Undertakings given by solicitors to third parties are strictly enforced. Generally speaking solicitors would expect their professional indemnity insurers to pick up the claim, but this is not always the case.
Under the Law Society’s Minimum Terms and Conditions solicitors are indemnified against civil liability in the following terms:
"1. Scope of cover
1.1 Civil liability
The insurance must indemnify each insured against civil liability to the extent that it arises from private legal practice in connection with the insured’s firm practice, provided that a claim in respect of such liability:
(a) is first made against an insured during the period of insurance; or is made against an insured during or after the period of insurance and arising from circumstances first notified to the insurer during the period of insurance."
A word about undertakings generally:
(a) Although undertakings are a matter of professional conduct, they are essentially contractual in nature: a solicitor promises to take a step or refrain from taking a step in consideration of some act or agreement not to act by some third party. The word "undertaking" does not need to be used.
(b) If a solicitor has made the undertaking conditional on the happening of certain events, and it appears that those events will not now occur, then the solicitor must inform the recipient of the undertaking as soon as possible.
(c) The courts will not enforce an undertaking that is impossible to perform, or has become so, but in appropriate cases will order the solicitor to pay compensation to the recipient.
(d) All partners in a firm are liable for the undertakings of anyone who is held out by the firm as representing it.
(e) A solicitor cannot assign the burden of an undertaking without the consent of the recipient nor will a solicitor who acquires the practice of another become liable for its undertakings unless they are (expressly) adopted (which is unlikely).
(f) The recipient of an undertaking cannot assign the benefit of that undertaking without the consent of the person giving the undertaking.
From an insurers’ point of view undertakings most frequently cause problems in lender claims.Typically, an insured acting for a vendor of property undertakes to redeem and discharge all charges from the proceeds of sale; for some reason a charge stays on the register; the purchaser to whom the undertaking has been given thus acquires an encumbered title; the purchaser brings a claim against the vendor’s solicitor seeking specific performance of the undertaking. In effect, this requires the vendor’s solicitor to pay the charge and redeem the debt. Liability is strict.
There are a variety of circumstances in which private client solicitors give undertakings on behalf of their clients, e.g. that a debt will be discharged from a sale of shares. What is sometimes overlooked when these undertakings are called upon is the important question of whether the undertaking has been given in the course of private legal practice. If they have not, the undertaking will not be covered by the policy of insurance.
The decision of HHJ McCahill QC in Halliwells LLP v NES Solicitors  P.N.L.R. 30 contains a useful review and discussion of what the judge described as "solicitorial function". The facts were that on 22 December 2008 a firm of solicitors, NES, gave an undertaking on behalf of their client to Halliwells for the benefit of their client, a finance company, GCF. The undertaking was to pay the sum of £1.5m on or before 10th March 2009. In reliance on the undertaking GCF made an advance to a property company connected with NES’s client as a bridging loan. The loan was to be repaid on 11th March 2009 but was not.
NES did not have the funds to hand to meet its commitment under the undertaking and played no other part in the transaction other than to give the undertaking. In the claim to enforce the undertaking NES’s insurer, Quinn, was joined as third party. Quinn defended, successfully, on the basis that it was not liable to indemnify NES in respect of work not normally taken in the course of business as a private solicitor.
The relevant passages in the judgment are paras.  –  where the judge referred to the decision of the Court of Appeal in United Bank of Kuwait v Hammoud  1 WLR 1051:
"… two requirements must be fulfilled before an undertaking is held to be within a solicitor’s ordinary authority. First, in the case of an undertaking to pay money, a fund to draw on must be in the hands of, or under the control of, the firm; or at any rate there must be a reasonable expectation that it will come into the firm’s hands. Solicitors are not in the business to pledge their own credit on behalf of clients unless they are fairly confident that money will be available so that they can reimburse themselves. Secondly, the actual or expected fund must come into their hands in the course of some ulterior transaction which is itself the sort of work that solicitors undertake. It is not in the ordinary business of solicitors to receive money or a promise from their client, in order that without more they can give an undertaking to a third party. Some other service must be involved."
Applying this test the judge found that NES had not been providing solicitorial services in relation to the underlying transaction: Quinn was not obliged to cover the claim.
Thus if notified of a circumstance or claim which arises from an undertaking, insurers should consider first of all whether the promise in question really is an ‘undertaking’, and secondly whether it has been given in relation to the provision of solicitorial services on the basis of funds available to the insured.
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