Transactional Lawyers May Need to Explain Even Unambiguous Contract Terms to Client

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By Samson Habte

Sept. 17 — A transactional attorney may be liable for malpractice for failing to explain unambiguous terms in a contract negotiated by the client himself—even if the client was a sophisticated businessman and notwithstanding the lawyer's assertion that he was “primarily a scrivener” during the deal, the New Jersey Superior Court, Appellate Division, held Sept. 2 in an unpublished decision.

Although the client may not ultimately “be able to satisfy his burden of proof,” the trial judge erred in finding “that an attorney owes no duty, as a matter of law, to explain unambiguous business terms in a written agreement, when the client is a sophisticated businessperson who negotiated the terms of the agreement himself,” the court said in a per curiam opinion.

The panel also suggested several factors that may be relevant in determining whether a lawyer breached the standard of care in malpractice cases arising out of “complex transactional matters” involving “significant financial issues.” (See box.)

Dispute Over ‘Kicker.'

The ruling revives a malpractice suit that Robert Cottone filed against lawyers at Fox Rothschild LLP who advised him during negotiations with an insurance brokerage firm that bought Cottone's company in 2000 and wanted him to relinquish equity he acquired in that transaction.

Questions on Transactional Law Standards

The court suggested factors that could be relevant to determining whether a lawyer breached the standard of care in malpractice cases arising out “complex transactional matters” involving “significant financial issues.”

In such cases, it said, a jury might consider:

▸ “First, did the attorney ascertain the client's business objectives through appropriate consultation.”

▸ “Was reasonable advice provided to the client ‘on the various legal and strategic issues' bearing on those identified business objectives.”

▸ “During the drafting process, did the attorney scrutinize the proposed agreement to ensure that the writing effectuates the business objectives defined by the client.”

▸ “Did the attorney review the written agreement with the client, to determine that the client understood the material terms that might reasonably affect the client's decision to execute it.”

▸ “Were the various provisions to accomplish each of the client's stated objectives pointed out or, if they were not, did the attorney ensure that the client assents to the omission of any such objective.”

The court cautioned: “We do not suggest that all of these actions are always required. However, if the scope of representation includes one or more of these activities, failure to perform an included act in a reasonably competent manner may indicate a breach of the standard of care.”

The brokerage, NIA Group II LLC, sought to buy back shares Cottone acquired and a “Warrant” to buy additional shares to clear the way for a merger.

Cottone said NIA-II offered to provide a “kicker” on his equity if a redemption agreement was reached before the merger. The malpractice suit alleges that Fox Rothschild lawyer Eric J. Michaels negligently failed to alert Cottone to language in the redemption agreement which limited that “kicker” to stock Cottone already owned and not his “Warrant” rights.

According to the opinion, Cottone “solely negotiated” the terms of the redemption agreement, and he asked Michaels to review draft agreements without specific instructions to scrutinize the “kicker” provision.

‘Mere Scrivener'?

The trial judge granted summary judgment for Michaels and his firm, saying Cottone could not establish a breach because the language relating to the kicker was “unambiguous” and Cottone failed to give Michaels a “list of points” to look for when he asked Michaels to review the agreement.

According to the opinion, Cottone's expert witness “assailed Michaels' contention [that] he was a ‘mere scrivener' throughout the representation, and thus was only responsible for ensuring that the written agreement reflected the terms negotiated by plaintiff.”

To the expert, the court said, “this testimony demonstrated that Michaels had abdicated his role as counsel and reinforced his conclusion that Michaels failed to fully address the issues raised by the representation and advise plaintiff accordingly.”

The appeals court said summary judgment was premature because there remain genuine issues of material fact, including “whether plaintiff communicated to Michaels his desire and expectation that the Redemption Agreement include a kicker for his Warrant.”

“While plaintiff may not be able to satisfy his burden of proof with respect to his version of events, defendants should not have prevailed on that factual issue on a motion for summary judgment,” the opinion states.

Wilentz, Goldman & Spitzer P.A. represented Fox Rothschild. Robert W. McAndrew, Morristown, N.J., represented Cottone.

To contact the reporter on this story: Samson Habte in Washington at

To contact the editor responsible for this story: Kirk Swanson at

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