Risk Management Tip: Understanding Duties to Third Parties, Part 1

By Jennifer Becker, Long & Levit

The primary duty to a non-client is to be truthful. This month we examine this duty in litigation.
Generally, attorneys owe no duty to a non-client. In Goodman v. Kennedy (1976) 18 Cal.3d 335, purchasers alleged they were damaged because of negligent advice given by an attorney to his clients concerning issuing stock. After purchasers bought the stock from the clients, it was determined the sale violated securities laws and the stock was rendered valueless. The Supreme Court rejected the purchaser’s negligence claim, concluding that the attorney had no relationship with the purchasers, and no duty of care.

The Court noted that the advice was neither communicated to purchasers, nor was it given to enable the clients to satisfy any obligations to the purchasers. The complaint did not allege that purchasers had any relationship to the lawyer’s clients or to the corporation as stockholders or otherwise when the advice was given. The court also reasoned the purchasers were not parties upon whom the clients intended to confer a benefit when the defendant attorney provided the advice; they were only parties with whom defendant’s clients might negotiate a bargain at arm’s length. The court concluded that a finding of duty under the circumstances would impose an undue burden on the profession and a diminution in the quality of legal services received by the client. Id. at 343-344.

Contrast Goodman to Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2003) 107 Cal.App.4th 54 (rev. denied 7/16/03.) An insurer waived its reservation of rights for intentional and willful acts in a construction defect dispute. After plaintiffs prevailed against the insured contractor on fraud claims, the insurer’s counsel asserted there was no coverage for fraud damages, a misrepresentation given the insurer’s waiver. The Plaintiffs agreed to a settlement consistent with the attorney’s representation, forgoing recovery for intentional claims. When the plaintiffs learned of the misrepresentation, they sued the attorney and his law firm for fraud.

Drawing heavily on the Restatement Third of Law Governing Lawyers and Cicone v. URS Corp. (1986) 183 Cal.App.3d 194, the court stated that attorneys, even when acting for their clients, can be personally liable for fraudulent conduct toward third parties. Shafter, supra, 107 Cal.Atpp.4th at 70 – 72. The attorney’s misrepresentation about the insurance coverage was a false statement of fact, not a non-actionable legal opinion.

The Berger Court held the litigation privilege, Civ. Code § 47, did not protect the attorney from liability, because its application would contravene California’s Insurance Code. Shafter, supra, 107 Cal.Atpp.4th at 78. The litigation privilege will not apply when it would override the purpose of a specific statutory scheme. People v. Persolve (2013) 218 Cal.App.4th 1267, 1275. Fraudulent communications within the litigation context will not be protected if a plaintiff can establish a specific statutory scheme would be rendered pointless by application of the privilege.

About the author
Jennifer Becker is certified by the State Bar of California, Board of Legal Specialization in Legal Malpractice, and is Chair of BASF’s Legal Malpractice Section.  She is a partner at Long & Levit, and the Editor-in-Chief of Long & Levit’s Lawyers and Judge’s Blog, www.longlevit.com/blog/, which is searchable by topic and case name.