Formal Opinion No. 80: Lawyers' Duty to Disclose Mistakes in Commercial Closing Adopted February 18, 1989
| Publication year | 1989 |
| Pages | 1151 |
| Citation | Vol. 06 No. 1989 Pg. 1151 |
1989, June, Pg. 1151. Formal Opinion No. 80: Lawyers' Duty to Disclose Mistakes in Commercial Closing Adopted February 18, 1989
In representing a client at the closing of a commercial transaction, a lawyer has both a duty of loyalty to the client and a duty of honesty and fair dealing to the other party and to the other party's attorney. If at the closing, one party or its attorney has made an undeniable mistake in the closing settlement statement regarding a basic assumption or element on which the contract between the parties is based and silence by the other party would be conduct amounting to a knowing misrepresentation under the facts and circumstances, an attorney must advise his client to disclose the mistake rather than remain silent about the mistake and accept the benefits of it. If the client refuses disclosure, the attorney may not continue representing the client in the closing. To do so would violate D.R. 1-102(A)(4) and, depending on the facts, might also violate D.R. 7-102(A)(3), (5), (7) or (8). Whether the attorney also either is permitted or required to make disclosure to the other party depends on whether, under the facts and circumstances, the attorney's previous silence and other conduct, despite discontinuing participation in the closing, would be conduct by the attorney (i) involving dishonesty, fraud, deceit or misrepresentation, (ii) resulting in concealing or knowingly failing to disclose that which the attorney is required by law to reveal, or (iii) knowingly making a false statement of fact or law. If the attorney participates in the closing without disclosure being made and later determines disclosure should have been made, the attorney should call upon the client to rectify the error. If the client refuses, the lawyer may similarly be permitted or required to disclose the mistake to the other party, depending on the facts and circumstances.
A request has been submitted to the Ethics Committee ("Committee") for its opinion regarding a lawyer's duties in representing a client in the closing of a commercial transaction when the lawyer realizes the other party, in preparing the settlement statement, has made an undeniable mistake regarding a basic assumption or element on which the contract between the parties is based. The mistake, if not discovered, will benefit the client financially. The client requests the attorney to not disclose the mistake. While the
Attorney X ("Seller's Attorney") represents Client Y, a corporation ("Seller"), in the purchase and sale of Seller's assets to A, a corporation ("Buyer"), represented by B, an attorney representing Buyer ("Buyer's Attorney"). Z is the president and sole shareholder of Seller. The parties had entered into a written contract for the purchase and sale of Seller's assets. Among other typical provisions, the contract provided for the purchase price, including the assumption of certain liabilities by Buyer, and the allocation of the purchase price among the assets and assumed liabilities. It appears but it is not certain that the written contract was prepared by Buyer's Attorney. At the closing, Buyer and Buyer's Attorney presented the contemplated closing documents and the closing settlement statement, apparently prepared by Buyer's Attorney. When Z and Seller's Attorney reviewed the closing settlement statement, they realized that it clearly and undeniably contained a conceptual and formatting error relating to the allocation of the purchase price. The effect of the error was that Seller would receive a net payment substantially in excess of that undeniably contemplated by and due under the sale and purchase contract. When Z and Seller's Attorney conferred about the closing documents and the error in the closing settlement statement, they speculated that Buyer or Buyer's Attorney may have corrected or adjusted for the error in the disbursement checks to be delivered at the end of the closing. In any event, Z requested of Seller's Attorney that, if at all possible, he did not wish to point out the mistake. No disclosure of the error was made. The parties proceeded with the closing. The final disbursements mirrored the closing settlement statement and the mistaken, excess payment was delivered to Seller.
All of these events occurred within a short period of time during which Seller's Attorney realized the conflict between his duty of loyalty to his client on the one hand and, on the other hand, his duty to act honestly and fairly in dealing with Buyer and Buyer's Attorney. Seller's Attorney did not know how to resolve the conflict and determine which duty was paramount and still permit the closing to occur. He states he therefore decided to participate in the closing and permit the erroneous disbursements to be made without any comment regarding the mistake, but to do so with the intent to resolve the problem after the closing.
Subsequently, in seeking guidance from various colleagues, Seller's Attorney received conflicting advice on how to assess his duties in the situation and on whether any obligation to disclose the mistake to Buyer and Buyer's Attorney existed at or after the closing. Therefore, Seller's Attorney decided to submit this inquiry to the Committee and so informed Z. In the meantime Seller's Attorney also advised Z that, should the mistake be discovered by Buyer or Buyer's Attorney, Buyer would have a good claim against Seller and Z for return of the excess money and in all likelihood they would be required to return the money. Also, Seller's Attorney advised Z to place the money in a separate account for safekeeping until this matter could be resolved.
For policy reasons, the Committee frequently declines to answer requests regarding the completed conduct of a specific attorney. Completed events frequently involve many determinations of facts and applications of substantive law and require individual legal advice. Nevertheless, the Committee determined to address the general questions presented by this inquiry because they are particularly important for guidance to the bar and because this opinion may assist in the resolution of problems underlying the inquiry. The Committee offers no opinion regarding any party's duty and possible liability under applicable substantive law, for example, under principles of contract or agency law. Given the particular circumstances, the committee also has recommended to the attorney presenting the inquiry to consider obtaining individual legal advice in this matter.
1. In representing a client in the closing of a commercial transaction, what are a lawyer's duties to the client and to the other party when confronted by the other party's undeniable mistake regarding a basic assumption or element on which the contract between the parties is based, when the lawyer's client benefits financially from non-disclosure and the client requests disclosure not be made?
2. If the parties closed without disclosure having been made and in doing so the attorney had not been able to resolve the attorney's conflicting duties in the situation, what duty, if any, does that lawyer have to rectify the situation if the lawyer determines that disclosure was required at the closing?
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