By Brian Anderson, Senior Claims Attorney
The on-going coronavirus pandemic has created many different challenges for lawyers during the past nine months. From client communication to court proceedings to economic pressures on clients, there are no shortages of challenging issues for lawyers. WILMIC Senior Claims Attorney Brian Anderson describes some of the risks that lawyers face and how to deal with them.
Failed Business Transactions Place Lawyers at Risk of Legal Malpractice Claims
In 2020, lawyers practicing in the area of business transactions and commercial law entered the top five areas of law receiving claims. Of greater concern is the fact that this area of practice represented over 17 percent of the indemnity dollars WILMIC paid to resolve these types of claims last year. We believe this increased severity trend will continue in 2021.
Business and commercial law includes the drafting and reviewing of contracts, agreements and commercial transactions. Although the lawyer’s client may represent a small business entity, this type of legal work often involves a complex transaction involving multiple parties. Because there are often extensive documents to analyze that could be subject to various interpretations, the lawyer can easily be second guessed after things go wrong.
Small businesses remain under great stress as we are now entering into the second year of this global pandemic. A difficult environment for small business is likely in 2021, based upon the strong headwinds they are facing. According to a year-end survey conducted by SCORE, a national association dedicated to helping small business owners, only 34% of small businesses reported that they were able to turn a profit in 2020. Businesses related to travel, arts and culture experienced the biggest losses last year. Struggles were also noted by construction firms, restaurants, professional services, health services and retail. We are anticipating that lawyers practicing in the areas of business transactions and commercial law could increasingly become the target of legal malpractice claims as their clients may be forced to enter into a risky transaction, in haste, to generate short-term cash flow opportunities to maintain their business operations. If your client’s business ultimately fails or the transaction you handled proves to be less profitable than anticipated, the lawyer may be the most solvent party left against whom a claim can be made. It is all too easy to blame the lawyer after their client’s business failed, when the underlying transaction is scrutinized by legal malpractice counsel, with the full benefit of hindsight.
Last year, we saw claims where the attorney was dragged into claims involving the parties to a failed business dispute, after the litigation was already pending for a period of time. A common theme in these types of claims, from the “aggrieved client’s perspective,” is that the attorney was the only lawyer involved in the underlying business transaction and represented “both sides.” This type of arrangement helped set up a “conflict of interest” legal malpractice claim, wherein the plaintiff, (client or not), blamed the lawyer for not better protecting their interest or more clearly defining whom they represented at, before and after the closing.
Another risk to guard against is handling a business sale or commercial purchase agreement at the last minute, that your client had already put together with the other party. If you are asked to simply “review” a transaction agreement that your client already agreed to, this can be problematic if the deal does not end up going as planned. Your review of the transaction materials may include the work of another attorney or expert advisor, such as an accountant, that your client actually relied upon when deciding whether or not to move forward with the underlying deal. Clear communication with your client advising of the pros and cons of the transactions and any limitations that impacted your ability to completely analyze the matter, must be communicated in writing. Although your involvement may truly be limited in scope, if your client communications do not reflect this you could inadvertently become the scapegoat after things go wrong.
A carefully drafted scope of retention, with a follow-up “as I advised you” letter, can protect an attorney practicing in this environment from becoming the guarantor of their client’s faulty business judgment. Providing legal guidance to a stressed business owner is important. With this risk management guidance to consider at the outset of the representation, we are hopeful that your business transaction legal work can be completed without you later becoming the target of a legal malpractice claim.
WILMIC’s 2020 Claims Statistics
In analyzing the most common types of claims reported to WILMIC in 2020, the top five areas of practice, sorted by frequency and severity, reveals the following:
Careful, frequent and detailed communications with your clients remain paramount, as economic pressures are likely to impact your clients this year. Addressing conflict concerns, before an issue presents, remains the best way for a lawyer to avoid a claim or grievance down the road. Finally, developing a clear scope of retainer that is understood by your client and that is documented, in writing, will go a long way toward helping you avoid a claim or grievance.