Attorneys who dabble in business transaction (BT) representations do so at their peril. CNA claim data shows that nearly 70 percent of all BT claims are instituted against attorneys who reported that this area of practice generated 5 percent or less of their annual revenues. This is not to say that attorneys who devote much of their practice in this area are free from risk. Claims brought against attorneys who devote more than 25 percent of their practices to BTs result in over twice the incurred loss as claims brought against the less experienced attorneys, as previously reported in CNA Professional Counsel: A Claim Study for Lawyers: Investigating the Hidden Risks of Business Transactions Practice.
Historically, the CNA Lawyers Professional Liability Program claim experience has demonstrated that an area of practice generates a similar percentage of reported claims and incurred losses. But when it comes to the BT practice, the percentage of incurred losses is more than twice the percentage of reported claims.
To further demonstrate the potential exposure for attorneys involved in business transactions, consider the following statistics:
- There are approximately 190 reported business transaction claims per year.
- The average yearly cost (indemnity and defense) of BT claims per year, for the last five years, is $12.65 million.
- The average per claim cost for a BT claim is $140,000.
The bottom line? Attorneys who are involved to any extent in business transactions are more likely to get sued. When a business deal goes bad, the parties will probably look to counsel to recover their losses. Clearly, attorneys are not warrantors of the deals for which they provide counsel. However, when the attorney's representation falls below the standard of care, the attorney may be liable for professional negligence.
To assist attorneys in best protecting themselves against BT claims, here are five red flags that may signal potential concerns:
- When the client is more experienced than the attorney in the industry or in the type of transaction. Experienced industry clients are often very good clients. They understand the business and require less handholding through complex transactions. However, experienced industry clients who also are aggressive may seek to take advantage of less experienced counsel. While representing these clients, attorneys should feel confident and comfortable with their own analysis and recommendations. Attorneys should not solely rely on the direction of the client or become pressured by the client to reach a legal conclusion.
- When the client is a possible "bad actor" engaging in fraud in connection with the underlying transaction. Attorneys should step back and objectively view the clients and their cases on occasion. They are under ethical obligations not to engage in illegal activities or to assist their clients in engaging in illegal activities. Most often, it is difficult for an attorney to imagine that one's own client is a "bad actor." As we are learning from many recently filed lawsuits, however, clients may raise various issues of concern. In these situations, attorneys should "trust but verify" information received from their clients.
- When the attorney is representing all parties in the BT matter. At the outset of an engagement, attorneys are often asked to represent multiple parties to a transaction when all of the parties seem to be in agreement with the terms. In addition, the parties are seeking to save expenses on attorney fees. As experience teaches us, parties that agree to terms one day are not guaranteed to do so the next day. Be sure to document the terms of your representation for the transaction and have each of the parties execute advance conflict of interest waivers.
- When the attorney is representing an established client in a transaction with unrepresented parties. When representing a client in a transaction with an unrepresented client, it is always good practice to flag the file for special consideration. Attorneys should continuously remind themselves to not make any statements or take any actions that may create the reasonable belief in the unrepresented party that the attorney is acting as their own lawyer.
- When the attorney is serving solely as a "scrivener" to a transaction negotiated by the parties. Parties to a transaction may approach the lawyer to simply memorialize or review a previously agreed-to deal. This request typically results in a cost savings to the parties who believe that they have amicably handled a transaction and believe that they have adequately memorialized the material terms and conditions. Beware. These "scrivener representations" unnecessarily place a lawyer in the middle of a potential future dispute and the lawyer sees little upside from a fee perspective.
CNA's recent edition of PROfessional Counsel, "Business Transactions Professional Liability Fact Sheet," authored by Sean Ginty and Theresa Garthwaite, identifies these red flags and, additionally, provides helpful data, opportunities for risk management and additional risk control assistance.
I'll leave you with two pieces of advice to get started in protecting yourself from BT claims:
- Attorneys that are new to BT practice should seek out mentors and gain experience in this area of the law.
- When lawyers are preparing to accept BT cases, they should be especially wary of conflicts of interest. Corporate structures are exceedingly complex in today's business environment.
If you will be representing more than one party, remember that disputes often arise. In those circumstances, attorneys would be well-served to execute advance conflict of interest waivers from all parties before any dispute develops.