How Much Can You Rely On Your Consultant's Lawyer?

HOW MUCH CAN YOU RELY ON YOUR CONSULTANT'S LAWYER?

by Gary Lawson, JD, LLM,

Bruce Campbell, JD, and

Gavin Kahn, Esq.

A common practice in business today is for companies to focus on the core of their businesses while hiring third parties or consultants to handle many ancillary activities. For example, businesses that do not specialize in investing hire third parties to make investment decisions for them. Still other companies hire consultants to assume the liability for risky activities. An example of an attempt to shift risk to consultants can be seen in the direct marketing business. Frequently, the direct marketing company ('the Company') relies upon consulting firms to review, if not structure, a variety of marketing programs and promotions. It is common for the direct marketing consultant to obtain a legal opinion from a law firm that is chosen by the consultant. The legal opinion usually sought is on whether the particular promotion satisfies some or all federal and state laws regulating such activity.

It is common for the cost of the legal opinion to be considered an extra cost under the contract between the Company and the consultant, to be paid for by the Company. More often than not, the Company, the consultant, and the law firm know that the legal services are intended to benefit and be relied upon by the Company. Nevertheless, if there is a written agreement describing the legal services to be rendered, it is often between the consultant and the lawyer. And the Company is not a party to the agreement.

If asked, many companies that hire consultants and pay the attorneys recommended by the consultants often express the belief that any legal opinion rendered concerning their company is an opinion on which they can rely. Moreover, these companies frequently believe that if the legal advice given falls below the standard of care-that is, constitutes malpractice- that the company receiving bad advice can sue the lawyer. Many companies are surprised to learn that the legal advice that they paid for will not serve as a basis for a claim, even if the lawyer committed malpractice.

To gain an appreciation of how unusual this situation may seem to many companies today, a brief review of how tort law has evolved may be helpful. Prior to the 20th century, virtually all American courts refused to impose liability for negligence unless the injured party had a contractual relationship or was in privity with the party who injured him. Thus, if a manufacturer of 'widgets' put his product into the stream of commerce, he was only responsible to those with whom he was in privity (those who purchased his product from him directly). Gradually, the privity requirement was eroded. Early on in this evolution, manufacturers became liable to persons who bought their product from other parties who distributed the product through the chain of distribution. More recently, manufacturers have been held liable to persons who, although they did not buy the product in the stream of commerce, were injured by the product being used by someone who did purchase the product.

While the privity requirement was being relaxed in the context of product liability, the courts also began to relax the privity requirement for certain services. Thus, accountants who were negligent in rendering an opinion that a company's financial statements accurately portrayed its financial condition could be held liable to investors in the company who could show that they made the investment on the basis of the erroneous financial information. For an accountant to be found liable in such a situation, the accountant would have to have been aware that the financial reports were to be used for a particular purpose, that a known party was intended to rely on the report, and that there was some conduct on the part of the accountant that linked him to that party and evidenced the accountant's understanding of that party's reliance.(1)

Even though the privity requirement has been relaxed in cases brought against accountants, the courts have generally balked at relaxing the privity requirement for claims against lawyers. The courts have justified their adherence to the privity requirement on the basis that legal ethics require the lawyer to serve only his client. Thus, in most states, a lawyer may be found liable only to his client. The most frequently stated rationale for the privity requirement is that a lawyer must devote his efforts solely to the benefit of his client. On the other hand, one might attribute this state of the law to a silent fraternalism or an unspoken bond between lawyers and judges. That is, judges who were once practicing lawyers are sympathetic to the wishes of lawyers to avoid liability for their rendition of legal services. Regardless of the motivation for adherence to the privity requirement, the vast majority of states still require the existence of privity between a client and a lawyer before liability may be established against the lawyer.

Nevertheless, in a minority of states, the courts have looked at the lack of privity between an injured party and a lawyer and have accepted one of several theories in order to allow an injured party to establish liability against the lawyer. One theory allows persons who are intended third-party beneficiaries to establish liability against the lawyer. This theory has been used most frequently in the context of probate proceedings. For example, a testator gives instructions to his lawyer to set up a trust for A, B, and C. Yet the lawyer fails to establish the trust. As a result, A, B, and C sustain adverse tax treatment of their inheritance and are required to pay more taxes than if the trust had been established. In most instances, A, B, and C would not have a privity relationship with the lawyer. Nevertheless, the trust was specifically designed for their benefit. Unless the privity requirement is relaxed, A, B, and C will be unable to establish liability against the lawyer for malpractice. To provide A, B, and C with a remedy, some courts have said that because A, B, and C were the intended beneficiaries of the trust, they should be able to establish liability against the lawyer.

A second theory that has been used to relax the privity requirement against lawyers is to allow persons whose relationship to the transaction or event is so close that it places them within in a zone in which it is highly likely that they would be harmed. Defining the parameters of who is within such a zone has been difficult. The courts have struggled with this issue but have said that the analysis requires a detailed factual review and will be done on a case-by-case basis. These courts have generally looked to three criteria for imposing liability: (1) the awareness by the lawyer that the statement is to be used for a particular purpose; (2) reliance by a known party on the statement in furtherance of that purpose; and (3) some conduct by the lawyer linking him to the relying party and evincing his understanding of that reliance. Even though these criteria may be satisfied, a company will still only have the ability to establish liability against its consultant's lawyer in a handful of jurisdictions.

Therefore, companies that deal with consultants and their consultants' counsel should not rely on the possibility of the courts to relax the privity requirement. Instead, companies should take certain steps to ensure they will have recourse if bad advice is given to them by their consultants' attorneys. One solution is for the company to establish a contractual relationship directly with the consultant's law firm. In addition, all agreements between a company and its consultants should be reviewed by the company and its counsel to determine if the agreement with the consultant allows the consultant to hire counsel. Second, the company may be well served by including in their agreement with their consultants a provision that establishes a link between the legal services rendered to the consultant and the company. Third, the company could provide in its contract with the consultant that a copy of all correspondence between the consultant and the lawyer hired by the consultant must be sent to the company. Finally, the company could require that any legal opinion letters from counsel to the consultant be addressed to both the consultant and to the company.

Generally, when a company hires a consultant, there is an expectation that the company can rely on the consultant's lawyers. Nevertheless, this expectation can be frustrated unless the company takes steps to establish a link between itself and the counsel. A careful review of all contracts with the consultant should be undertaken to determine if consultants have the authority to hire counsel. Where appropriate, steps should be taken to protect the company's expectation that it can rely on its consultant's counsel.

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