Lawyer liability to non-clients under the new Restatement of Law Governing Lawyers.

• Author: Ziser, George J.

Of course, attorneys owe primary duties to clients, but counsel also must be careful to observe the duties of care owed to non-clients

IT IS well recognized that the concept of privity is no longer "king of the hill" when it comes to a professional's liability to non-clients. While a small number jurisdictions retain the privity doctrine as a limit on an attorney's duty to non-clients,(1) most no longer apply the rule and under some circumstances have allowed non-clients to sue attorneys.

Generally speaking, under current case law, an attorney may be liable to a non-client if the client intended the attorney's services to benefit the non-client, or the attorney knew or should have known that the non-client would rely on the attorney's actions. These circumstances give rise to a duty to prevent foreseeable injury to the non-client. The duty is limited, however, by the attorney's obligations to the actual client. If the duty to the non-client will interfere or potentially interfere with a duty owed to the actual client, then the duty to the actual client will prevent liability from attaching to the non-client. This is usually the case where the client and non-client are in an adversarial position or have conflicting interests.

The seminal case that upheld professional liability to non-clients was decided 40 years ago and did not involve an attorney. In Biakanja v. Irving,(2) a California Supreme Court case, the defendant was a notary public who prepared an invalid will. Under the traditional analysis of privity, the stepson of a former client could not have prosecuted a malpractice action against the notary public because there was no contractual relationship between them. However, the California Supreme Court replaced the privity of contract requirement with a multi-factor analysis based on public policy concerns that are implicit in the concept of "duty."

The court identified the following factors to be considered to determine whether a duty is owed:

* the extent to which the transaction was intended to affect the plaintiff;

* the foreseeability of harm to plaintiff;

* the degree of certainty that the plaintiff suffered injury;

* the closeness of the connection between the defendant's conduct and the injury suffered;

* the moral blame attached to the defendant's conduct; and

* the policy of preventing future harm. This analysis was applied by the California Supreme Court to lawyers in Lucas v. Hamm,(3) and it forms the basis for the duty rule currently followed in most jurisdictions.

RESTATEMENT VERSION

Section 74 of the new American Law Institute Restatement (Third) of the Law Governing Lawyers, as approved by the ALI in May 1998, sets forth certain circumstances in which an attorney may owe a duty of care to a non-client. That section, entitled "Duty of Care to Non-clients," provides an alternative to the Biakanja duty analysis with a situational approach based on the case law that may be applied more readily to the realities of the legal practice.

This article discusses cases that are illustrative of Section 74's restatement of a lawyer's duty of care to non-clients.

Section 74 provides in pertinent part as follows:

[sections] 74. Duty of Care to Certain Non-clients

For purposes of liability under [sections] 71, a lawyer owes a duty to use care within the meaning of [sections] 75:(4)

(1) to a prospective client, as stated in [sections] 27;(5)

(2) to a non-client when and to the extent that:

(a) the lawyer or (with the lawyer's acquiescence) the lawyer's client invites the non-client to rely on the lawyer's opinion or provision of other legal services, and the non-client so relies, and

(b) the non-client is not, under applicable tort law, too remote from the lawyer to be entitled to protection;

(3) to a non-client when and to the extent that:

(a) the lawyer knows that a client intends as one of the primary objectives of the representation that the lawyer's services benefit the non-client; and

(b) such a duty would not significantly impair the lawyer's performance of obligations to the client, and the absence of such a duty would make enforcement of those obligations unlikely;

(4) to a non-client when and to the extent that:

(a) the lawyer's client is a trustee, guardian, executor, or fiduciary acting primarily to perform similar functions for the non-client;

(b) circumstances known to the lawyer make it clear that appropriate action by the lawyer is necessary with respect to a mater within the scope of the representation to prevent or rectify the breach of a fiduciary duty owed by the client to the non-client, where (i) the breach is a crime or fraud or (ii) the lawyer has assisted or is assisting the breach;

(c) the non-client is not reasonably able to protect its rights; and

(d) such a duty would not significantly impair the performance of the lawyer's obligations to the client.(6)

APPLICATIONS OF RULE

1. Inviting Reliance--Section 74(2)

   1. Opinion Letters and Other Representations

   1. Duties to Client Not Impaired

   Letters, opinion or otherwise, written for clients with the express purpose of inducing action by a non-client will give rise to a duty to the non-client. This is especially true where the attorney's letter is a requirement of the non-client. In Home Budget Loans Inc. v. Jacoby & Meyers Law Offices,(7) a lender required a borrower to obtain written verification from an attorney that the attorney had reviewed the proposed loan documents, had explained the terms of the transaction to the borrower, and that the borrower understood the terms and wished to proceed with the loan. The borrower's attorney wrote a letter stating that he had explained the terms of the loan to his client, the borrower, and that "she understands and wishes to proceed with the transaction." The borrower subsequently sued the lender to rescind the contract, claiming she did not understand the terms of the loan. The lender cross-complained against the borrower's attorney for negligent misrepresentation.

   The California Court of Appeal held that the attorney could be liable to the lender for negligent misrepresentation because the attorney wrote the letter for the purpose of influencing the lender's conduct.(8)

   An attorney may be liable for opinion letters shown to third parties where the attorney knows that the opinion letter will be relied on by a third party. In Courtney v. Waring,(9) several franchisees of a retail tool business known as "Tools-R-Us" sued the franchiser's attorney on the ground that the franchise prospectus contained material misrepresentations.

   The trial court sustained the attorney's demurrer to the legal malpractice claims, but the California Court of Appeal reversed on the ground that the attorney knew the prospectus would be shown to prospective franchisees and also knew that the information contained in it would be used to induce them to purchase franchises, stating:

   In simple terms, defendants are alleged to have prepared a false and/or misleading document, the purpose of which was to influence plaintiffs' conduct. It is the attorney's knowledge regarding the purpose of his work product which ... establishes a duty to those whose conduct has been influenced.(10) In Bily v. Arthur Young & Co.,(11) the California Supreme Court addressed the difficult question of whether an accountant owes a duty of care in the preparation of an independent audit of a client's financial statements to persons other than the client. The court concluded that an auditor owes no duty of care regarding the conduct of an audit to the world at large. However, an auditor may be liable to persons who act in reliance on negligent misrepresentations in a transaction which the auditor intended to influence. Additionally, the court stated, an auditor may be liable for fraud to reasonably foreseeable third persons in the preparation and dissemination of an audit report.

   In its analysis, the court discussed several decisions involving the professional negligence of attorneys, and stated:

   California courts have consistently required some manifestation on the part of a professional who offers an opinion, information, or advice the he or she is acting to benefit a third party or defined group of third parties in a specific and circumscribed transaction.(12) The court contrasted Burger v...