Consequences of Formation

Consequences of Formation

The Restatement (Second) of Agency defines agency as the fiduciary relation that results when one person manifests consent that another act on that person's behalf and subject to that person's control, and the other consents to act.¹ This chapter has used that definition as a test for whether a client-lawyer relationship exists. The definition also says what follows once the relationship does exist, because each of its three phrases carries a consequence. A fiduciary relation gives the client claims against the lawyer, and those claims begin with proof of the relationship. Action subject to the principal's control gives the client a voice in the representation, which raises the question of who decides what. Action on the principal's behalf lets the lawyer bind the client to others, which raises the question of who bears the loss when a lawyer abuses that power.

Formation disputes are rarely academic for this reason. A person who suffered a loss wants to hold a lawyer responsible, or a lawyer wants to show that no duty ever attached, and the answer to the formation question decides which of them prevails. A stranger to the lawyer is rarely owed a duty of professional care, and a prospective client holds only the narrower protections described earlier. A client holds the full set of rights the relationship carries.

Duty and Malpractice Exposure

A client who blames a lawyer's carelessness for a financial loss must first prove that the lawyer was the client's lawyer. The relationship is the source of the lawyer's duty of professional care, so formation is the threshold issue in a legal malpractice claim.²

Legal malpractice is ordinarily an economic tort: it causes financial harm without personal injury or property damage, and it consists of breaching a duty that the contract or the relationship with the client created.³ The plaintiff therefore must first prove a client-lawyer relationship that establishes a duty on the lawyer's part. Breach, factual and proximate cause, and damages, the remaining elements of any negligence case, come into play only after the relationship has been shown.⁴

Duty comes first because negligence liability attaches only to the breach of an obligation owed to the particular plaintiff. Without a client-lawyer relationship there is rarely a duty, and without a duty there is no malpractice liability.⁵ The relationship does a second job. Because the harm in a malpractice case is almost always purely financial, the economic loss rule, which ordinarily limits negligence recovery for financial harm unaccompanied by injury to a person or property, would otherwise stand in the plaintiff's way. Given the relationship, that rule does not eliminate liability for negligence, so the relationship both creates the duty and makes a purely financial loss recoverable.⁶

Proof of the relationship usually follows the formation routes taught earlier in this chapter. Where the plaintiff signed a retainer agreement, the lawyer clearly owes a duty of care for the legal work done under it, and most relationships form by express agreement. A relationship may also arise by implication, and then the existence of a duty is a live issue. Courts look for an implied contract for the lawyer to perform legal work, commonly reject a unilateral or unreasonable belief by the plaintiff that the lawyer was acting, and often require a concrete communication asking the lawyer to take the matter. Neither a retainer nor a fee is necessary, although each counts as evidence. Whether a duty exists is a question of law, but many courts send disputed facts about the relationship to a jury, so a lawyer who denies the relationship often cannot win on summary judgment.⁷

On a fact pattern, ask first whether a relationship formed, because identical carelessness can support a claim for one plaintiff and none for another.

The rule that duty rests on the relationship has a counterpart for people outside it. A lawyer may owe a non-client a duty of professional care, but only in narrow circumstances, so the plaintiff must establish those circumstances with specific facts and cannot assume them from the bare fact of injury.⁸ The earlier subsections on identifying the client apply this point. A lawyer retained to represent an entity can be sued for malpractice by the entity but not by its CEO, its general counsel, a lower-level employee, or its shareholders, and a person who merely pays a client's fee is owed no enforceable duty absent an express agreement or facts that create an implied relationship.⁹ Deciding who the client is therefore decides who may sue.

The label fiduciary supports a second kind of claim. Because the lawyer stands in a fiduciary relationship with the client, the client may also be able to sue separately for breach of fiduciary duty, especially where the lawyer has violated the duty of loyalty or the duty of confidentiality.¹⁰ A separate fiduciary claim may be treated as redundant when the same facts already support malpractice, and the contract between client and lawyer can both create professional duties and limit them. A lawyer who reveals a client's confidences to a rival has breached a trust, and the fiduciary theory describes exactly that wrong.

The duty element matters especially to the client because agency law leaves few alternatives. The client, as principal, is ordinarily chargeable with the negligent acts of the lawyer, as agent, and an error the lawyer causes in the underlying matter usually cannot be undone there. A suit for damages against the lawyer is then the client's usual, if second-best, remedy.¹¹ That remedy depends on the duty, and the duty depends on whether the relationship formed.

Client Control and Authority

The phrase subject to the principal's control becomes, inside a representation, a rule about who decides what.¹³ In agency law, control means that the principal is in charge; the principal need not control every last detail of how the job gets done.¹⁴ Applied to a client and a lawyer, that idea divides authority along a natural line. The client decides what the representation is for, and the lawyer decides how to pursue it with the professional skill the client came to buy.

Model Rule 1.2(a) states the division as an ends-means rule. The client decides the objectives of the representation. The lawyer decides the means by which to pursue them, after consulting the client about those means, though the lawyer need not submit to the client's preference.¹⁵ The split tracks the reasons the relationship exists. Objectives belong to the client because achieving them is why the client hired the lawyer, and a lawyer who substituted a different goal would be performing a service nobody requested. Means belong to the lawyer because they call for professional judgment, and the duty to consult keeps the client informed and gives the client a chance to object before the lawyer acts.

The division is a default and not a cage. The Restatement of the Law Governing Lawyers lets client and lawyer agree which of them will make specified decisions, and it lets the client instruct the lawyer during the representation. A lawyer need not carry out an instruction the lawyer reasonably believes to be contrary to professional rules or other law, and if the client persists in a wrongful instruction, the lawyer would need to withdraw.¹⁶ Some objectives belong to the client in an especially personal way. A criminal defendant, once fully informed by the lawyer, alone decides whether to plead guilty, whether to testify, and whether to waive a jury trial, and a lawyer who sees signs of diminished capacity looks to Rule 1.14.¹⁷

Settlement shows the division at work, and it is the decision on which a lawyer most easily acts without authority. The client in civil litigation decides whether to settle and on what basis.¹⁸ The agency reason is that the client retains legal control over the subject matter of the litigation and over important decisions affecting the client's substantial rights.¹⁹

A lawyer can still hold authority to settle, so recall how agents acquire authority. Actual authority comes from the principal's manifestation to the agent, either an express instruction or an implied grant to take the steps needed to complete the assigned task.²⁰ Employment as a litigator carries implied actual authority to manage the procedural side of the case and to open settlement negotiations with opposing counsel. It does not carry authority to reach a settlement, and the employment relationship alone gives the lawyer no implied authority to settle.²¹ The lawyer cannot fill the gap alone, because an agent cannot create her own authority.²²

Authority to settle can also arise from the client's conduct. Implied actual authority results from conduct that leads the lawyer to reasonably believe the client wants the lawyer to act, and courts judge it by reasonableness across the whole relationship between client and lawyer.²³ Pohl v. United Airlines found implied actual authority to settle on facts of this kind, where the client's conduct toward the lawyer gave the lawyer reason to believe the client wanted the case settled. The contractor client's silence gave the lawyer nothing to read as approval. On a fact pattern, a statement that the client hired the lawyer to handle the lawsuit supplies authority to negotiate and no more. The lawyer's own conviction that the deal is fair supplies none, because only the client's words and conduct can create authority. The next subsection asks where the loss falls when a lawyer goes past authority dishonestly.

Risk of a Dishonest Lawyer

Delegation works because an agent can act for the principal in a way that binds the principal to a third party, and an agent who abuses that power can bind the principal just as effectively.²⁵ When the abuse injures someone who did nothing wrong, the law must choose which of two innocent parties absorbs the loss. The client is the principal, having manifested consent that the lawyer act on the client's behalf and subject to the client's control, and that status decides the choice.²⁶

re Dreier applied the rule to a lawyer's theft. Gardi had claims against JANA, and the attorney Marc Dreier represented him. Dreier negotiated a settlement with JANA that Gardi refused to sign. Dreier then forged Gardi's signature on the agreement. JANA gave Dreier a check for $6.3 million under the purported settlement, and Dreier stole the money to invest in a Ponzi scheme he was running on the side.²⁷ Learning of the theft, Gardi argued that the settlement was unenforceable and that his claims against JANA therefore remained viable. Had the court accepted that argument, JANA would have borne the loss from Dreier's theft.

The court rejected the argument. Dreier had duped both parties, and the well-settled rule of agency law dictates that, as between two innocent parties, "the risk of loss from the unauthorized acts of a dishonest agent falls on the principal that selected the agent."²⁸ Gardi had selected Dreier, so the settlement stood. The rule is a tiebreaker for cases in which neither party is at fault and the loss must land somewhere, and it does not depend on any wrongdoing by the client.

The rule makes sense because of what each innocent party could do before the harm occurred. Gardi chose Dreier and, as principal, could direct his work. JANA could not choose Dreier or direct him; it could rely only on the signed agreement in front of it. Shifting the loss to the party with no means of guarding against the agent would leave a good-faith payor exposed to every lawyer's fraud on a client it never met, while leaving the loss with the principal gives every client a reason to select a lawyer with care. The same allocation explains why the client's usual recourse is a claim against the dishonest lawyer, the second-best remedy noted in the malpractice discussion above, while the settlement that the other side performed in good faith stays in place.

The case is easy to file under apparent authority, and the ordinary rule for that doctrine shows why the court did not. Apparent authority is created by the principal's manifestations to the third party. If a buyer tells a seller that an agent may negotiate the purchase of an antique car and then privately orders the agent to make no deal, the agent's later bargain still binds the buyer, because the buyer's own statement gave the seller reason to believe the agent had authority.²⁹ An agent cannot supply that missing piece alone, since an agent who merely announces that authority exists has created nothing, and the principal's conduct toward the third party must do the work.³⁰

In Dreier that inquiry never began. Dreier did not present himself as Gardi's agent exercising authority. He forged Gardi's signature, so the agreement appeared to be Gardi's own act in Gardi's own name, and the court held that the settlement bound Gardi without regard to Dreier's apparent authority.³¹ The two situations therefore reach the principal's liability by different routes. In the antique-car case, the principal is bound because of what the principal told the third party. In Dreier, the principal is bound because the risk of a dishonest agent's unauthorized act falls on the one who selected the agent. An answer that spends its time on whether Gardi ever told JANA that Dreier could settle asks the wrong question for a forgery.

On a forged-settlement fact pattern, say that the lawyer had no authority of any kind, that apparent authority is beside the point because no purported agent was acting, and that the loss as between the client and the innocent payor falls on the client who selected the lawyer, whose recourse is a claim against the lawyer.