Well Documented Advice Defeats Malpractice Claim

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The best is not always good enough. Clients sue their professionals, whether justified or not. So, while there is no way to eliminate malpractice exposure, there are plenty of steps to avoid or help to defend such a suit. One of the golden rules of risk management is to properly maintain a written record of communications with the client. In particular, documentation is especially important when the client and professional may disagree. A well-documented file will not prevent all lawsuits but, as exemplified in a recent New Jersey decision, may serve as a dispositive defense during litigation.

In the underlying dispute, discussed here, the CEO of a shipping company butted-heads with the board of directors. The CEO retained counsel to represent him during settlement discussions. However, the CEO and the board engaged in settlement discussions without input from the CEO’s counsel. When this information came to the attention of counsel, it repeatedly advised the CEO not to proceed with the settlement as contemplated. Nonetheless, the settlement was executed and the CEO stated on the record that he understood and approved the settlement.

Two years later, the CEO had a change of heart and filed a malpractice claim against his attorneys claiming that it was their ineffective representation which led to an unfavorable settlement. We call this the “settle and sue” method or “buyer’s remorse.”

On appeal, the court found that the CEO failed to provide any evidence that he was not advised of the consequences of the settlement and dismissed the case. The court found that the defendant law firm provided proof that it disagreed with the settlement and advised its client of the ramifications. Specifically, there were at least 13 separate documents relied upon by the defendant law firm that establish that the CEO proceeded with the settlement despite the law firm’s advice to the contrary.

This case provides a lesson to all professionals that a well-documented file goes a long way toward defeating a malpractice claim. Granted, we cannot prevent all suits, but professionals do themselves a great service by carefully documenting client communications. When settling cases, attorneys need to be mindful of the possibility of buyer’s remorse and take precautions to avoid liability. Attorneys should be careful to explain all the terms of the settlement and give their client ample time to weigh their options.   Attorneys should also document their explanation of the settlement terms and the client’s consent in writing. This may not stave off the buyer’s remorse lawsuit, but may help to preclude liability.