In many jurisdictions, the legal relationship between a lawyer and a client is a complex one. One of the reasons why is that it is governed by several areas of law and regulation. For example, contract law is relevant to the engagement terms between a lawyer and a client, and provides a basis on which a client can sue the lawyer if the lawyer breaches the engagement terms and causes loss to the client (for a discussion about damages or compensation for breach of contract, see China Business Law Journal volume 4 issue 2, page 76: Compensate or indemnify?).
In addition, a lawyer may be liable to a client in tort – i.e. independently of contract law – if the lawyer is negligent and the negligence causes loss to the client. Further, there are duties, obligations and requirements that arise as a result of the special nature of this relationship (for a discussion about fiduciary duties in common law jurisdictions, see China Business Law Journal volume 3 issue 1, page 94: Duty or obligation?) and also as a result of the professional rules of conduct to which lawyers are subject.
Lawyers need to take great care when advising clients, preparing legal documents and providing legal services generally. Their potential liability for mistakes and negligence is often unlimited and increases with the size of the deal and the legal complexities.
There are several ways in which lawyers manage their potential liability. One way is through professional indemnity insurance, which is compulsory in most jurisdictions. However, insurance only provides protection up to the insured amount and does not provide unlimited protection. Another way that lawyers manage their potential liability is to limit claims to the assets of the law firm and to insulate partners from personal liability. This is why lawyers practise through limited liability partnerships in many jurisdictions (for a discussion about limited liability partnerships, see China Business Law Journal volume 4 issue 6, page 89: Partnership).
A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at www.vantageasia.com.