By Elizabeth M. Cristofaro, Goldberg Segalla
The responsibility of an attorney runs primarily and directly to the client only. Canons 4 and 5 of the Code of Professional Responsibility set forth an attorney’s responsibilities of undivided loyalty and client confidences, but make no mention of an attorney’s responsibilities to non-clients. For centuries, because of the interest in ensuring that attorneys give undivided loyalty to their client’s interests, the courts have limited the scope of an attorney’s responsibility to non-clients by adopting a strict privity of contract rule. However, once the nationwide debate over the privity question was ushered in during the post-Industrial Revolution in products liability cases, the door swung open for similar arguments for abandoning the privity rule as it applied to professionals, including attorneys. This article explores the historical erosion of the strict privity rule in attorney negligence cases, looks at the rules adopted in a number of select jurisdictions, and explores the dangers and benefits of the erosion of the strict privity rule.
The History of the Erosion of the Privity Rule
It is believed that the early origins of the concept of privity of contract are taken from the English common law in the case of Winterbottom v. Wright, 152 Eng. Rep. 402 (Ex. 1842), which concerned the liability of a mail coach manufacturer to an employee of the purchaser for injuries allegedly caused by a construction defect in the coach. A concern expressed in Winterbottom is that a lack of privity could open the floodgates for passengers or even bystanders to sue and that the only way is to confine the right to recover to those who enter into the contract.
The concept of privity continued later in the 1861 House of Lords decision of Robertson v. Fleming, 4 Macq. 167 (H.L. Sc. 1861) in which a solicitor, hired by a debtor to draft a security agreement for the benefit of the debtors’ sureties, erred. The sureties sued for negligence, but the case was dismissed because there was no privity of contract between the sureties and the solicitor.
The Winterbottom and Robertson precedents persuaded the United States Supreme Court in the case of National Savings Bank v. Ward, 100 U.S. 195 (1879), to rule that National Savings Bank had no cause of action. The defendant attorney was hired by his client to examine title to land and issued to his client a certificate setting forth that the land was unencumbered, which was not an accurate statement as to the status of the land. The defendant’s client presented to National Savings Bank the inaccurate attorney certificate and National Savings Bank loaned the defendant’s client money using the land as security. When the loan was not repaid, the lender lost its funds and sued the attorney. National Savings Bank argued that it had been injured by its reliance on the attorney’s negligently prepared certificate. National Savings Bank did not argue that it relied on the certificate or that the defendant attorney knew that the title certificate would be relied on by it. The only argument raised by the bank was that mere lack of privity should not bar it from recovery. The Court followed the British cases by stating that, without privity of contract, an attorney could not be liable for the damages negligently caused to others while representing a client. The Court accepted and relied on the British analysis that the abolition of privity would unleash the inevitable explosion of liability and never once discussed that the expansion of liability may undermine the attorney-client relationship. However, the Supreme Court acknowledged that a different rule would apply if fraud or collusion were involved in the attorneys’ actions.
Interestingly, National Savings set forth two steps before privity would cease to protect negligent attorneys from suit by non-clients. First, the doctrine of privity would have to be abolished. Second, the courts would have to find that no good reasons existed to allow attorneys to be protected by the privity immunity.
Of course, today we know that the first National Savings step of abolishing the concept of privity of contract was announced in the case of MacPherson v. Buick Motor Company, 217 N.Y. 382, 111 N.E. 1050 (1916). Just as the concept of privity of contract has its origins in products liability law, so does the erosion of the concept of privity of contract has its origins in products liability law, attributable to the seminal case of MacPherson.
In MacPherson the plaintiff sued the manufacturer of an automobile for injuries he allegedly sustained because of a defect in the automobile. The plaintiff did not purchase the automobile from the manufacturer and argued that lack of privity should not bar his cause of action. The court allowed plaintiff’s claim for a negligently manufactured car and based its holding on the foreseeability test of duty, looking to such issues as whether the danger can be foreseen, whether it is apparent to the manufacturer that the product will be used by others in addition to those with whom there is privity. However, in 1931, Justice Cardozo, writing for the New York Court of Appeals in the case of Ultramares Corporation v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931) refused to expand the concept of privity in a professional negligence case involving public accountants. In Ultramares, the accountants had negligently certified the accuracy of the corporation’s balance sheet. The plaintiff claimed that he relied on the balance sheet when deciding to loan money to the corporation which really was insolvent. The court declined to find that plaintiff could recover from the accountants because the accountants did not know the identity of the user or the specific use of the balance sheet.
Over four decades past before the courts looked to the second National Savings’ step in order to determine if liability would attach to an attorney for his negligent acts as they affected non-clients. It was not until 1958, in the case of Biakanja v. Irving, 49 Cal. 2d 647, 320 P.2d 16 (1958), that a quasi-legal malpractice action challenged the need for privity. In Biakanja the defendant, a notary who was a non-lawyer, was instructed by his client to prepare a will that would give all of his property to one of his eight siblings. The will was denied by the probate court because the execution was not properly witnessed, and the plaintiff, rather than receiving all of his brother’s estate, received only one-eighth of the estate. The California Supreme Court determined that privity was not essential and that liability could be predicated on public policy concerns. Six factors would resolve the question of duty on a case-by-case basis. The six factors were: (1) the extent to which the transaction was intended to affect the plaintiff; (2) the foreseeability of harm to the plaintiff; (3) the degree of certainty that the plaintiff suffered injury; (4) the closeness of connection between defendant’s conduct and the injury suffered; (5) the moral blame attached to the defendant’s conduct, and (6) the policy of preventing harm.
Three years later in the California Supreme Court case of Lucas v. Hamm, 56 Cal.2d 583 (1961), cert. denied, 368 U.S. 987 (1962), the beneficiaries to a will who sued an attorney were allowed to recover for their damages. The court restated the Biakanja balancing test, deleting the moral balance factor and adding the undue burden on the legal profession factor, and concluded that the burden was warranted, especially since the alternative was to have innocent persons bear the loss. The facts in Lucas are similar to those in Biakanja. The defendant attorney contracted with his client to write a will for the decedent, leaving portions of the residual estate to the plaintiffs. The defendant attorney drafted the will in such a way that the bequest was invalid under the rule against perpetuities, resulting in the plaintiffs receiving less money than they would have if the will had been drafted to accomplish the decedent’s intent. The plaintiffs claimed that their losses were a direct and proximate result of the defendant’s negligence and his breach of contract.
The Lucas court reviewed the balancing test announced in Biakanja and determined that it should be expanded to attorneys. The court rejected the argument that expanding attorneys’ liability to non-clients would impose undue burden on the profession and rejected the argument that there would be unlimited liability. The court was persuaded by the fact that the innocent third party would bear the loss and that the decedent’s intent was and would be frustrated.
A Jurisdictional Sampling
Today, it can be said that the rules concerning the requirement of privity are in a state of transition. The duty of care is created by particular facts, the subject matter, and the relationship of the parties, irrespective of the duty of undivided loyalty. There are common fact patterns that have never resulted in negligence liability; such as adversaries in litigation. The most common fact patterns that create attorney liability to non-clients for negligence are negligently drafted wills and negligently drafted opinions that are detrimentally relied upon by non-clients. The question in every case is the extent to which a non-client has a legal right to rely on an attorney’s work, and to recover damages when that reliance results in a loss. The conclusions and holdings that attorneys owe responsibilities to non-clients are as varied as the jurisdictions from which they come.
A balancing test similar to that set forth in Biakanja was adopted in Gould v. Mellick & Sexton, 263 Conn. 140 (2003). In Mellick the defendant attorneys represented a partnership which was developing land by creating a limited liability partnership with numerous investors. The defendant attorneys were retained by their client to draft the private placement memorandum. The plaintiffs allege that the defendants violated a duty of care owed to them by, inter alia, failing to inform them of certain misrepresentations and omissions in the private placement memorandum. The court held that under the facts presented the defendant attorneys did not owe a duty of care to the plaintiffs.
The Connecticut Supreme Court determined that “the test for the existence of a legal duty of care entails (1) a determination of whether an ordinary person in the attorney’s position, knowing what the defendant knew or should have known, would have anticipated the harm of the general nature of that suffered was likely to result, and (2) a determination, on the basis of public policy analysis, of whether the defendant’s responsibility for its negligent conduct should extend to the particular consequences or particular plaintiff in the case. Id. at 153. Even though the court reaffirmed the test for the existence of a legal duty of care, it refused to find one existed here because to impose a concomitant duty to protect plaintiffs’ interests would interfere with defendant’s duty of undivided loyalty to its client. Here, the court stated that it was clear that the partnership hired the defendant attorneys to further its own interests and not those of plaintiffs and other investors with whom the partnership was engaging in an arm’s length transaction.
The court also looked to its holding in Krawczyk v. Stingle, 208 Conn. 239 (1988), where the duty of an attorney to relatives of a decedent who retained the attorney to draft a will was discussed. In Krawczyk, the court stated that whether there is a duty owed by attorneys to persons with whom they are not in privity is a question of public policy. In addressing the issue, the court looked to see if the primary or direct purpose of the transaction was to benefit the third party. In Krawczyk the decedent very clearly expressed two requirements of his estate planning: he wanted to devise certain property to certain individuals and he wanted to avoid probate court, both requests requiring a series of complicated trusts to be drafted. Unfortunately, the decedent’s health rapidly deteriorated, and the defendant attorney could not conclude preparing the documents requested and needed to effectuate her client’s wishes. The plaintiffs, potential heirs, argued that the defendant attorney, learning about her client’s rapidly deteriorating health should have convinced him to abandon the complex trust documents, ignored the decedent’s testamentary capacity at the time, and rushed to have her client execute whatever documents she had completed. The court determined that under the facts of the case, the imposition of potential malpractice liability would undermine the duty of entire devotion to the interests of the client. The court stated that “prophylactic principles of public policy counsel against rules of liability that promote such a conflict of interest.” Id. at 247.
In Petrillo v. Bachenburg, 139 N.J. 472 (1995), the buyer of real estate claimed that she was misled by a percolation report written by seller’s attorney and that she would never have purchased the land if she had known that the report was a composite of many percolation tests performed on the tract of land, twenty-eight of the thirty tests showed that the land was unsuitable for a septic system. Plaintiff purchased the land in reliance on the attorney’s report and hired an engineer to design a septic system that would be approved by the health district. The septic system was not approved for construction. The plaintiff sued alleging that the attorney’s failure to provide the full percolation tests violated a duty of care owed to her.
The court held that a lawyer’s duty to a non-client depends on a balancing test: the duty to represent his client vigorously with the duty not to provide misleading information on which third parties will rely. However, the court stated that a lawyer’s duty is limited to situations when the lawyer intended or should have foreseen that the third party would rely on the lawyer’s work and when the client is not too far remote to be entitled to protection. In Petrillo the court stated that the attorney should have known that by giving the report to a real estate broker that the broker would turn over the report to the prospective purchaser and that the attorney did nothing to limit his responsibility and restrict the prospective buyer’s foreseeable use of the report, such as the use of disclaimer language.
In the case of Guy v. Liederbach, 501 Pa. 47 (1983), the court was presented with the question of whether a named beneficiary of a will who is also named as an executrix has a cause of action against the attorney who drafted the will and directed her to witness it when the fact that she witnessed the will voided her entire legacy and her appointment as executrix. The court held that the Lucas standard is too broad and set forth that a properly restricted cause of action for third party beneficiaries in accordance with the principles of Restatement (Second) of Contracts §302 (1979) is appropriate. The court held that while important policies require privity to maintain an action in negligence for professional malpractice, a named legatee of a will may bring suit as an intended third party beneficiary of the contract between the attorney and the testator for the drafting of a will which specifically names the legatee as a recipient of all or part of the estate. The court rejected the Lucas standard, stating the dangers of adopting negligence concepts of duty analyzed in terms of scope of the risk of foreseeability are underscored by the experience in California after the state abolished the doctrine to allow such negligent suits, leading to ad hoc determinations and inconsistent results. The court further rejected the balancing test set forth in Biakanja. The court held that it will retain the requirement that plaintiff must show an attorney-client relationship or a specific undertaking by the attorney furnishing professional services as a necessary prerequisite for maintaining in trespass or a theory of negligence.
In the recent Superior Court decision of Hess v. Fox Rothschild, LLP, 2007 PA Super 133, 925 A.2d 798, 2007 Pa. Super. LEXIS 1145 (2007), appeal denied, 2008 Pa. LEXIS 92 (Feb. 14, 2008), the court recognized that the Pennsylvania Supreme Court strongly reaffirmed the requirement that a plaintiff must show an attorney-client relationship or a specific undertaking in order to maintain an action in negligence for legal malpractice. The court further recognized that the high court recognized that persons who are legatees under a will and who lose their intended legacy due to the testator’s attorney’s negligence should be afforded some remedy pursuant to the principles of the Restatement (Second) of Contracts §302 (1979), which defines intended and incidental beneficiaries.
Although the courts in New York cling to the rule that attorneys are not liable to third parties, when ultimately determining the issues presented New York common law has adopted a balancing test. In the case of Prudential Ins. Co. v. Dewey, Ballantine, Dashby, Palmer & Wood, 80 N.Y. 2d 377 (1992), the Court of Appeal of New York discussed the theoretical basis for liability against legal professionals. The plaintiff, Prudential Insurance Company, was provided an opinion letter at the defendant law firm’s client’s instruction. Plaintiff claims that the letter contained false assurances that the mortgage documents that were to be recorded were legal, valid and binding obligations of the debtor and that neither the Federal nor State law would interfere with the practical realization of the benefits of the security intended.
The court first determined that the attorneys are not insulated from liability under Canons 4 and 5 of the Code of Professional Responsibility regarding the preservation of client loyalty and client confidences.
The court next looked to see if the relationship between the defendant lawyers and Prudential were sufficiently close as to approach that of privity. In determining whether such a relationship existed, the court looked to see if the attorneys knew that the opinion letter it prepared was to be used by the plaintiff for a specific purpose, i.e., the “end and aim” of the opinion letter was to provide information to the plaintiff; the plaintiff relied on the defendant’s opinion letter; and “by addressing and sending the opinion letter directly to [the plaintiff, the lawyers] clearly engaged in conduct which evinced its awareness and understanding that [the plaintiff] would rely on the letter, and provided the requisite link between the parties.” Id. at 385. The court determined that a duty of care did exist but that the defendant attorneys did not violate that duty as the opinion letter had qualifying language that limited the enforceability of the mortgage documents for the exact scenario presented in the case.
The Dangers and Benefits of the Erosion of the Privity Rule
Although many courts nationally favor abandoning the requirement of strict privity of contract, there are policy reasons for slowing the erosion of privity. The potential for conflicts of interest between the attorney’s responsibility to his client and his fears of liability to unknown third persons is a realistic present concern. There are times when what is in the client’s best interest is not necessarily in the interests of the non-clients, as the Connecticut case of Krawczyk shows. Additionally, the potential for non-client liability may lead counsel to take a more conservative approach when representing his client for fear of being sued by non-clients. Such an approach would directly contravene the rules of professional responsibility which require an attorney to represent his client zealously. Fear of non-client liability may temper an attorney’s zealous advocacy.
The economic ramifications of the expansion of non-client liability can create a burden on the legal profession. Higher malpractice insurance premiums, retreating from the practice of certain areas of law, such as trusts and estates planning, or passing on the costs of the increased exposure to the consumer are but only a few examples of the economic burdens placed on attorneys and society as a result of the erosion of privity.
As the cases demonstrate, there are certainly benefits to abandoning the strict privity of contract rule. Liability to non-clients may be the only way that many are able to recoup their losses especially when all those involved in the transaction are judgment proof. Certainly, it is not distasteful to put the economic burden on the blameworthy individual. Additionally, fear of being exposed to non-clients may be a way to police attorney misfeasance and nonfeasance as it may be an impetus for an attorney to exercise a high degree of professional care.
The cases cited in the survey of the select jurisdictions herald the dangers and pitfalls of abandoning or eroding the strict privity of contract rule. Above all, however, the cases show that the decision whether to erode the privity doctrine affording attorney’s immunity create inconsistent results because the balancing factors test can be skewed to yield any result the court wants. It is for this reason that it is very difficult to determine how a court will rule when presented with a non-client law suit against a negligent attorney.
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