Business Transaction Lawyers Face an Increasing Risk of Malpractice Claims

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The Great Recession resulted in numerous business transactions failing. Clients of the lawyers in these transactions often blame them for the failure looking for deep pockets to bail them out of a bad deal. This increased exposure to malpractice claims necessitates that transaction lawyers even more carefully risk manage their practice. This article reviews a recent case demonstrating this risk and offers risk management guidance gleaned from the opinion and other sources.

The More Complicated the Business Transaction the Greater the Malpractice Risk

Cottone v. Fox Rothschild LLP* was an appeal from summary judgment in favor of a lawyer and his firm in a malpractice claim. The issue was “whether the trial court correctly determined that an attorney owes no duty, as a matter of law, to explain unambiguous business terms in a written agreement, when the client is a sophisticated businessperson who negotiated the terms of the agreement himself.”

This suit concerned a buyout negotiation between the client and a company in which he held an equity interest. The client had several million dollars at stake on the outcome of the negotiation. The draft negotiation agreement included especially complicated and ambiguous terms. The firm’s lawyer advising the client, without specific instructions, reviewed the draft agreement on several occasions offering suggestions and advice. In reviewing the final draft of the agreement both the client and the lawyer missed the significance of newly inserted terms by the company that substantially reduced the amount the client would receive. The client signed the modified agreement only to realize later that he would not receive nearly as much money as he anticipated. He soon sued the lawyer and his firm for malpractice.

The client claimed that the lawyer’s error in failing to explain the significance of the added language caused him to agree to terms that cost him millions of dollars. The lawyer and the firm defended by claiming that they were acting only as scrivener and “that the mere existence of an attorney-client relationship between the parties did not impose on them a legal duty to explain to plaintiff, a sophisticated client, clear and unambiguous business terms in the Redemption Agreement.”

The Appeals Court found that summary judgment was premature because there were genuine issues of material fact over the communications between the client and the lawyer concerning the client’s expectations from the final agreement. The Court then offered this useful risk management guidance:

“[We] perceive several actions which may be considered by a jury in determining whether the attorney breached the standard of care.”

  • “First, did the attorney ascertain the client's business objectives through appropriate consultation.”
  • “Was reasonable advice provided to the client ‘on the various legal and strategic issues bearing on those identified business objectives. (‘An attorney in a counseling situation must advise a client of the risks of the transaction in terms sufficiently clear to enable the client to assess the client's risk.’).”
  • “During the drafting process, did the attorney scrutinize the proposed agreement to ensure that the writing effectuates the business objectives defined by the client.”
  • “Did the attorney review the written agreement with the client, to determine that the client understood the material terms that might reasonably affect the client's decision to execute it. (attorney is obligated to inform the client ‘promptly of any known information important to him [or her]’); (attorney should ‘review all important provisions with the client before proceeding to an agreement’).”
  • “Were the various provisions to accomplish each of the client's stated objectives pointed out or, if they were not, did the attorney ensure that the client assents to the omission of any such objective.”

“We do not suggest that all of these actions are always required. However, if the scope of representation includes one or more of these activities, failure to perform an included act in a reasonably competent manner may indicate a breach of the standard of care.” (citations omitted)

*2014 BL 240874, N. J. Super. Ct. App. Div., No. A-0420-12T4, 9/2/14, (unpublished).

 


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