Two recent cases illustrate a common type of legal malpractice claim. In a recent case tried in Austin, a law firm was the only firm involved in a shareholder loan to the corporation, and drafted all of the documents for the transaction. A UCC-1 drafted by the firm and executed at closing was never filed, and the shareholder was unable to recover collateral for the loan upon bankruptcy of the corporation. The law firm claimed it had no duty to the shareholder, but the shareholder claimed that the firm represented him. The law firm did not provide a document clarifying who the client was in the transaction, and an associate testified in deposition that there was a “trust” relationship with the shareholder. On the other hand, the shareholder paid no legal fees and knew that the firm represented the corporation in other matters. After hearing conflicting expert testimony, the jury rendered a verdict against the law firm for $1.3 million.
In a California case, one law firm was involved in a real estate investment matter. The firm claimed it represented an entity formed to hold property. Investors in the entity claimed that they thought the firm was protecting their interests, too, and that they were never told that they would have personal liability for the investment. A jury rendered a $34.5 million verdict against the law firm.
While appeals are pending in both of these cases, they illustrate that lawyers face a serious danger that some “non-clients” may later claim that lawyers represent them. In Texas, a lawyer can have a duty to disavow an attorney client relationship if a person “reasonably believes that the lawyer represents them.” Parker v. Carnahan, 772 S.W.2d 151 (Tex. App.-Texarkana 1989, writ denied). To avoid claims from unanticipated claims from non-clients, lawyers should follow a number of practices.
- Use engagement letters and contracts. Specify who the client is and, often just as important, who the client isn't. When representing an entity, make sure that the person you are talking to knows that you do not represent them, and that you represent the company, if that is the case.
- Use declination letters. If you are not going to represent someone in a matter, document that fact in writing.
- Use non-engagement letters. It is not uncommon, as in the two cases noted above, for lawyers to work with unrepresented parties. Give those parties a letter that says that you are not representing them and that they should consult with their own counsel if they have questions.
- Avoid creating unintentional evidence you are someone else's lawyer. In one case, a Texas lawyer who represented the lender in drafting mortgage documents was considered to be the lawyer of the borrower because the borrower paid the lawyer's fees on the closing statement, and there was no other documentation of the attorney client relationship.
- Act in accordance with the scope of representation documents. Giving advice to non-clients or undertaking actions on their behalf may create duties to those persons, even if you have otherwise documented the attorney-client relationship appropriately. Texas has recognized a cause of action for negligent misrepresentation of facts to non-clients when the non-client relies on the lawyer's representation of facts. McCamish, Martin, Brown & Loeffler v. F. E. Appling Interests, 991 S.W.2d 787 (Tex. 1999).