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Contract clause detrimental to client may be legal malpractice

On Behalf of | Jun 24, 2023 | Contractual Mistakes, Duty of Care, Legal Malpractice, Transactional Malpractice |

A major part of many law practices is the drafting of contracts to accomplish a wide range of client goals. First, an attorney should gain a deep understanding of what the client wishes to accomplish through contract and consider how to do so. Then, the lawyer carefully writes the agreement incorporating the required terms as well as any supplemental provisions necessary to protect the client’s interests.

Legal counsel may also review a proposed contract drafted by the other party’s attorney. The review should be done with an eye toward disputing or negotiating any terms different from those agreed upon – or that are not in their client’s best interests. It goes without saying that both contract drafting and review require a lawyer to pay careful attention to each word, clause and section in light of how the agreement functions as a whole.

Negligent insertion of a harmful contractual provision

A pending Massachusetts lawsuit provides an example, where a lawyer included a contract clause that allegedly harmed their client financially. The plaintiff is a doctor who founded with others a successful “life sciences investment firm” consisting of a venture capital business as well as a hedge fund. Eventually, they decided to spin off the hedge fund and promote one of their hedge fund managers to run the new enterprise.

The founders intended to remain limited partners in the hedge fund with the right to receive profit shares. The plaintiff engaged a large law firm with which he had done business for years, including legal work for the investment firm, to negotiate and draft the spin-off agreement.

Unfortunately, the firm included a section that allowed the hedge fund manager to engage independently in a “strategic transaction” that let him force out the plaintiff by redeeming (paying out) his interest, which the manager did. Thereafter, the doctor no longer had rights to profits from the hedge fund, so he sued the law firm for damages from legal malpractice, allegedly for negligently including the harmful provision.

Reuters reports that the plaintiff alleges a loss of $363 million because his law firm negligently included the clause that let the hedge fund manager push him out. Also, they did not adequately explain the risk it created before contract execution. After the plaintiff confronted the drafting attorney about this, she reportedly reviewed it, bracketed the disputed provision and wrote an expletive in the margin.

The plaintiff’s malpractice lawyers are alleging that the section was a negligent “cut-and-[paste]” from another document, according to Reuters.

Headed to trial, for now

The court denied the defendant law firm’s request for summary judgment. The law firm argued (among other things) that even if it had been negligent, later wrongful actions of the hedge fund manager interrupted any harm emanating from the drafting problem.

For the law firm to have committed malpractice, it must have breached the duty of care they owed their client, and that breach must have harmed the client. If the manager’s actions superseded the law firm’s allegedly negligent drafting, the firm would not be liable in malpractice or negligence.

But the judge did not accept the law firm’s arguments, seeming dubious about whether the manager violated any provisions or duties. He concluded that even if the manager had, it would not have “absolve[d] [the firm] of liability.” The root cause of the plaintiff’s losses is the problematic provision, which the manager foreseeably, legitimately enforced to the doctor’s detriment. “And a jury could reasonably find that [the law firm] could have protected [the plaintiff] from the risk of suffering this harm, for example by not including the [harmful] provision . . .”

The court scheduled a pretrial hearing for July 25, 2023. Unless the parties settle, a trial will likely follow.

In the meantime, anyone concerned about whether contract terms drafted or reviewed by their attorney have harmed them should seek advice from an experienced legal malpractice lawyer.