Urdea’s first recommendation for protecting a firm from the financial consequences of clawbacks is to review and update all internal policies and procedures regularly.

“I’ve talked about this idea of having your back-end policies and procedures, internal policies and procedures up to date and making sure that you are sending out proper engagement material,” he said.

He emphasised the significance of ensuring that these policies are updated, explaining that this is not merely a formality but rather a proactive measure to safeguard the firm’s financial interests.

“Now, the reason for that is that it’s engagement material that you could use to incorporate certain terms that might actually protect you in these circumstances,” he said.

Another strategy that Urdea highly recommends is for legal leaders to ensure that their firms don’t become creditors with unsecured debt.

“[Section] 588 FA of the Corporations Act talks about creditors and unsecured debts, I think avoiding being a creditor and avoiding having an unsecured debt owed to you are two of the best ways to avoid having clawbacks happen down the track,” he said.

He outlined that this can be achieved through the careful and thorough structure of cost agreements and engagement terms, ensuring that all parties fully understand and agree to the terms laid out.

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“So with cost agreements, you would obviously state what the parameters of the work that you’re going to do, and how much the estimated costs are going to be,” he said.

However, Urdea advises taking an extra step by securing payment upfront. While he acknowledges that may not always be feasible, he stresses its effectiveness in preventing becoming a creditor and, consequently, minimising the risk of potential clawbacks.

“But on top of that, I think getting paid upfront, and it’s not always possible, but it’s a great way to avoid this getting paid upfront by doing that, you’re not a creditor. So that’s a really practical way to avoid having clawback issues later down the track,” he said.

“[It is] the same way that a supplier might want payment on delivery, cash on delivery, us, as lawyers, we might want payment into trust or payment upfront for fees, and we do it.”

“But occasionally, you know, you don’t do it because someone needs something urgently and you get busy with the work now.”

In addition to other risk management measures, Urdea suggests that law firms consider including indemnities or personal guarantees as part of client engagement terms to mitigate potential financial and legal risks.

“Other practical ways, you could request for indemnities or personal guarantees as part of your engagement as well. So rather than just placing the entity that you do the work for on your cost agreement, you could actually incorporate a director onto it too,” he said.

In a far more complex yet potentially effective strategy, Urdea suggested that firm leaders request and organise payments through a third party to avoid clawback provisions.

“Now, another way is, [which is] a little bit more tricky, but request payment by third parties. So a payment from a director, for example, might be a great way to avoid clawback provisions, and that’s because the company itself is not actually paying you the debt; it’s a third party,” he said.

However, Urdea cautioned that this method can be “complicated”, especially “if there’s a pre-existing debt between the company and the third party” as “it could still be looked at as the company paying you the debt, even if a third party is paying”.

Urdea further said: “A lot of these come back to your engagement and getting, you know, making sure that you know how to, you know, what terms you’re engaging your clients on and you are across whether your policies are to get money upfront for clients where you have some kind of intuitive feeling about maybe some distress on their end.”