Transaction Law: Risky Business for Legal Malpractice Suits
Contrary to popular perception, business transaction and commercial law is a high-risk area of practice for attorneys. It is the ONLY area of practice that is high in both frequency and severity. For attorneys practicing in this area, this should be a concern, as they can be hit by multiple high cost legal malpractice lawsuits. However, these risks can be mitigated be securing lawyers professional liability insurance and integrating risk management techniques.
Business transaction and commercial law pertains to the drafting and negotiation of contracts, agreements and commercial transactions. It does not include mergers, acquisitions, buyouts or any corporate structuring or restructuring. Formation, operation and dissolution of corporations or partnerships fall under a separate area of practice called corporate law.
WHY IS THIS AREA OF PRACTICE HIGH IN BOTH FREQUENCY AND SEVERITY?
Malpractice lawsuits in this area of law are costly to defend. The underlying cases are usually complex, involve multiple parties, require expert testimony, extensive document analysis and are subject to various interpretations. These factors also play into the probability of having a malpractice suit especially for less experienced attorneys. An attorney who is less experienced may not have the knowledge or expertise to handle complex cases.
For business transaction and commercial law, attorney experience is inversely correlated to the likelihood of a legal malpractice suit. This simply means that the more experienced an attorney is, the less likely they are to commit an error in this area. According to our statistics, nearly 90% of business transaction claims over the last two decades are instituted against attorneys who reported that business transaction practice generated 5% or less of their annual revenues. Experience in this area of practice is an asset.
WHAT TYPE OF ERRORS ARE PREVALENT FOR THIS AREA OF PRACTICE?
The top error for this area of law is conflict of interest. Transactions and agreements can involve multiple parties, so there is a high likelihood of conflicting interests. This error type accounts for 15% of all business transaction and commercial law claims. Conflicts of interest typically arise when attorneys fail to recognize, communicate and/or withdraw from conflicting interests –either from the onset or from the conflicts that develop during representation.
The second common error type in this area of practice is fraud. Fraud is an intentional error where the attorney’s actions or inactions are intended to deceive the client. This encompasses making statements with no reasonable basis, promises with no intention to perform, etc. Fraudulent claims can be challenging for firms as they support punitive damages which in most cases are not covered by insurance. These cases can impact the financial wellbeing as well as ruin a firm’s reputation. Fraud, even when committed by one partner, transfers the risk back to the whole firm.
Other common types of errors include malicious prosecution or abuse of process, failure to obtain client’s consent or to inform the client, planning or strategy errors, inadequate investigation and failure to follow the client’s instructions.
WHAT CAN I DO TO DECREASE MY RISK OF A LEGAL MALPRACTICE SUIT?
Apart from risk transfer, attorneys can employ other risk management strategies. For example, if an attorney is beginning in this area of practice, they can associate with a mentor or co-counsel so that they “learn the ropes” of transactional cases. Attorneys can also assess their experience and gauge their capacity to handle business transactional cases. If an attorney does not have enough time or resources to manage, investigate or research the matter, they probably shouldn’t accept to represent the client.
Furthermore, attorneys must be on the look out and be prepared to withdraw if conflicts of interests arise. In the case in which there are multiple parties, an attorney must communicate and document discussions about potential conflicts of interest. Documents such as conflict waivers document discussions about potential conflicts of interest. In addition, an attorney must always be aware and alert to the possibility that perceived conflicts of interest can turn into actual conflicts especially in multi-party representations.
To conclude, information about these areas of practice can help firms curb potential lawsuits from clients. Employing extensive and specific documentation of engagements especially instructions from clients and being alert to the potential conflicts during representation can help mitigate these high frequency, high severity lawsuits.