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Legal Malpractice Issues

Transactional malpractice: When is a lawyer liable for a bad deal?

| Jan 12, 2021 | Legal Malpractice Law, Transactional Malpractice |

Lawyers represent clients in many situations. Not only do they advocate for them in the courtroom, but also in negotiations about business, real estate and financial transactions. Not all deals turn out as expected – and sometimes transactions fall through – but when does a lawyer’s involvement in their client’s failed or unsatisfactory deal constitute transactional malpractice?

What can negligence look like in this context? Here are some potential examples of how a lawyer might violate their duty of care to a client in a transactional context:

  • Not acting in the client’s best interest
  • Failing to provide relevant legal advice or giving inaccurate advice
  • Not disclosing a conflict of interest
  • Not protecting the client’s rights
  • Not advocating for the client’s position
  • Misrepresentation
  • And others

To be actionable, the negligence must cause loss to the client

Also called transactional negligence, the states vary slightly in how they determine whether it occurred. Whatever the test, the issue often turns on causation and whether the client can provide evidence that legal counsel’s professionally negligent behavior caused financial loss to their client. For example, did the lawyer’s negligence cause the deal to fall through or result in contractual terms harmful to the client? Did faulty legal advice cause the client to sign a contract they otherwise would not have, or would the client have walked away from the deal if its lawyer would have given sound, accurate legal advice?

Would the deal have been better, or would the client have walked away?

The Colorado Supreme Court in the well-known decision of Gibbons v. Ludlow articulated a test dubbed “better deal or no deal.” Although the case involved alleged real estate broker transactional malpractice, it is often discussed in the context of attorney transactional negligence. This analysis asks whether but-for a lawyer’s transactional negligence, their client either could have obtained a better deal or would have turned down the deal, coming out ahead of what transpired.

Did the attorney’s negligence compromise the client’s deal in some way that caused a loss?

In one Florida case, the court said that a law firm that had represented a client in negotiating a business deal could not be held liable for failing to get the other side to sign a contract because it was not the attorneys’ fault. Rather, the contract fell through because the two sides never came to a “meeting of the minds” about what the final deal should look like, so they never had a binding contract through no fault of the lawyers.

Transactional malpractice cases can be complicated

The transactions involved in these claims are often very complex, involving intricate tax, securities, accounting, financial, legal or regulatory issues, and the negotiating parties can take months or even years to reach agreement. The sophistication of these deals, in which substantial money can be at stake, as well as the time and financial investment parties invest in negotiating the underlying deals can result in complicated issues of proof in related transactional malpractice claims.

(Gibbons v. Ludlow is available on Westlaw at 304 P.3d 239.)