Transactional malpractice, distinct from litigation malpractice, occurs when an attorney improperly handles a transaction or provides incorrect legal advice concerning a transaction. This type of malpractice can lead to significant financial harm or other damages for individuals, corporations, and small businesses. Unlike litigation malpractice, which involves errors in the handling of lawsuits, transactional malpractice pertains to the attorney’s performance in advising and managing business deals, contracts, real estate, trust, tax, and other non-litigation matters.
Transactional malpractice cases often arise from a variety of situations. For example, if a business hires an attorney to draft a contract, oversee a merger, or provide guidance on regulatory compliance, and the attorney makes errors or gives bad advice, the client may suffer substantial financial losses. These losses can stem from poorly drafted agreements, missed deadlines, inadequate due diligence, or failure to disclose critical information. The attorney’s negligence in these instances can severely impact the client’s business operations and financial stability. For example, we once represented a newly formed company that had perfected a way to automate the delivery of prescription medicine in a vending-type machine which was placed in pharmacies and nursing homes. The company had hired a large law firm that specialized in helping start-up health care companies. Our client was growing fast and raising millions of dollars in capital from investors. The law firm failed to inform our client that taking money from physician investors that actually prescribed medicine through their vending machines was a violation of federal law, subject to a $8,000 per violation penalty. The company was forced to file for bankruptcy protection because of the negligent advice of its attorneys. This case was settled for a confidential amount shortly before trial and is a perfect example of transactional malpractice.
To establish a case of transactional malpractice, several key elements must be proven. First, there must be evidence of an attorney-client relationship, indicating that the attorney owed a duty of care to the client. This duty requires the attorney to perform their services with the competence and diligence that is standard in the legal profession. Second, the client must show that the attorney breached this duty by providing substandard legal services or advice. This breach can manifest in various ways, such as errors in drafting documents, failure to conduct proper research, or giving advice that is legally unsound.
Once a breach of duty is established, the next step is to demonstrate causation. The client must prove that the attorney’s negligence directly caused the financial harm or other damages suffered. This often involves a detailed examination of the transaction and the attorney’s role in it, as well as expert testimony to establish the connection between the attorney’s actions and the resulting harm. Finally, the client must show that they incurred actual damages as a result of the attorney’s malpractice. These damages can include financial losses, lost business opportunities, and other quantifiable harms.
Transactional malpractice can have devastating effects on businesses and individuals. As seen in the example above, for small business owners, the impact can be particularly severe, potentially leading to bankruptcy or significant setbacks. Large corporations, while better able to absorb financial losses, can still suffer from damaged reputations, lost profits, and disrupted operations. In some cases, the consequences of transactional malpractice can be long-lasting, affecting the client’s ability to conduct future business or maintain stakeholder trust.
One common scenario in transactional malpractice involves real estate transactions. If an attorney fails to properly review a property title or overlooks zoning issues, the client may end up with a property that cannot be used as intended or that has legal encumbrances. Another example is in the context of mergers and acquisitions, where inadequate due diligence or poorly drafted agreements can lead to unforeseen liabilities or missed opportunities.
Clients who believe they have been victims of transactional malpractice should seek legal counsel promptly to evaluate their case. It is important to act within the statute of limitations for malpractice claims, which varies by jurisdiction. Delaying action can hinder the ability to recover damages and rectify the situation.
Attorneys facing transactional malpractice claims may argue that the client’s losses were due to factors beyond their control or that the client contributed to the outcome through their own actions or decisions. This defense highlights the importance of a thorough evaluation of all aspects of the transaction and the attorney’s involvement.