Defending the transactional legal malpractice case: trends and considerations for defense counsel.

• Author: Hogan, R. Todd

LEGAL malpractice claims involving underlying business transactions present a unique set of circumstances to both insurers and defense counsel. Transactional claims may involve sophisticated, complex, and high risk agreements that are distinct from typical litigation malpractice cases. Damages are frequently substantial as the transacting parties have high expectations of returns under the agreements. Even though traditional legal malpractice theories still apply to transactional settings, counsel and insurers should recognize that typical standards and defenses, such as the proximate cause requirement of "case within a case," have special application in transactional settings.

This article provides both an overview of some of the basic legal concepts that surround transactional legal malpractice claims as well as some practical considerations in defending and handling such claims. This first part of the article discusses recent legal authority that applies the "case within a case" standard in transactional settings. The second half of the article provides an overview of what types of practical issues can arise and should be considered in defending and handling these types of claims.

1. "Case within a Case" Requirement in Transactional Legal Malpractice Cases

   The elements of a professional negligence cause of action include: 1) the duty of the professional to use such skill, prudence, and diligence as other members of the profession commonly possess and exercise; 2) a breach of that duty; 3) a proximate causal connection between the negligent conduct and the resulting injury; and 4) actual loss or damage resulting from the professional's negligence. (1) In order to establish the proximate cause element in a legal malpractice case, the plaintiff must establish the "case within a case," which requires proof that the claim underlying the malpractice action should have been successful if the attorney had acted in accordance with his or her duty. (2) Courts have more recently been asked whether "case within a case" applies to claims involving transactional malpractice; that is, whether a plaintiff must prove that an excluded or unfavorable term in the underlying agreement would have been accepted by the other negotiating party if the attorney had acted in accordance with his or her duty.

   The majority of courts that have addressed this issue have determined that the "case within a case" standard does apply to transactional malpractice claims. (3)

   The Viner v. Sweet decision is instructive. (4) The plaintiffs in Viner filed a lawsuit against the attorney who represented them in the sale of their business. The plaintiffs claimed that their attorney had led them to believe that several favorable terms were included in the sales agreement, but these terms were not in fact included. A jury awarded the plaintiffs lost profits of over $13 million. The defendant attorney moved for judgment notwithstanding the verdict and for new trial, arguing that the trial court erred in failing to instruct the jury that the plaintiffs had to prove they would have obtained those favorable terms in the sales agreement but for the defendant's negligence. The trial court denied the motions. The California Court of Appeals affirmed and distinguished the standard for establishing causation in transactional malpractice claims as opposed to traditional litigation malpractice claims. The California Supreme Court rejected the Court of Appeals' rationale, summarizing the Court of Appeals' decision:

   First, the court [of appeals] asserted that in litigation a gain for one side is always a loss for the other, whereas in transactional work a gain for one side could also be a gain for the other side. Second, the court [of appeals] observed that litigation malpractice involves past historical facts while transactional malpractice involves what parties would have been willing to accept for the future. Third, the court [of appeals] stated that 'business transactions generally involve a much larger universe of variables than litigation matters.' According to the Court of Appeals, in 'contract negotiations the number of possible terms and outcomes is virtually unlimited,' and therefore the 'jury would have to evaluate a nearly infinite array of 'what-ifs,' to say nothing of 'if that, then whats,' in order to determine whether the plaintiff would have ended up with a better outcome 'but for' the malpractice.' (5) The California Supreme Court reversed and rejected the Court of Appeals' rationale in failing to apply the "case within a case" standard. The California Supreme Court announced:

   The Court of Appeals here attempted to distinguish litigation malpractice from transactional malpractice in order to justify a relaxation of the 'but for' test of causation in transactional malpractice cases. One of the distinguishing features, according to the court, was that in litigation a gain for one side necessarily entails a corresponding loss for the other. We question both the accuracy and the relevance of this generalization. In litigation, as in transactional work, a gain for one side does not necessarily result in a loss for the other side. Litigation may involve multiple claims and issues arising from complaints and cross-complaints, and parties in such litigation may prevail on some issues and not others, so that in the end there is no clear winner or loser and no exact correlation between one side's gains and the other side's losses. In addition, an attorney's representation of a client often combines litigation and transactional work ... Nor do we agree with the Court of Appeals that litigation is inherently or necessarily less complex than transactional work. Some litigation ... is relatively uncomplicated, but so too is much transactional work ... But some litigation ... is as complex as most transactional work. It is true, as the Court of Appeals pointed out, that litigation generally involves an examination of past events whereas transactional work involves anticipating and guiding the course of future events. But this distinction makes little difference for purposes of selecting an appropriate test of causation. Determining causation always requires evaluation of hypothetical situations concerning what might have happened, but did not. In both litigation and transactional malpractice cases, the crucial causation inquiry is what would have happened if the defendant attorney had not been negligent. This is so because the very idea of causation necessarily involves comparing historical events to a hypothetical alternative. (6) The California Supreme Court concluded that, "just as in litigation malpractice actions, a plaintiff in a transactional malpractice action must show that but for the alleged malpractice, it is more likely than not that the plaintiff would have obtained a more favorable result." (7)

   Most commentators agree with the holding in and rationale of the Viner decision.

   Proof of causation requires analysis of the consequences of proper advice. Thus, the client needs to prove what should have been achieved had the 'proper' advice been given. If the alleged error is the failure to obtain or advise of a provision, concession or benefit, the client must prove that the other party would have agreed. It is not sufficient to show that the other party 'might have' agreed. (8) Other legal commentators agree:

   In the transactional setting, a plaintiff should therefore have to demonstrate that an underlying position (be it a set of proffered business terms or otherwise) was compromised or negatively impacted due to the purported negligence of the defendant-attorney. While I (and many others) use the term 'case-within-a-case' in the context of legal malpractice matters generally, the plaintiff in a transactional legal malpractice case will generally not be complaining of negligence in some underlying litigation. The use of the term 'case-within-a-case' should not distract from the valid argument, however, that the plaintiff in the transactional legal malpractice matter should still have the same burden as the plaintiff in the litigation legal malpractice matter to demonstrate that a meritorious underlying position was compromised by the negligence of the defendant-attorney. This means that the plaintiff must show that he or she would have been ultimately better off in the underlying transaction in a world where the defendant-attorney' s...