Risk Watch: Practitioners acting as Directors or Entrepreneurs – Professional Indemnity Issues Part 2

Practitioners acting as Directors or Entrepreneurs – Professional Indemnity Issues Part II

AMANDA ADAMSON, SENIOR SOLICITOR, LAW CLAIMS

The July, 2021 edition of Riskwatch identifi ed the risk that liabilities incurred while acting as a Substitute Decision Maker or pursuant to an Advance Care Directive under the Advance Care Directives Act 2013 will not be indemnifi ed under the Legal Practitioners Professional Indemnity Insurance Scheme (PII Scheme). It warned that the practitioner who accepts obligations pursuant to a Power of Attorney but who does not accept obligations as a Substitute Decision Maker should carefully identify the capacity in which they are instructed and limit their retainer accordingly.

The capacity in which a practitioner performs an act will affect the protection afforded by the PII Scheme in other ways. This is because the touchstone of the operation of the PII Scheme is the connection with the Insured’s Legal Practice.1 Legal Practice is a defi ned term. It primarily means:

“… the provision of such legal services as are usually provided by a legal practitioner in private practice in Australia, while holding a current practising certifi cate under the Act or a law of a State or Territory of the Commonwealth of Australia and entitled to practise thereunder including acceptance of obligations or trustee, executor, administrator, attorney under power, tax agent or notary public …”2

The central concept is legal services and these are to be distinguished from entrepreneurial activity. The Federal Court has said:

“It has not been material to consider whether it is possible for the role of a professional advisor and the role of an entrepreneur properly to coincide or overlap, but the appearance of solicitors performing these respective roles in the present case leads me to invite attention to signifi cant differences between the two functions. These differences … arise because the fi eld of professional activity is co-extensive with a lawyer’s professional duty. That duty is to give advice as to the meaning and operation of the law and to render proper professional assistance in furtherance of a client’s interest within the terms of the client’s retainer… It is a duty which arises out of the relationship between lawyer and client.

But activities of an entrepreneur … [fall] outside the fi eld of professional activity. Those activities are not pursued in discharge of some antecedent professional duty… and the promotion of a scheme in which particular clients may be advised to participate is pregnant with the possibility of confl ict of entrepreneurial interest and professional duty.”3

Entrepreneurial activity remains entrepreneurial in nature even if peripheral legal services are provided. A Court will consider which of the legal services or the entrepreneurial activity is central to the activity in question. A Court is likely to fi nd, that if legal services are only peripheral to entrepreneurial activity then the liability is not relevantly connected to Legal Practice.

4

Particular attention is drawn to the practitioner who is appointed as a director of a company. Although it is well known and has been so for many years that some solicitors accept appointments to the boards of companies including blue chip public companies,5 acts performed in the capacity as company director are not regarded as Legal Practice and liabilities incurred in this capacity fall outside the PII Scheme.6

Instructively for practitioners, the PII Scheme document casts a beam of light through the grey dividing line7 between Legal Practice and entrepreneurial activity. It should be observed any claim arising from acts or omissions undertaken (directly or indirectly) as a consequence of practitioner being a director is expressly excluded from the PII Scheme. Exclusion clause 16.5 provides that:

“The Insured will not be indemnifi ed including for Defence Costs, with respect to … 16.5.1 any Claim arising from acts or omissions as an insurance agent undertaken by any person associated with the Insured’s Legal Practice. 16.5.2 any Claim arising from acts or

omissions undertaken (directly or indirectly) as a consequence of any Insured being a director or other offi cer of a body corporate other than a service administration or nominee company or trust, the sole business of which is conducted in connection with the Insured’s Legal Practice.

16.5.3 any Claim in connection with the participation in any respect whatsoever by any Insured in procuring, arranging or assisting with a money lending activity or transaction (with or without security) whether alone or in conjunction with any other person save only where that person’s involvement is as to provision of legal advice and/or drawing of documentation and matters reasonably incidental hereto.

16.5.4 any Claim in connection with any Insured providing a Financial Service in respect of which that person was required to be licensed or authorised under Chapter 7 of the Corporations Act 2001 (Cwth). 16.5.5 any Claim in connection with the provision be multi-disciplinary practice with which any Insured is associated of a service other than a legal service of the type usually provided by a legal practitioner in private practice in the jurisdiction.”

A Practitioner who accepts an appointment as a director of a company, whether commercial or not-for-profi t, should ensure that they are protected by adequate D&O (Directors and Offi cers) insurance and, depending on the circumstances, might cause a ‘nonretainer’ letter to issue from their Law Practice to ensure, for example, that the practitioners’ partners are not exposed to the implication of a retainer between the company and the practitioner director by virtue of the work being undertaken by the practitioner as a director.

Endnotes 1 Legal Practitioners Professional Indemnity

Insurance Scheme, Schedule 2 Policy of

Insurance, Clause 1.1. 2 Legal Practitioners Professional Indemnity

Insurance Scheme, Schedule 4 Defi nitions and

Interpretation, Clause 1.33(a) 3 Solicitors’ Liability Committee v Gray and Anor (1997) 147 ALR 154 at 185 – per Beaumont, Burchett JJ quoting from Leary v Federal Commissioner Taxation (1980) 32 ALR 221 at 240 – per Brennan J 4 Solicitors’ Liability Committee v Gray and Anor (1997) 147 ALR 154 at 168 – per Lockhart J 5 Solicitors’ Liability Committee v Gray and Anor (1997) 147 ALR 154 at 164 – per Lockhart J 6 Solicitors’ Liability Committee v Gray and Anor (1997) 147 ALR 154 7 Solicitors’ Liability Committee v Gray and Anor (1997) 147 ALR 154 at 165 – per Lockhart J. It has been said that “whether or not the dividing line is bright or blurred, the distinction has value”. (Malcolm

Douglas Carr trading as Forshaws Neill v Swart & Ors [2007] NSWCA 337)

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