Originally Published in the Illinois Bar Journal, November 1998

Originally Published in the Illinois Bar Journal, November 1998.

Lawyer Liability in Illinois

and the Restatement of the

Law Governing Lawyers

By Peter A. Monahan and Patricia M. Noonan

I. Introduction

For decades, the American Law Institute has published Restatements aimed at restating the law in areas such as torts, agency, and trusts. For the first time, the Institute is formulating a Restatement that will address the law specifically applicable to lawyers. The "Restatement of the Law Governing Lawyers" (the "proposed Restatement") encompasses two significant areas. It includes ethical rules governing lawyer conduct in the disciplinary context, as do the American Bar Association's Model Rules of Professional Conduct and the Illinois Code of Professional Responsibility. It also includes the law pertaining to a lawyer's civil liability and represents the first attempt by a national group to organize the law on this subject.

The Institute has substantially completed its review of the project. The chapter governing attorney civil liability[1] had been tentatively approved by the Institute's membership at the May 1997 annual meeting.[2] Several topics pertaining to attorney ethical rules[3] had already been granted tentative approval at the Institute's May 1996 annual meeting. In May 1998, at the last annual meeting held by the Institute, the membership granted approval to the remaining ethical rule topics.[4] The final, official text for the entire Restatement is expected to be published in 1999.

Upon final publication, the Institute's positions on attorney civil liability will undoubtedly shape the law of legal malpractice in Illinois, especially an attorney's duty of care. Although Illinois case law has established the scope of an attorney's duty to both clients and non-clients and has defined the applicable standard of care for civil actions, several issues relevant to an attorney's duties are unexplored by Illinois case law.

Because decisional law is fact specific, it often fails to help attorneys predict when a duty may be owed. Since the purpose of the proposed Restatement is to organize all attorney conduct issues in a code-like document, it is instructive on numerous issues. This article will examine the impact of the proposed Restatement on Illinois attorneys' civil liability duties to clients and non-clients.

II. Illinois Attorneys' Duties to Clients

Illinois law recognizes that the scope of an attorney's duty to a client exists in relation to the representation sought by the client and undertaken by the attorney.[5] Illinois reviewing courts' application of this principle, however, has been limited, and the holdings fact specific.

A. Defining the Scope of Representation

In Practical Offset, Inc. v Davis[6] the plaintiffs filed a legal malpractice action asserting that their hiring an attorney to represent them in a business sale imposed an obligation on the attorney to ensure proper filing of a financing statement necessary to perfect a security interest the clients retained in the assets sold.

The first district appellate court noted that the contract for sale drafted by the attorney expressly referred to the security interest and the filing of the financing statement, and that the attorney admitted that he was retained for the purpose of negotiating and completing the contract.[7] The court held that even though the clients did not specifically employ the attorney to file a financing statement, it would be unrealistic to require a specific direction in those circumstances. The attorney's employment, the court concluded, was broad enough to encompass filing of the financing statements.[8]

In Schmidt v Hinshaw, Culbertson, Moelmann, Hoban & Fuller[9] the first district acknowledged that the scope of an attorney's representation exists only in relation to the representation sought by the client and the authority conferred. There, the court granted summary judgment to a law firm on the question of its breach of the duty of care. The court rejected the client's argument that an issue of fact existed whether the attorney disregarded the client's instructions that the sale proceeds from the client's business be entirely personally guaranteed. The court noted that the client communicated several other goals to his attorney and that those considerations, along with the aims of the other parties, helped determine the ultimate structure of the transaction.[10]

The proposed Restatement similarly recognizes that a lawyer is not liable for failing to act beyond the scope of the representation defined by the client's objectives[11] and that individual clients may define their objectives differently. The cited examples are one litigant seeking as much money as possible, another an amicable resolution, and a third a precedent implementing his view of the public interest.[12] Thus, the proposed Restatement envisions a broad application of this limitation on an attorney's duty.

The proposed Restatement further qualifies this limitation on an attorney's duty with the express requirement that

the attorney appropriately inform and consult with the client about the client's objectives.[13] Illinois case law has not addressed an attorney's duties where a client seeks limited legal representation, although one Illinois court, in dictum, has recognized the medical negligence cause of action for lack of informed consent as applying to legal malpractice actions.

In Metrick v Chatz,[14] the court explained that, if a client suffers damage that was a foreseeable risk of which he or she was not informed, the attorney may be liable. The court, in Metrick, defined the duty of informed consent as every attorney's obligation to inform a client of the alternative legal solutions and to explain the foreseeable risks and benefits of each.[15]

B. Agreements to Limit the Scope of Representation

The proposed Restatement also addresses the validity of agreements between a lawyer and client to limit the scope of the attorney's representation.[16] Examples of limitation agreements include agreeing to handle a trial but not any appeal, counseling a client on only the tax aspects of a transaction, and advising a client about a representation in which the primary role has been entrusted to another lawyer.[17] The agreement may be in writing or oral, or it may be evidenced by the circumstances.[18]

The proposed Restatement says that the agreement's validity depends both on the lawyer obtaining the client's consent after adequate advice and on the reasonableness of the limitation in the circumstances.[19] The commentary explains that a client must be informed of significant problems that a limitation might cause. In the cited example of a lawyer providing only tax advice, the lawyer must advise the client that the transaction may raise non-tax issues and inform the client of any disadvantages in dividing the representation among several lawyers.[20]

The proposed Restatement's commentary on limitation agreements also elaborates on the reasonableness requirement and in so doing brings in several concepts new to Illinois law. It introduces the "sophisticated client" by taking the position that "[w]hen the client is sophisticated in such waivers, informed consent ordinarily permits the inference that the waiver is reasonable."[21] It does not, though, define the "sophisticated client" or otherwise indicate when an individual or corporation qualifies as one. For non-sophisticated clients, the reasonableness requirement is satisfied if the benefits supposedly obtained by the waiver could reasonably be considered to outweigh the potential risk posed by the limitation.[22]

The proposed Restatement's illustration of waiver benefits introduces another issue unexplored by Illinois courts: that a lawyer and client may agree that the lawyer will provide less than frill representation in a case. One illustration is a law firm explaining to the client corporation's inside legal counsel that the firm can litigate the case within the corporation's proposed budget but only by conducting limited discovery in the case. The corporation's benefit, which justifies less-than-full representation, is using counsel of its choice at limited expense.[23]

Another illustration is a legal clinic offering for a small fee to have one of its tax specialists conduct a half-hour review of a client's income tax return. The clinic advises at the outset that the review may fail to find important tax matters and that clients must pay for a second appointment to get more complete consideration of their returns. Limited representation is justified here because clients gain the benefit of an inexpensive but expert tax review when they might otherwise receive no review at all.[24]

Finally, the Proposed Restatement's commentary states that special circumstances may warrant the limitation agreement - e.g., a client may seek assistance on a matter on which the statute of limitations is about to run. In these circumstances, a client would not reasonably expect extensive investigating and research before the case must be filed. Another cited special circumstance is where the client asks the lawyer for help in an area outside the lawyer's expertise because other counsel are unavailable. The lawyer must, however, assist only to the extent reasonably necessary to deal with the situation.[25]

III. Attorneys' Duties to Non-Clients

A. Pelham v Griesheimer and Intended Beneficiaries

Prior to the seminal decision in Pelham v Griesheimer[26]; Illinois attorneys had a duty of care only to their clients and not to non-clients. In Pelham, the Illinois Supreme Court borrowed from contract law the concept of a third

party direct beneficiary and the distinction between intended and incidental beneficiaries to determine the scope of an attorney's duty of care to non-clients in the absence of contractual privity.[27] To succeed in a negligence action against an attorney, a non-client must prove that "the primary purpose and intent of the attorney-client relationship itself was to benefit or influence" the non-client third-party.[28]

The Pelham court's narrow exception to the privity requirement was based in part on the court's recognition of potential conflicts of interest between the client and non-client. The court particularly noted the conflict-of-interest problem in adversarial proceedings. The court stated that when a client's interest is involved in an adversarial proceeding, imposing a duty on the attorney to another person would interfere with undivided loyalty to the client.[29] In adversarial cases, the court concluded that a non-client would have to prove a "clear indication" of an "intent to directly benefit" the non-client.[30]

In Pelham, the court found that an attorney who represented a woman in her divorce proceeding owed no duty to her children because they were only incidental beneficiaries of the representation. The children alleged that the attorney failed to ensure that they remain beneficiaries under their father's life insurance policies as required by the divorce decree. The court held that the attorney was hired for the primary purpose of obtaining a divorce for his client, not to benefit her children.[31]

Illinois appellate districts have had many occasions to apply the primary, intended beneficiary test. They have found a duty in non-adversarial circumstances where the client's intent is expressly indicated, e.g., where there are express beneficiaries under a will.[32] Courts have had more difficulty applying the Pelham rule where the intent and adversarial nature of the direct attorney-client relationship are not readily discernible. For the most part, Illinois appellate districts have reiterated the concerns set forth in Pelham in disallowing actions where they find the non-client's relationship to the client is adversarial.[33]

B. Voluntarily Undertaking a Duty to Third Parties

In Pelham, the court also indicated in dicta that a lawyer could voluntarily undertake a duty to a non-client. The court recognized that when a lawyer voluntarily performs a service that has foreseeable consequences to a non-client third-party, the lawyer has a duty to exercise reasonable care to the non-client because both the client and non-clients could have justifiably relied on the lawyer's undertaking.[34] This situation would have arisen in Pelham, the court stated, if the attorney had undertaken to notify the insurance company or the husband's employer of the provision in the divorce decree.[35]

The basis of liability referred to by the Pelham court was the attorney's "undertaking] a duty"; however, the

court did not say whether the general tort law elements of the "voluntary undertaking" theory of liability also apply to legal malpractice actions.[36] Under general tort law, courts have held that any duty to a third party arising from a voluntary undertaking to perform services is limited to the undertaking.[37] They also have required the third party's reasonable reliance only in cases of "non-feasance" - where the party fails to perform promised services - as opposed to "misfeasance," where the party negligently performs a service.[38]

Only one Illinois reviewing court's opinion subsequent to Pelham has addressed the undertaking-basis for an attorney's liability to a non-client. In Geaslen v Berkson, Gorov & Levin, Ltd.,[39] the first district appellate court considered whether the buyers' attorney in a failed stock deal, who had sent an opinion letter to sellers stating that he had no reason to suspect buyers' representations and warranties were untrue or misleading, could be found liable for negligence. The court found that the buyers' attorney owed a duty to the sellers because the attorney undertook to render the letter of opinion but limited the duty to the accuracy of the matters expressed in the opinion letter. The duty did not extend to investigation and disclosure of matters beyond the scope of the letter.[40]

The court did not reach the other required elements of the action, finding the complaint appropriately dismissed because the allegations were insufficient regarding matters in the opinion letter. However, the court cited cases from other jurisdictions that applied the elements applicable to negligent or intentional misrepresentation causes of action to claims of inaccuracies in attorney opinion letters.[41]

Nor did the Geaslen court address whether the undertaking theory applied in both the adversarial and non-adversarial settings, though it did note that since the opinion letter was prepared pursuant to the attorney's own client's request, a lesser conflict-of-interest concern existed than in Pelham.[42] Although the Geaslen decision was appealed, the Illinois Supreme Court did not have occasion to address these issues since the defendant's attorneys did not contest the existence and scope of the duty of due care.[43]

C. The Proposed Restatement Position

The proposed Restatement's position on an attorney's duty of care to non-clients includes liability theories based on the direct third-party beneficiary and undertaking concepts.[44] It also imposes certain obligations on attorneys to non-clients - not imposed by Illinois courts,- in situations where the lawyer represents a fiduciary.[45]

The Restatement requires only that the client's intention to benefit the non-client be "one of the primary objectives of the representation," not the "primary or direct purpose of the transaction or relationship."[46] This provision is stricter than an earlier draft, which required only that the "client intends the lawyer's services to benefit the non-client,"[47] but it still suggests that there could be several objectives to the representation.

The Restatement's rule likely would have changed the outcome of many Illinois cases where courts found a claimant to have benefited from a representation but disallowed the action because benefiting the claimant was not the primary and direct reason for the representation.[48] Further, the commentary and illustrations do not indicate which situations satisfy the requirement other than the obvious example of an express beneficiary under a will.[49] As a result, if the proposed Restatement's rule were adopted by Illinois courts it would likely cause further uncertainty about attorneys' liability.

The proposed Restatement offers clearer guidance about duties to non-clients in "undertaking" situations. It appropriately labels the duty "inviting reliance of non-clients" because the duty arises when the lawyer or the client (with the lawyer's acquiescence) invites the non-client to rely on the lawyer's opinion or services and the non-client relies.

The only qualification on the duty is when, under applicable tort law, the non-client is too remote from the lawyer to be entitled to protection.[50] It cites as an example differences in general tort law about limitations of duty on those supplying information for the guidance of others, which are set forth in Restatement Second of Torts Section 552(2). The proposed Restatement makes no qualification for the adversarial nature of the relationship between the client and non-client. The commentary explains that the lawyer's client typically benefits from the non-client's reliance, and it summarily concludes that recognizing the claim does not conflict with duties the lawyer properly owes to the clients.[51]

In addressing the specific elements of the claim, the proposed Restatement explains that in the case of an opinion letter, the cause of action is usually identical in substance to negligent misrepresentation and subject to rules governing proof of materiality, reliance, and the like.[52] The duty, according to the Restatement, requires the lawyer only to use care to avoid making or adopting representations, not to prevent misrepresentations by others in the drafted documents. It offers no further guidance regarding the elements of the action in circumstances involving legal services, other than to state that the analysis is similar.[53]

In addition, the proposed Restatement allows a lawyer to specify that an opinion or representation is directed only to a client or is based on facts provided by the client without independent investigation.[54] The effectiveness of this limitation depends on-whether it was reasonable under the circumstances to conclude that recipients of the opinion also got the limitation or disclaimer and understood its import.[55] One of the specified relevant circumstances is whether the recipient is represented by counsel or a similarly experienced agent.[56]

Unlike Illinois law, the proposed Restatement sets forth a third basis for imposing a duty of care to non-clients on attorneys; i.e., where the attorney represents a client acting in a fiduciary capacity for the non-client, such as trustees, executors, and guardians.[57] This duty of care, however, is very limited. It requires a lawyer to use care only to prevent or rectify a client's breach of fiduciary duty to the non-client where the breach constitutes a crime or fraud or where the lawyer has assisted in the breach.[58] The proposed Restatement does not adequately describe what constitutes assisting in a fiduciary breach, merely citing the examples of a lawyer preparing documents needed to accomplish the breach or assisting helping the fiduciary to conceal it.[59]

The duty discussed by the proposed Restatement is one that, if unmet, gives rise to a negligence action; it does not address the fiduciary duties a fiduciary client may owe to the non-client beneficiary, which many courts, including those in Illinois, have held may be asserted derivatively in actions against the attorney.[60] The duty arises only when circumstances known to the lawyer make it clear that action by the lawyer is necessary to prevent or mitigate the client's breach of fiduciary duty. It does not create a duty of inquiry, and a lawyer may assume, in the absence of contrary information, that the client is complying with the law.[61]

The duty would not apply, however, where it would create conflicting obligations that might impair the lawyer's performance for the client. For example, if the lawyer were subject to liability for assisting the fiduciary in an open dispute with the beneficiary, or reasonably believes the action to be forbidden by professional rules of conduct, the duty would not apply (e.g., the attorney would not be liable for failing to disclose confidences when he or she reasonably believes disclosure is forbidden).[62]

IV The Standard of Care Applied to Illinois Attorneys

A. "Errors in Professional Judgments" - the Illinois Approach

For purposes of determining a lawyer's liability for malpractice, Illinois courts apply the general standard of care of professionals. A lawyer who owes a duty must exercise the degree of care expected from the legal profession. [63] Illinois courts, except in the rare case where the attorney's conduct falls within the common knowledge of lay persons, require that the standard of care be established through expert testimony.[64]

Illinois case law, however, distinguishes between attorney negligence and mere errors of judgment. An attorney is not liable for errors in judgment, only for failing to exercise a reasonable degree of care and skill, even if it led to an unfavorable result for the client.[65] Illinois courts have accepted the "error in professional judgment" rule in legal malpractice actions, recognizing the unique aspects of legal work. "Attorneys are retained to exercise their judgment on behalf of their clients in areas where there are no sure and definite answers and attorneys cannot always determine future courses of action by precise mathematical equations. Criticism in hindsight of one of many courses of action is not probative of negligence."[66]

Although numerous Illinois reviewing courts have cited the "error in professional judgment" rule, few have had occasion to apply the rule. Illinois case law has not sharply defined the scope of the rule or made clear whether the trial judge decides the question as a question of law or the trier of fact based on expert testimony. Goldstein v Lustig[67] is the only case in which an Illinois reviewing court applied the rule to defeat an action at the pleading stage. In Gelsomino v Gorov,[68] on the other hand, the same first district appellate court reversed the trial court's ruling, which had entered summary judgment under the error of professional judgment rule. The court stated that the question is usually one of fact to be determined through expert testimony.[69]

Unlike. Illinois, several other jurisdictions have taken a more aggressive approach, defining the scope of the rule and holding that the trial judge should make the determination of its applicability to defeat complaints at the pleading stage.[70] These courts have been especially critical in reviewing complaints alleging errors made by an attorney in preparing for trial and during the course of a trial.[71] In contrast, only one Illinois reviewing court has had occasion to even consider the rule in the context of an attorneys trial decisions.[72]

B. Professional judgment-the Restatement Approach

The proposed Restatement is unlikely to have any effect on future Illinois courts' review of this issue. The Restatement discusses the concept of professional judgment with regard to the competence standard, but does not define the scope of the rule or explain how the question should be resolved.[73] In its general discussion of the competence standard, it states that "[i]n appropriate circumstances, a tribunal passing on a motion for summary judgment or directed verdict may determine whether a lawyer has satisfied the duty."[74] It does not, however explain whether a court's determination that an attorney was exercising professional judgment may be an "appropriate circumstance[]" to grant summary judgment or a directed verdict.

In contrast to its treatment of the "error in professional judgment rule," the proposed Restatement speaks more fully to other competence-standard issues that have not been adequately addressed by Illinois case law. An issue yet to be addressed by Illinois reviewing courts is whether a higher standard of care will be imposed where, for example, a lawyer claims to be a specialist.[75]

The proposed Restatement explains in commentary that a higher standard than general competence applies when a lawyer represents that he or she has greater competence or will exercise greater diligence than would the typical lawyer in good standing undertaking similar matters.[76] The commentary, though, does not define the higher standard or indicate how courts will determine it. The higher standard will apply whether it is made directly to the client or indirectly through an advertisement, listing, or assertion of specialization on a letterhead.[77] Further, the representation may be made on behalf of the lawyer or his or her law firm.[78]

The proposed Restatement also allows agreements "to specify the level of competence or diligence that the lawyer is to provide."[79] This wording was changed from a previous draft, which provided "[i]n limited circumstances, a client and lawyer may enforceably agree that the lawyer will provide services at a level of competence less than ordinarily required."[80] The examples set forth in the agreed-upon version suggest that an attorney and client may agree to a lesser standard of care than the general competence standard. It cites the example of a sophisticated client insisting on a trusted lawyer's opinion in a field in which the lawyer is unskilled. It also cites agreements to provide services only within an agreed-upon budget or according to an agreed-upon timetable.[81] It does not explain, however, how an attorney's conduct is to be judged under a lessened standard.

C. Ethics Rules and Establishing the Standard o f Care - the Illinois Approach

Illinois case law also has been relatively limited in its discussion of what legal experts may rely on to establish the standard of care. One issue that Illinois and other courts have struggled with has been the use of ethical codes in defining the standard of care. Ethical codes drafted by the American Bar Association and most states, including Illinois, have made careful efforts in their preambles to limit the legal effect of the code provisions to the disciplinary context.[82]

As a result, courts have uniformly recognized that an ethical code violation does not constitute an implied cause of action for legal malpractice.[83] Only a few jurisdictions have held that an ethical code conclusively established the standard of care[84] or, on the other hand, that ethical standards are inadmissible in a legal malpractice action.[85] The majority of jurisdictions have held that evidence of ethical code violations may be relevant in establishing the standard of care, although there is wide divergence in the substance and extent of the evidence actually admitted.[86]

While some Illinois cases have allowed the introduction of ethical rules as evidence on the standard of care,[87] the admissibility of ethical rules has remained largely unaddressed in Illinois reviewing courts. There is no Illinois Supreme Court case that sets forth the manner and substantive content of admissible evidence. Only one Illinois Appellate Court district, in Mayol v Summers,[88] has found it appropriate for jury instructions in legal malpractice cases to quote disciplinary rules, and no Illinois reviewing court to date has addressed the interplay between evidence of an ethical violation and the role of an expert witness in a legal malpractice case.

D. Standard of Care - the Restatement Approach

In contrast to the Illinois and other ethical codes, the preamble to the proposed Restatement's preamble ethical code expressly states that the lawyer codes unmistakably help define standards of conduct relevant to civil liability claims against members of our profession.[89] The proposed Restatement's civil liability provisions also expressly state that proof of an ethics rule violation may be considered by a trier of fact as an aid in understanding and applying the standard of care "to the extent that ... proof of the content and construction of [the ethical rule] is relevant to [the claim].^"[90] It qualifies the legal effect of the proof, though, by stating that such proof does not preclude a claim that the lawyer's conduct, in the circumstances, fulfilled the duty of care.[91]

Most significantly, the proposed Restatement states that an expert witness may rely on the ethical rule in forming an opinion on the standard of care and may testify as to its construction and application to the circumstances.[92] In effect, it allows experts to dispute the interpretation and application of the ethical rules and allows a lay jury to determine the correct interpretation. Further, the proposed Restatement states that a court may instruct the jury about the content and construction of the rule and its bearing on the standard of care[93] It does not, however, explain how a court should instruct the jury when the experts dispute the content and construction of the rule.

V Conclusion

The positions taken by the American Law Institute in the proposed Restatement on the law governing an attorney's duty of care are extensive and are likely to have a dramatic effect on rulings by Illinois courts on this subject. Several of the Institute's positions have addressed issues largely unexplored by Illinois courts, including agreements to limit the scope of representation and specifying the level of attorney competence.

The Institute also addresses several concepts unique to Illinois law, such as the "sophisticated" client. The Restatement fails to fill in gaps in Illinois case law in other areas, however, such as defining an attorney's duties to non-clients and determining whether attorneys should be held liable for errors in professional judgment under the competence standard.■