Legal malpractice claims by third parties: is privity dead?

Introduction
Legal malpractice
Negligent misrepresentation
Will beneficiaries
In-concert liability
Non-client actions
Comment

Introduction

The attorney-client relationship is becoming increasingly challenging to define.(1) As a result, lawyers' exposure to professional liability claims is growing.(2) Generally, an attorney is not liable to third parties for negligence in the performance of his or her professional duties.(3) However, this rule is not all encompassing.(4) When an attorney assumes a fiduciary obligation it applies to people who, although not strictly clients, may rely on the attorney and who the attorney has, or should have, reason to believe relies on this obligation.(5) Thus, when an attorney undertakes a duty to someone other than his or her client, he or she may be liable for damages caused by a breach of that duty to a person who was intended to benefit from the attorney's performance.(6) Over the past few decades, the concept of privity – a defining characteristic of the attorney-client relationship – has been slowly eroded by courts around the country.(7) Accordingly, it has become difficult for attorneys to know who their clients are and to whom they owe a duty of care.(8)

Privity began to wear down more than a half-century ago with the California Supreme Court's holding in Biakanja v Irving.(9) In Biakanja, despite the lack of privity between the notary and the beneficiary, the court permitted an intended beneficiary of a will to recover against the notary public who failed to attest the will properly.(10) In concluding that the notary owed a duty to the intended beneficiary, the court placed particular importance on the "end and aim" of the transaction – the passing of the decedent's estate to the intended beneficiary.(11)

Legal malpractice

Legal malpractice generally consists of three elements:

• the existence of an attorney-client relationship creating a duty of care;
• a breach of that duty; and
• proximate causation.(12)

Traditionally, in order to form an attorney-client relationship express mutual consent of both the attorney and the client was necessary.(13) At present, many courts use the "totality of the circumstances" to infer that an attorney-client relationship exists, including the supposed client's "reasonable expectations".(14) For example, if an attorney represents a family member in a proceeding in which the family member's unrepresented siblings have an interest, a court may deem those siblings to be putative clients of the attorney if the attorney does not make it clear that he or she is not representing them.(15) One of the easiest ways to establish certainty in the attorney-client relationship is to use an engagement letter.(16) This letter should define who is being represented, the scope of the engagement and, where appropriate, who is not being represented and what matters are not being handled.(17)

Some jurisdictions have refused to extend a lawyer's liability for malpractice to anyone other than the lawyer's client.(18) Other jurisdictions have adhered to the strict privity rule, allowing lawsuits by non-clients only in instances involving malicious conduct such as fraud, or where the non-client can show a specific undertaking by the attorney to furnish legal services to the plaintiff.(19) Proponents of strict privity argue that increased attorney liability could have an adverse affect on a lawyer's overall approach to how he or she counsels a client.(20) In addition, advocates argue that because an attorney's primary purpose is to represent his or her client's interests zealously, if courts relax strict privity rules then conflicts between duty to a client and duties to third parties will result.(21) Alternatively, opponents of the strict privity rule believe that increasing attorney liability will result in more careful legal representation, a higher degree of professional care and greater diligence.(22) Moreover, it has been argued that expanding liability for attorneys will bring all professionals under the same standard, eliminating the special privileges that attorneys enjoy above other professionals, such as physicians and accountants.(23)

Although many courts favour abandoning the requirement of strict privity, there are policy reasons for slowing the erosion of privity.(24) The potential for conflicts of interest between the attorney's responsibility to his client and his fears of liability to unknown third parties is a realistic present concern.(25) The potential for non-client liability may lead counsel to take a more conservative approach when representing clients for fear of being sued by non-clients.(26) Such an approach would directly contravene the rules of professional responsibility, which requires an attorney to represent clients enthusiastically, as fear of non-client liability may temper an attorney's zealous advocacy.(27) In addition, the economic ramifications of the expansion of non-client liability can create a burden on the legal profession, a few examples of which include higher malpractice insurance premiums, retreat from the practice of certain areas of law (eg, trusts and estates planning) or passing on the costs of the increased exposure to the consumer.(28) On the other hand, there are certainly benefits to abandoning the strict privity rule.(29) For example, fear of being exposed to non-clients may be a way to police attorney misfeasance and non-feasance as it may be an incentive for attorneys to exercise a high degree of professional care.(30)

Courts have recognised three seemingly distinct tests when addressing whether a lawyer owes a duty of care to a non-client (described in more detail below):

• intended beneficiary;
• foreseeability; and
• multi-factor.(31)

The intended beneficiary approach requires that the benefiting of the non-client be the direct, intended reason for the creation of the lawyer-client relationship.(32) The most common application of this approach is negligently drafted testamentary instruments.(33) Foreseeability is more of a policy-based approach that identifies the potential scope of one's duty not to harm another, but the bare formulation of foreseeability does not allow for a precise determination of the liability risk.(34) The multi-factor approach is perhaps a variation of the foreseeability and intended beneficiary approaches and it leaves much to the decision maker's discretion.(35)

Many jurisdictions allow third parties to bring legal malpractice claims where no attorney-client relationship exists.(36) In these jurisdictions, an attorney may be liable to a third party if the third party was an intended beneficiary of the attorneys' services or if it was reasonably foreseeable that negligent service or advice, to or on behalf of the client, could cause harm to others.(37) Courts consider six factors in determining whether an attorney owes a duty to a party in a particular transaction, including:

• the extent to which the transaction was intended to benefit the plaintiff;
• the foreseeability of harm to the plaintiff;
• the degree of certainty that the plaintiff suffered injury;
• the closeness of the connection between the defendant's conduct and the injury;
• the policy of preventing future harm; and
• the extent to which the profession would be unduly burdened by a finding of liability.(38)

The key inquiry in determining if such a duty exists is whether the non-client can prove that the attorney's work on behalf of his or her client was intended to provide a direct benefit to the non-client.(39) An attorney's knowledge that a third party will be affected by representation of the client is not in and of itself sufficient to create a duty of care to the third party.(40) In fact, an essential basis for establishing an attorney's duty of care under the 'intended beneficiary' theory is that both the attorney and the client intend for the third party to benefit from the legal services.(41) Further, an attorney's undertaking of a duty to the third party must be the result of a conscious decision.(42)

Several jurisdictions require that an attorney-client relationship exist in order for an attorney to be liable for legal malpractice.(43) In these cases, the plaintiff must show that the attorney owed it a duty, the attorney breached that duty and the plaintiff suffered damages as a result of the breach.(44) The plaintiff must show that but for the attorney's negligence, the legal matter would have been resolved more favourably for the plaintiff.(45) Regardless, most of these jurisdictions define a narrow set of circumstances where an attorney can be liable to a third party, specifically when the attorney commits fraud or a malicious or tortious act, including negligent misrepresentation.(46) For example, Illinois courts authorise legal malpractice claims by non-clients where the primary purpose of the attorney-client relationship was to provide a benefit to the non-client (common situations include representations involving estate planning, preparation of opinion letters and preparation of loan documentation).(47)

Negligent misrepresentation

In almost all jurisdictions, an attorney can be liable to a non-client for negligent misrepresentation.(48) For a negligent misrepresentation claim to be successful, a plaintiff must show that:

• the attorney, in the course of his or her business, profession or employment;
• made a misrepresentation of a material fact, without reasonable care;
• for the guidance of others in their business transactions;
• with knowledge that his or her representations would be relied on by the injured party; and
• that the injured party justifiably relied on the misrepresentation to his or her detriment.(49)

For guidance, most jurisdictions look to Section 552 of the Restatement (Second) of Torts (1997), which provides:

"1. One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.

2. Except as stated in Subsection (3), the liability stated in Subsection (1) is limited to loss suffered

1. by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows the recipient intends to supply it; and

2. through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction."

The requirement that the misrepresentation was made "for the guidance of others in their business transactions" is an essential element of negligent misrepresentation.(50) This element establishes that the attorney provided information that guided the recipient of the information in his or her business transactions.(51)

Some argue that Section 51 of the Restatement (Third) of the Law Governing Lawyers (2000) should be adopted as a new balancing test for when an attorney will be liable to a non-client. Section 51 imposes a duty of care:

"3. to a non-client when and to the extent that:

1. the lawyer knows that a client intends as one of the primary objectives of the representation that the lawyer's services benefit the non-client;

2. such a duty would not significantly impair the lawyer's performance of obligations to the client; and

3. the absence of such a duty would make enforcement of those obligations to the client unlikely."(52)

However, the restatement has been criticised because it asks only if a benefit is "one of the primary objectives" of the representation.(53) Just because a third party may benefit from an attorney's representation of his client does not mean that the attorney thereby owes a duty to the third party.(54) The law imposes a duty on an attorney for the benefit of a third party only when the "primary purpose and intent" of the attorney-client relationship is to benefit the third party.(55)

Will beneficiaries

Jurisdictions are split as to whether a will beneficiary has standing to assert a legal malpractice claim against the drafter of the will.(56) While attorneys have no duty to testamentary beneficiaries regarding what share they receive from the testator's estate, they may be held liable to the beneficiary of a will (even when there is a lack of privity) for negligent drafting if it causes the beneficiary to spend considerable money defending the contest of the will.(57) A few jurisdictions retain the rule that in the absence of fraud, collusion or malice, an attorney is not liable to a non-client for harm caused by the attorney's negligence in the drafting of a will or planning an estate.(58) However, other jurisdictions allow intended beneficiaries to bring legal malpractice suits against the will drafter when the testamentary intent, as expressed in the will, is frustrated and the beneficiary's legacy is lost or diminished as a result of negligence.(59) Further, an attorney retained by a trustee or personal representative assumes a duty of care to the beneficiaries. Under certain, specific circumstances attorneys who represent the trustee or personal representative of the estate have been found liable to third-party trust or estate beneficiaries where the attorneys' negligent conduct foreseeably affects the beneficiaries' interests.(60) A named beneficiary in a will may assert a cause of action, on a third-party beneficiary theory, for breach of contract against the attorney who drafted the will.(61)

In-concert liability

Recently, it has become increasingly common for attorneys to be sued, along with their clients, for aiding their clients in some venture which a third party believes amounts to a tort or a breach of a fiduciary duty.(62) These causes of action are commonly referred to as 'in-concert liability claims' as they include the common tort law claims of civil aiding and abetting and civil conspiracy.(63) In most jurisdictions in-concert liability claims must establish that:

• the client owes a duty to a third party;
• the lawyer is aware of the duty owed by the client to the third party;
• the client breaches that duty and/or commits a tort against that third party;
• the lawyer is aware of the breach and/or tort committed by the client;
• the lawyer assists the client in committing the tort and/or breach; and
• the third party suffers some damage.(64)

To state a claim for in-concert liability there must be an underlying tort that was aided by the defendant.(65) In-concert liability claims are not typical errors and omissions claims and may not fall within the coverage offered by the typical professional liability policy.(66)

The two main contexts in which a lawyer can be involved in an in-concert liability claim are when the lawyer aided the client in committing a tort (usually fraud) on the third party or the lawyer aided the client, or even caused the client, to breach a fiduciary duty to the third party.(67) A classic example of an in-concert liability claim against a lawyer in the context of a fraud claim is Thornwood v Jenner & Block.(68) In that case it was alleged that Jenner & Block aided one partner in the purchase of a partnership interest from another partner and, without the selling partner's knowledge, the purchasing partner negotiated a deal which was about to make the partnership very valuable.(69) Jenner & Block was accused of aiding the purchasing partner in the negotiation while knowing that the selling partner had no knowledge of the impending deal.(70) The lawyer participated in the transaction, including counselling the purchasing partner and drafting all of the documents.(71) The Illinois Court of Appeals held that these alleged acts constituted knowing substantial assistance, which was sufficient to state a claim for aiding and abetting the alleged fraud committed by the purchasing partner.(72) The key for the establishment of in-concert liability was the contention that the lawyer understood that the conduct of the client was tortious, but that the lawyer helped the client with her conduct anyway.(73)

The more common use of in-concert liability claims against a lawyer is in the context of aiding and abetting a breach of fiduciary duty.(74) The key element is the lawyer's knowledge that his or her legal services are being used in a way that allows the fiduciary to harm the plaintiff.(75) A typical example of this type of claim is the Massachusetts case of Kurker v Hill.(76) That case involved a dispute between the shareholders of a closely held company.(77) The majority shareholders were accused of 'freezing out' a minority shareholder by selling the company below market value to another company owned by several of the majority shareholders.(78) Each event that allowed the freeze-out to occur was allegedly orchestrated by lawyers for the majority shareholders.(79) While the court refused to impute direct liability for breach of fiduciary duty by the attorneys to the minority shareholder, the court did find that a claim could be stated against the lawyers for aiding and abetting and conspiracy based on the substantial assistance allegedly provided by the lawyers to bring about the transaction.(80) The key alleged element was the lawyer's knowledge that the majority shareholders were breaching duties owed to the minority shareholder while the lawyer documented the transaction.(81)

Non-client actions

For a non-client to succeed in a negligence action against an attorney, it must prove that the primary purpose and intent of the attorney-client relationship itself was to benefit or influence the third party.(82) The most common fact patterns that create attorney liability to non-clients for negligence are negligently drafted wills and negligently drafted opinions on which non-clients rely detrimentally.(83) Litigation attorneys face the lowest odds of being subjected to claims by non-clients since it is generally accepted that an attorney representing one party in litigation owes no duty of care to an adversary.(84) In most states, even though there is the possible threat of malicious prosecution or abuse of process claims, such claims are relatively rare and often difficult to prove.(85) Trust and estates lawyers, on the other hand, are particularly susceptible to claims asserted by people who were admittedly never their clients.(86) Frequently, heirs of estates, disinherited family members and trust beneficiaries file suit against estate planning lawyers, claiming that estates were planned either negligently or improperly.(87) Real estate and other transactional lawyers are also at a relatively high risk of being exposed to claims by non-clients.(88) For example, a real estate buyer may have a claim against a seller's attorney if the seller's attorney leaves out information in an important document.(89)

It has become apparent that courts will continue to expand attorneys' liabilities to non-clients.(90) However, it is difficult to employ measures that are specifically designed to reduce exposure to claims by non-clients.(91) Attorneys should take preventive measures to minimise exposure, such as using caution when volunteering information to a non-client and clarifying in writing, whenever possible, limitations or disclaimers on the scope and substance of any communications to a non-client.(92) It is also imperative that attorneys avoid having statements construed as representations of fact, as opposed to expressions of opinion, by expressly conveying that one's comments are opinions rather than facts.(93)

Comment

An attorney's obligation clearly extends beyond that owed to his or her client. Accordingly, an attorney must now look past his or her client to others who may be related to his or her work.(94) As the scope of duty increases, so too does an attorney's exposure to professional liability claims.(95) However, it should be comforting to know that standard professional liability insurance policies for lawyers do not limit coverage to claims by clients.(96) In fact, most policies provide defence and coverage for claims by non-clients, as long as the claims arise out of the rendering of professional services.(97)

For further information on this topic please contact Kevin G Flynn or Pamela M Albanese at Mendes & Mount LLP by telephone (+1 212 261 8000) or email (kevin.flynn@mendes.com or pamela.albanese@mendes.com). The Mendes & Mount website can be accessed at www.mendes.com.

Endnotes