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"The Art of the Deal: Making a Case For Transactional Malpractice Just Got a Lot Easier"

The Recorder
By: Kurt W. Melchior

In September, the Second District Court of Appeal issued what may be the most important legal malpractice case in a generation. Viner v. Sweet, 01 C.D.O.S. 8520, will thoroughly change the dynamics in all negotiations (including settlement negotiations in litigation).

David and Deborah Viner sold much of their interest in a media company. Attorney Charles Sweet represented them in the negotiations.

The Viners' complaint against Sweet was that all of the terms they wanted were not found in the final signed contract, or were so badly drafted that they lost arbitration about them against the buyers. A jury awarded them $13 million in damages on that claim. The verdict was reduced on appeal but still affirmed.

The Viners' claim was that they had told Sweet repeatedly that a large number of deal terms (seven, to be exact) "were essential and non-negotiable," and Sweet had been instructed to take whatever time was necessary to obtain them. Sweet, the Viners claimed, assured them that "each of these goals had been accomplished" in the ultimate contract.

Plaintiffs used to have to prove that but for the malpractice, they would have had a better outcome in the underlying legal engagement - the trial of the "case within the case." Last year, a different court of appeal held that such proof was not required where the malpractice involved non-litigation events. (Parichan, 84 Cal.App.4th 702.) Viner builds on Parichan, stating that under this case there is no requirement of proof of the "case within the case" in transactional malpractice. It then takes that point to another level.

If the "case within the case" standard had been applied here, the Viners would have had to prove that if Sweet had negotiated properly, the buyer would have given them the terms they wanted - a standard on which almost every claim of mishandled negotiations would falter. The court ruled this was not required:

In litigation malpractice, the parties and the court are faced with a zero-sum game: either the plaintiff would have won the underlying litigation but for the attorney's malpractice (or would have at least have suffered a smaller loss), or he would have lost at trial anyway. It is therefore a relatively simple matter (conceptually if not practically) to go back and re-construct the underlying litigation absent the attorney's negligence, in order to see if the result was indeed caused by such negligence.

The court said that "[a] business deal, by contrast is not a zero-sum game with a clear winner and a clear loser. The terms of the contract are interdependent, with much give-and-take and trading between the parties." In such a situation it would be difficult to reconstruct what would have happened "but for." Moreover, the "but for" evidence would depend upon testimony from an adverse party who - since the negotiations had resulted in a contract which favored it - would have every incentive to justify its position. In such a situation, said the court, the malpractice plaintiff could not be expected to prove a "case within a case."

Therefore, in transactional malpractice a "normal" standard of causation should apply: If the jury found that malpractice did occur and that the plaintiff had proved damages, it could determine whether the malpractice was a proximate cause of those damages, and award damages accordingly. The court specifically rejected the "but for" standard of causation.

Proof that the attorneys negotiated in a manner which fell short of the standard of care can now be of many kinds, such as the following:

  • The client instructed the attorney to obtain term X and term X was not in the contract.
  • The contract language concerning term X did not meet the client's expectations.
  • To obtain term X, the attorney conceded term Y, which the client did not want.
  • The attorney failed to advise the client that the opponent would not concede term X, or that it would concede term X only upon conditions which the client (later) claimed were unacceptable.

The court observed that unlike most litigation, negotiations attempt to define the terms on which the client will structure its future, whose outcome is by necessity speculative and uncertain. Thus once negligence is established - which can be done quite simply by the client's testimony that he would not have signed the contract without term X, or would not have signed the contract if he had understood how term X was limited, etc. - the damages become what an expert, or even the client himself will claim would have been realized but for bad negotiating practice.

The uncertainty whether the client had indeed asked the attorney to obtain term X would be no more than the standard difference in all litigating parties' factual contentions: The client will say, and the lawyer will deny, that he asked the lawyer for the term, and not to close the deal without it. This would become a common type of swearing contest which the jury resolves.

The court makes little of the seemingly critical argument whether the opposing party would have accepted term X, calling it "a highly speculative venture ... involv[ing] subjective testimony about hypothetical scenarios, and principally from those who represented the party on the other side of the contract negotiations." Such an approach "would introduce unprecedented layers of pure speculation and conjecture into the trial of the malpractice action."

Liability can thus be established on the plaintiff's simple say-so about what he wanted and didn't get, or didn't want but got. Yes, there will be testimony and arguments about the unreality of the plaintiffs' position, about their reading of the contract before signing it, about the other side's positions in the bargaining. But as this case proves, even very sophisticated clients can persuade a jury that their own lawyer's encouragement somehow misled them to believe that the written text that they signed (non-X) meant the fulfillment of their wish (i.e., X). The court held all these difficulties were outweighed by the facts that negotiation is not a zero sum game and that no opponent would ever testify that they had suckered the other side into giving a better deal than necessary.

Damages under this scenario are simply the value of what was left out of the contract. For this, the court relied on two quite simple cases it found in a nationwide search, where consequential damages of "what would have been" were allowed.

But while those cases meet Viner's theoretical framework, their facts are quite different. One attorney failed to obtain insurance on the land his client had purchased, and the property was destroyed in a fire. Another attorney failed to obtain and record a proper security agreement, and the client's security interest was lost. These are black-and-white situations. Professional skills were needed to secure a safe outcome for a transaction whose intent and scope no one was disputing. Viner applies their logic to transmute uncertainty into wish fulfillment - a frightening transformation!

The terrain for a transactional malpractice claim is thus laid out:

  • The client claims that he asked the lawyer for term X (or to avoid term Y).
  • Term X was not included in the contract, or was included in a way which later did not satisfy the client (or term Y was included).
  • The contract had adverse consequences for the client, which become the damages stemming from the failure to obtain the desired terms.

Each point is logical, but the end product is not. For as the court observed, it is pure speculation whether term X could have been obtained if properly negotiated, or whether the client would have aborted the deal if term X could not be included. Viner lets the client skate past all these risks. He simply sues the lawyer for negligently not asking for or not getting the deal points, and now has a good chance to collect damages which may be pure "pie in the sky."

This outcome is a world away from the narrow, focused cases of specific identifiable loss on which Viner relied as precedents. Failure to get a proper security agreement or putting the property damage insurance against the wrong parcel is malpractice. But here, the gap between the client's wish (or his ex post facto reconstruction of his wish) and the actual outcome may have little basis in the realities of the negotiating table, where every term was open and no deal was certain to happen.

It is a reasonable assumption that the Viners are well educated, sophisticated business people, and that at trial Sweet cross-examined them extensively as to whether they had followed the negotiations and had read the contract before they signed it. Also, defendants may have had evidence that the terms asserted at trial were not the same during the negotiations, or that the buyer rejected the terms, and that these rejections and other positions which evolved during the negotiations were discussed with the clients as they took place, etc. The opinion did not deal with such issues.

On the assumption that Viner is now law, all attorneys should now routinely pursue a course of self-preservation which would include written notice to the client of the desired deal points, and ongoing written advice to the client as to how the deal is developing. The client should be asked to promptly advise of all disagreements in writing.

But these inescapable recommendations have the air of total unreality. There simply is not time in fast-lane negotiations to provide successive, lengthy written analyses of the deal, which may cover a myriad of issues (and explanations of untold variations between the current profile of the deal and the client's original deal points) as the negotiations go forward, and again as the deal finally settles in. But without such markers the attorney is left at the mercy of a disappointed client long after the transaction has closed, if results then happen that the client dislikes.

Kurt W. Melchior is a partner at Nossaman, Guthner, Knox & Elliott in San Francisco, where he practices complex litigation.

This article is reprinted with permission from the Dec. 12 issue of The Recorder, copyright 2001.

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